Asian Conversation | Redefining emerging markets: Arif Naqvi of The Abraaj Group9 min read . Updated: 07 Oct 2017, 12:48 AM IST
Labelling growth markets as emerging markets is lazy and patronizing, says Abraaj Group chief executive Arif Naqvi
Labelling growth markets as emerging markets is lazy and patronizing, says Abraaj Group chief executive Arif Naqvi
Singapore: For the past decade, Arif Naqvi, founder and group chief executive of Dubai’s The Abraaj Group, a leading global private equity firm, has been trying to dispel the myth of the so-called emerging markets.
He insists on calling them global growth markets.
“Labelling growth markets as emerging markets is lazy and patronizing," he says.
“Why are we still calling China an emerging market? China has emerged. It is poised to become the largest economy in the world!"
Facts are on Naqvi’s side.
These emerging markets—or growth markets as he likes to call them—contribute 60% of global gross domestic product (GDP) growth; 85% of the world’s population lives in these markets.
By 2025, it is expected that almost half of the world’s billion dollar plus companies will be based here and nearly half of global GDP growth will be fuelled from the 414 cities—293 of them in Asia—of these “emerging markets".
Yet, when BlackRock Inc. recently surveyed 50 of their largest sovereign and pension fund clients globally to ask about their asset allocation, only half of those clients had any equities allocation to emerging markets at all.
For those that did, the average allocation was only 5%.
For emerging market debt allocation, the numbers are even more confounding.
Only one-third of these large institutional investors had any allocation in emerging market debt, and even among those that did, it was a minuscule percentage of their portfolios.
“There is a stark divide today between where global growth is and the reality of where even some of the world’s most sophisticated investors are putting their capital," Naqvi said in an interview on the sidelines of the Milken Asia Summit in mid-September.
He attributes this discrepancy, in some part, to the fact that emerging markets are sometimes mistakenly associated with greater political risk and instability than some of the developed markets.
Naqvi believes that it is also important to not paint the whole landscape of growth markets with a single brush.
“You have to disaggregate these markets. In our view, you can classify these markets into three categories, or the ‘3Cs’ as we call them: China, which needs to be treated differently, given it is a market of its own; commodity exporting countries; and, finally, consumer-driven economies, which represent our geographic and investment area of focus."
Naqvi recounts a question he asked British economist Jim O’ Neill, best known for coining the term BRIC: “’What do Brazil and Russia have in common with India and China?’ And he said, absolutely nothing; but it sells! This is why I hate acronym investing; it can be misleading."
Naqvi also says that it is critical to disaggregate the risks of different countries.
“Different growth markets are at different stages of development that pose differing risks," he notes. “To mitigate these risks, focus on the ones where governance is improving, where currencies are stable or the risk can be mitigated. But the single biggest determinant of risk—and whether or not you will make money—is where are you putting your money? Do you have sufficiently credible partners in your investment journey? Local market knowledge and judgement is the most critical factor in investing."
Naqvi, 57, understands these factors well.
A graduate of the London School of Economics and Political Science, he has put more money in growth markets than most investors in the developed world.
He also understands instinctively that placing human well-being at the core of his business, while making significant returns on his investments, makes good business sense.
For this reason, perhaps, he has also been the recipient of numerous awards, including the Oslo Business for Peace Award, the highest form of recognition given to individual private sector leaders for fostering peace and stability through business.
In 2011, Private Equity International named him one of the 50 most influential people in the global private equity industry.
Naqvi is also the only representative of the private equity industry on the United Nations Global Compact Board, a founding commissioner of the Business and Sustainable Development Commission and a member of the Interpol Foundation, and a global business leader and board member of the B Team, a non-profit initiative that brings together a group of global leaders from business, civil society and government.
Under his leadership, Abraaj has pioneered the private equity industry in many of the world’s growth markets, where it has also led some of the first, and most notable private equity transactions.
The firm has $11 billion in assets under management and has deployed $8.1 billion in global investments.
Employing over 300 people, Abraaj today has 17 country offices spread across five regional hubs in Dubai, Istanbul, Mexico City, Singapore and Nairobi.
Asked how he has managed to achieve this success, Naqvi says, “In my view, strong returns are generated by the ability to find, build and exit exceptional companies and assets. We have local teams, who are connected to the linguistic, cultural, political, economic and legal intricacies of their geographies. And we look for businesses that have an aspiration for market leadership and demonstrate best-in-class governance structures."
He adds: “While Abraaj has to deliver superior returns to investors, it also plays an effective role as an economic and social change agent in the markets and communities in which it invests."
Naqvi is often asked about the challenges of investing in growth markets.
