Capital earmarked for coup-hit Myanmar may be re-routed to Vietnam, Cambodia

The military coup in Myanmar has forced investors, who had earmarked capital for the country, to go back to the drawing board.

While funds, such as Delta Capital and Anthem Asia, that solely focused on Myanmar are adopting a “wait-andwatch” approach as the political situation unravels, those with a wider geographic footprint are funnelling their money elsewhere — to Cambodia and Vietnam, in particular.

In the last five years, the Cambodia-Laos-Myanmar-Vietnam (CLMV) subregion has clocked a GDP growth rate of around 6% per annum — much higher than neighbours. And, investors have sought to make the most of this.

According to the Association of Southeast Asian Nations, foreign direct investment (FDI) flow into CLMV grew 6.3% year-on-year in 2019. While Vietnam topped in terms of value ($16.1 billion), it was Myanmar that registered the highest year-on-year growth of 55.9%.

The military’s seizure of power on February 1, though, has most likely put paid to the foreign fund inflow to Myanmar.

“Investor money that might have gone into Myanmar will not be going there. The countries around the region will benefit,” Dave Richards, managing partner of impact investor Capria Ventures, told DealStreetAsia in a recent interview.

In February last year, DealStreetAsia reported that the US firm will be investing up to $8 million in fund managers in selected countries with a focus on Myanmar and Nepal. “Capria’s efforts will focus on supporting local fund managers in Myanmar to strengthen their business, accelerate growth and build world-class investing operations,” it had said, adding that it will back two to three general partners from Myanmar to join its global network of 22 managers.

Many of those plans are now “on pause”. The firm is, instead, set to make its first investment in Vietnam this year, while looking for opportunities in Cambodia, Bangladesh, and Nepal. Meanwhile, many businesses have terminated partnerships with Myanmar entities that have ties to the armed forces.

Japanese beer maker Kirin Holdings, for instance, severed its ties with its partner Myanmar Economic Holdings Limited (MEHL), which provides welfare fund management services to the military. Singapore-based gaming firm Razer’s co-founder Lim Kaling announced recently that he is divesting his stake in a venture that indirectly owns an interest in Virginia Tobacco Company, which is linked to MEHL.

“The present coup suggests that, for the sake of wresting domestic control, the Tatmadaw [the Myanmar military] is ready to give up the diplomatic, trade, and investment gains of the last decade,” Romain Caillaud, a principal of the Tokyo-based advisory company SIPA Partners, told Nikkei.

Many Myanmar-focussed investors may now widen their footprint. “I expect a lot of investors that leave Myanmar to shift from a Myanmar-only strategy to a regional strategy,” said Andrew Durke, COO of Obor Capital. The Cambodian VC had plans to invest $13 million in startups in CLMV countries in 2020, DealStreetAsia had reported.

Entrepreneurs from Myanmar, too, may also move to other countries in the region to build and grow companies from there. “It would be Myanmar’s loss and Southeast Asia’s gain,” said Field Pickering, head of venture investing at Vulpes Investment Management, which launched the early-stage vehicle Seed Myanmar in 2016.

Vietnam in the spotlight

As investors and entrepreneurs look for safer shores, Vietnam is seen as an obvious choice in the CLMV region, generating interest from both commercial and development capital.

“For investors with set investment mandates in Southeast Asia and purely looking for financial returns, Vietnam remains a strong option for the same reasons that made it attractive in the past 5-10 years,” said Obor Capital’s Durke.

If countries like Cambodia and Laos present some opportunities for private equity investors due to the demand for more infrastructure projects, Vietnam stands out to venture capitalists as well thanks to its talent pool and the ecosystem that venture capital needs to support innovation at scale, according to Capria’s Richards.

From a development finance institution’s (DFI) point of view, the Dutch development bank FMO says the country has already built a business ecosystem that can facilitate investments from companies moving part of their supply chain from China. “A business-friendly government policy will help convince foreign investors to increase the capital allocated to this region,” a representative for FMO told DealStreetAsia.

