As the plane hit the tarmac, I got a first glimpse of this sprawling Southeast Asian city. The smog and dust from the burning rice fields was overwhelming and made every breath feel like a sip of old Scotch whisky. I grew up thinking that places like Czech Republic, Poland, Hungary or Bulgaria were having to do some catch-up (for full disclosure: I call the latter two countries my home). However, this place looked nothing like what I had experienced before, this was Emerging Market par excellence.
Numbers and stats often fail to paint a clear picture about the magnitude of the change. We met Loan in Saigon by accident, and were eager to hear her story. Born 28 years ago in a large village Northwest from Hanoi, she got her first pair of shoes at the age of 13. Her family invested in a colour TV shortly after. Loan herself became the first woman from her community to finish high school, and the first person ever to graduate from university. She is one of the millions who leapt straight into modernity, at the cost of enormous effort. These millions form the aspirational, urban middle class of Saigon and Vietnam or any other country in Southeast Asia and other emerging markets. They are the backbone of the process that makes everybody – from political observers to investors – salivate over the opportunities hidden in this once in a lifetime transformation.
In my subsequent work on private equity and M&A deals in Southeast Asia, I have often reminded myself of the period between the late 90s right up to 2008 days, when Eastern Europe was the darling of the global investor community. Foreign direct investment records were broken yearly, new private equity funds sprung up seemingly every other day. The region was on a supposedly inevitable path of convergence towards Western Europe. And converge it did – toward the quagmire of the post-crisis stagnation. Suddenly, a new narrative was constructed around Warren Buffett’s quote that “only when the tide goes out do you discover who’s been swimming naked”. Emerging Markets are the most exposed to hubris and complacency, and often swim naked.
It is now Southeast Asia’s turn to be the Emerging Market of choice, and rightly so – the macro-trends are so spectacular that even in a supposedly bad year the region is doing much better than the world as a whole. At the same time, this is home for some of the most corrupt political regimes (as per the latest Transparency International Survey). The regional market is inefficient despite ASEAN’s aspirations to create a wider zone of economic cooperation. As an example, Eastern Europe’s integration into the European Union was a massive driving force for improvement in institutional quality. Business practices gradually became more professional and made life much easier for owners, investors, and partners. However, in Southeast Asia, a private equity investor should count himself lucky if shown a coherent set of financial statements to start with – without necessarily qualifying if the numbers are real or not. Due diligence and leap of faith should in theory be mutually exclusive.
So, for all the excitement, the question is whether Southeast Asia will eventually develop the right infrastructure for business owners and investors. There are no permanent emerging markets – graduation to the developed world or stagnation are the two possible outcomes.