His answer is clear: “By understanding the micro-opportunity, by being laser-focused on the quality of the management teams that the firm backs, and by investing in resilient and defensive industries, Abraaj has been able to deliver successful returns in its markets."
Take the example of Egypt, he says.
“In the worst years of the Brotherhood government, our businesses in Egypt were growing at a rate of 25%. We did not flee. All our companies did well because we were doing good things in the country in health-care, in energy, and in retail. The market trusted us as we were committed to it."
Naqvi has another formula for success. “While you might think to invest in our markets means overcoming political and regulatory challenges, Abraaj instead relies on being a highly disciplined investor that finds like-minded partners which it trusts. This is why, despite the varied perceptions of risk that are attributed to growth markets, it is counter-party risk that can be the most damaging, and one that we are laser-focused on," he says.
Naqvi goes on to add, “We focus on the micro, and that means identifying the right cities, sectors and companies to invest in. So, you have what I call ‘headline hysteria,’ which is often driven by a lack of understanding of the markets one is investing in. We fill that knowledge gap by having teams on the ground who combine local understanding and networks with the global standards we adhere to as a firm".
“I like to say: You cannot be an island of excellence in an ocean of turbulence’. What that really means is that I cannot be the only business of my kind in the marketplace. I have to work hard to influence others," says Naqvi.
From hard discount stores to e-commerce businesses to power utilities in markets spanning Latin America, Turkey, and Asia, the firm has been focused on meeting the needs of both its shareholders and stakeholders.
It is a model, he says, that runs through the business and is serving the growth markets well.
Naqvi says that the future of the global economy is linked to how these growth markets develop and prosper in the next decade, and investors should be looking at them for the tremendous opportunity they present.
“Naturally, you have to be very careful about what you select in the growth markets as the politics keep changing; but they continue to pose enormous growth opportunities in infrastructure, health-care, education, energy, housing and retail due to the emergence of a sizable young population, a rising middle-class, rapid urbanization and migration to cities. Many growth markets are also seeing increasing political and economic reform. All these factors make it a very lucrative place for investing," he asserts.
If the developed capital markets properly recognize this opportunity and invest in a sizable way in these sectors, Naqvi is confident there are significant returns to be made. He believes investment in these markets will also lead to enormously improving their ecosystem through reducing unemployment, income inequality and social unrest. This, in turn, will have a direct positive impact on the global economy that is inextricably linked to these markets.
Naqvi points out with some pride that this is one of the most important things that Abraaj does. “Not only are we committed to making money for our investors, we are also engaged in developing a strong stakeholder culture in the countries we invest in."
He adds: “Two-thirds of the world’s GDP growth today comes from growth markets. This is where the consumer markets are growing at breakneck speed and opportunities are maximized. We should recognize their potential and start by investing in them more actively and also labelling them correctly as a start!"
Edited excerpts from an interview:
What is your view of India’s political and economic investment climate today?
For India, this government is as good as it gets and is bringing changes on the back of business-friendly policies. It has a can-do attitude and an absolute focus on economic growth. Nothing was happening for a long time—almost a whole decade—and now things are moving fast.
We see India as one of the fastest growing economies globally and one that is continuing to accelerate. As an investment destination, we believe that India has a robust economic outlook given the underlying strength in consumption and a pick-up in investment that will continue to support a superior upward growth trajectory.
What key hurdles should the Indian government urgently address to boost foreign investments?
The Indian government has developed a strong policy framework. However, these policies should be executed upon in a manner that ensures economic growth is well distributed.
Infrastructure is a great opportunity in India but bureaucracy is still a hurdle. We tend to avoid investing in sectors where we have to deal with too much bureaucracy. The fact that oil prices are low is a huge advantage. But, India needs to exploit it more. The next five years are key.
Tell us about your recent investments in India.
We have recently partnered with (French energy company) Engie to make Abraaj’s second investment in the clean energy sector in India. We have identified a robust pipeline of wind power projects representing over 1GW in several key Indian states to address a large and growing demand for clean energy.
In 2015, Abraaj partnered with the Aditya Birla Group to build a 1GW scale solar energy platform in India. We are excited about the clean energy opportunity in India as it has massive economic and social potential and we are privileged to work with outstanding partners.
In 2016, we invested in CARE Hospitals, India’s fifth largest healthcare business, as a key plank of our healthcare strategy that serves middle and low-income patients in South Asia and Sub-Saharan Africa.
And in that same year, we led a successful funding round for Big Basket, which is India’s largest online food and grocery store.
To date, we have invested half-a-billion dollars in India. It represents a dynamic market and is a core investment geography for us in Asia.
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