Even as competition for deals in Vietnam is higher, fund managers believe it creates a healthy “next investor” dynamic in this market. Pickering said it was “something that never arrived in Myanmar”.

“Once borders open up after the pandemic, and Asian investors return physically to Vietnam, I believe it will be a feeding frenzy and you will see deal activity erupt pushing Vietnam to the top of the list of emerging markets attracting foreign investment,” he added.

More competition means more deal flow and a larger market with more exit options. All of these factors have made Vietnam the “track record” of the CLMV region, Durke asserted.

Cambodia: A strong alternative

Phnom Penh-based Obor Capital, which has invested in five Cambodian businesses and one Vietnamese company with ops in Vietnam and Laos, is betting on Cambodia as a preferred investment destination.

Durke expects Cambodia to write a story similar to that of Vietnam. Cambodia can absorb some more capital, especially for deals in the $500,000 to $3 million range, Durke opined. “Examining the characteristics that make Myanmar attractive to investors, I think Cambodia is the most similar [to Myanmar],” he said.

Cambodia has seen most of its investments going to real estate and infrastructure sectors so far, while investments in the consumer and tech sectors have not kept pace with the nation’s economic growth.

Cambodia’s economy has grown at rates above 7% since 2011, and the share of people living in poverty has more than halved in the last decade, according to the United Nations Development Programme (UNDP). The kingdom has set a target to become an upper-middle-income country by 2030 and a high-income country by 2050.

Digital technology in the majority of Cambodian businesses (over 90%) was still at a basic level, the UNDP said in an August 2020 report. But the country’s growing economy with increasing FDI flows and a young demography would generate opportunities to exploit new technologies to reach its national income goals.

Pickering from Vulpes Investment Management, however, is sceptical of Cambodia’s potential because of its small addressable market. Laos is even smaller, and it is “difficult to imagine homegrown companies there ever scaling to create venture-like returns”, he said.

However, as DFIs likely retreat from Myanmar, Cambodia is probably going to see more capital from these investors, according to Durke.

“Frontier markets like Cambodia are still very new to private equity and venture capital, so investing here is investing in the future. And there is a big advantage of being the first mover in this market and getting attractive valuations,” said Durke.

Emerging Markets Investment Advisers (EMIA), which has sealed the majority of its deals in Cambodia, says it continues to see strong interest from both existing and new limited partners, according to the firm’s CEO Joshua Morris. EMIA is raising its third fund with an up to $120 million target, and is expecting its first close next quarter.

Patient capital

The standard private equity and venture capital model is difficult to execute in frontier markets as it requires a more patient fund structure with hands-on solutions provided to portfolio companies.

“If you hold a fire sale, instead of holding on and developing the firms for one to three more years, you might end up selling what could be very good companies,” Durke said. Fielding with risks in CLMV countries is not about technology or bringing products to the market. “It’s a different type of risk, like finding enough good talents and understanding the legal framework,” said Durke.

High upfront costs, combined with relatively smaller market opportunities compared to larger ASEAN markets, is the likely reason why there are fewer active firms in these frontier markets, Morris points out.

That explains why more DFIs, which have a higher risk appetite for the region, join as limited partners in CLMV funds, compared with other investors. DFIs also have knowledge and networks in these markets. “Our mandate is to stay in tune with the needs of the entrepreneurs we empower,” FMO said.

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Originally published on February 23, 2021, by Nguyen Thi Bich Ngoc of DealStreetAsia

Our investment into the veterinary industry - ADI

OBOR Capital is pleased to announce its investment in Animal Doctors International (ADI), a fast-growing provider of veterinary and pet travel services with one clinic in Vientiane, Laos and two clinics in Ho Chi Minh City, Vietnam.  With OBOR’s and our co-investors’ investment, ADI will open its fourth clinic in Hanoi and continue its expansion across the region.

Founded in 2014 by Dr. William Thomas, a UK-certified veterinary surgeon, ADI provides high-quality, integrated pet care supported by modern technology and internationally-educated veterinarians.  ADI has earned a strong reputation for its commitment to quality as evidenced by its consistently high customer reviews and retention. 

With its excellent brand reputation and strong leadership, ADI is poised to tap into the region’s increasing pet ownership, growing purchasing power, continuing urbanization, and higher awareness of veterinary needs.  As with all of OBOR’s investments, we will support ADI with financial expertise, regional network, and experience.  We are excited to partner with ADI as it delivers exceptional care to pets and their owners across Southeast Asia.

A new recycling industry in the making?

As waste generation continues to accelerate, governments and private sector stakeholders across the globe race to find efficient, affordable, environmentally-friendly solutions.  As with all problems, whoever can find solutions stands to create value – the bigger the problem solved, the more value created.  With its rapid economic growth and often lagging infrastructure, Asia faces a particularly immense challenge.  Circulate Capital, one of the leading investors focused on waste, estimates Asia needs an investment of at least $20bn in the short term to get its waste management sector up to speed.[i] 

A polluted canal in Cambodia’s capital Phnom Penh. (Source: Sovann Nou; Cambodia Daily 2019)

According to a recent report by Clean Green Cambodia (see graphic below)[ii], Phnom Penh generates 1 million tons of municipal waste per year, which is over a quarter of the country’s total waste. While most of this waste is organic (52%), plastic waste (21%) is on the rise. Robust data on recycling in the country is hard to come by, but most estimates predict less than 10% of all waste in Cambodia is recycled. The recycling system is based on an informal supply chain that goes from Edjai (informal waste collectors) to small collection centers to larger recycling depots that consolidate and compress materials into bulk quantities that are ultimately exported to neighboring countries where the actual chemical and mechanical processes take place. However, the capacity to export is expected to decrease significantly as neighboring countries respond to their own increasing waste issues by limiting and/or banning imports.  Following China’s decision to ban most imported solid waste in 2017, Vietnam stopped issuing licenses to import plastic waste in 2018 and announced it will ban all imports by 2025; Thailand is expected to ban plastic waste imports in 2021.

A handful of small-scale recycling initiatives focused on local issues have sprouted up outside of the informal system in recent years. Unfortunately, the scale of these operations is much too small to tackle Cambodia's rapidly increasing waste production. Phnom Penh's waste production is expected to more than double by 2030, straining the capacity of existing landfills.  In efforts to lure larger foreign investment into Cambodia’s recycling vacuum, the Ministry of Environment is offering tax reductions and electricity subsidies for recyclers.[iii] Gomi Recycle 110 of Japan was reportedly the first company to receive such benefits

Companies within the recycling space in Cambodia:

• Gomi Recycle 110, a private Japanese company is building a plastic recycling factory in collaboration with JICA (Japan International Cooperation Agency) in Svay Rieng province near the border with Vietnam. The factory is expected to start operations soon, although it has been previously delayed.[iv]

• A small recycling facility located on the outskirts of Battambang began operating in March 2017 with an initial investment of roughly $10,000; it operates as as non-profit doing low value-add work on plastic bags.[v]

• Cambodian startup SmartBIN was recently awarded $10k by the Toyota Impact Challenge for their smart bin technology that automatically measures recyclable waste and allows corporates to issue rewards to the general public for recycling.[vi]

There has been healthy investment in recycling in other Southeast Asia countries – especially in Polyethylene Terephthalate (PET) recycling, – suggesting that Cambodia has the potential to follow in its neighbors’ footsteps. For the purposes of this note, we looked at the low-hanging fruit (PET bottle recycling) but we still see opportunities in other areas such as waste-to-energy as well as aluminum, paper and e-waste recycling.

In October 2020, Daiwa and Delta Capital announced a $12m investment in the plastic recycler CPC Myanmar; CPC will become the first food-grade, bottle-to-bottle recycler in Myanmar capable of meeting US Food and Drugs Administration and EU Food Safety Authority standards for recycled PET.[vii] CPC will supply both domestic and overseas bottle manufacturers and expects to collect and recycle over 20% of the PET bottles in Myanmar while saving over 15,000 metric tons of carbon dioxide emission per year.

Vietnam and Thailand both recently announced massive initiatives aimed at solving their plastic waste challenges. In June 2019, the Packaging Recycling Organization Vietnam was launched with a mission to help create a “clean, green and beautiful country by driving the circular economy and making recycling of packaging more accessible and sustainable”.[viii] Founding members includes major brands with significant financial and technical resources: Coca-Cola, FrieslandCampina, La Vie, Nestlé, NutiFood, Suntory PepsiCo, Tetra Pak, TH Group, and URC. More recently, Thailand’s Indorama Ventures pledged $1.5 billion to triple its plastics recycling operations with much of the investment expected in Southeast Asia. The company aims to have recycled materials account for 20% of the 4 million tons of PET products they produce annually.[ix]

This investment activity runs counter to the fact that cost of virgin plastic has plummeted (due to crashing oil prices caused by the COVID-19 pandemic along with a supply glut caused by US fracking technology and a Saudi-Russia price war), making it theoretically less attractive to purchase recycled PET. The price of recycled PET flakes (used products are shredded into flakes before being transformed into pellets, which are then manufactured into new products) has indeed fallen in line with virgin PET.  However, the price of recycled pellets has held up impressively over last few years, maintaining a roughly 50% premium over virgin material for food grade pellets.[x] This price divergence suggests buyers differentiate between virgin and recycled materials, but recyclers must be “closer” to the end user in order to realize such premiums.

This trend aligns with growing commitments from global consumer brands to increase their use of recycled materials in response to rising awareness of plastic pollution and the environmental damage it causes…to name a few:

• Coca-Cola will collect and recycle 100% of its bottles by 2030

• PepsiCo will recycle 75% of packaging waste by 2030

• Adidas will use 100% recycled plastics by 2024

• Evian will make all its plastic bottles from 100% recycled plastic by 2025

The significant investment activity in recycling in Southeast Asia shows there is an appetite to build the region’s capacity. Some potential reasons Cambodia has lagged behind its regional peers includes its small market size (recycling benefits hugely from economies of scale) and relatively high electricity prices.  Concerns around market size should be alleviated by the facts that (A) there are very few domestic competitors, (B) foreign competition will continue to be blocked by waste import restrictions, and (C) waste generation will continue to grow significantly (driven by population growth and rapid urbanization and income growth).  Electricity costs can be addressed by the above-mentioned government subsidies as well as increasingly effective and affordable solar power.  Additionally – and beyond the scope of this short note – recyclers can benefit from carbon offset credits that are increasingly liquid and lucrative for high-profile projects in developing countries.  As with all investments in frontier markets, execution will depend on seasoned operators with diligent focus on financial management, good governance, and technical skills.

With a confluence of global trends (increased demand for recycled materials from consumer brands), regional regulations (limiting or banning of waste imports), and local conditions (growing plastic waste, financial support from the Cambodian government), we believe Cambodia’s recycling sector is ripe for investment.

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[i] https://aclima.eus/en/investors-see-untapped-potential-in-asias-plastics-problem/

[ii] https://www.cleangreencambodia.org/recycling-in-cambodia/

[iii] https://southeastasiaglobe.com/the-waste-land/

[iv] https://www.phnompenhpost.com/national/ministry-seeks-japans-funding-plastic-waste-management

[v] https://www.khmertimeskh.com/556069/aiding-the-country-by-following-his-passion/

[vi] https://southeastasiaglobe.com/cambodian-startup-lands-10k-for-smart-recycling-solution/

[vii] https://www.dealstreetasia.com/stories/delta-capital-daiwa-cpc-210712/

[viii] https://vietnamnews.vn/environment/521685/9-companies-launch-packaging-recycling-organisation-vietnam.html

[ix] https://asia.nikkei.com/Spotlight/Environment/Thailand-s-Indorama-makes-1.5bn-green-bet-on-plastics-recycling

[x] https://www.prnewswire.com/news-releases/sp-global-platts-to-assess-prices-for-food-grade-recycled-pet-packaging-pellets-301173672.html