Is Myanmar PE’s Next Frontier?

The country’s leap from hermit kingdom to vibrant democracy opens the door to a large opportunity for private equity investment. But challenges are also abundant.

Myanmar has undergone a remarkable transformation, moving from junta-led pariah state to vibrant democracy in the space of a few years, thanks in large part to the efforts of freedom-fighting politician Aung San Suu Kyi. Its new reform-minded government, led by the first president without military ties in more than half a century, is promising more individual rights, trade liberalization, and a strong free-market economy.

It’s the free-market evolution that’s attracting private equity’s attention.

“There are a number of industries that are ripe for private equity investment,” says Thomas Hugger, founder and CEO of Asia Frontier Capital, which targets high-growth Asian frontier economies. “In fact, every industry in the country needs money.”

This year, the parliament will consider revisions to its foreign investment law that would potentially reduce restrictions across many sectors. Investment is already rising rapidly. Approved investment for the 2015-16 fiscal year reached $9.4B, according to Myanmar’s Directorate of Investment and Company Administration— the highest since 2010.

In fact, Myanmar represents an almost unparalleled investment opportunity. The Asian Development Bank projects 8.4 percent growth in 2016-17. It’s one of the only places in the world where growth in sectors such as pharmaceuticals, healthcare, agriculture, real estate, and infrastructure is expected to climb by double digits every year.

A half-dozen funds are investing or planning to invest soon in Myanmar, including Andaman Capital Partners, Asia Frontier Capital, Bagan Capital, Golden Rock, Mandalay Capital/Silk Road, Myanmar Investment Group and PMM-GEMS.

Only about six companies will list on the newly opened Yangon Stock Exchange this year. Other ambitious companies will require outside capital to grow.

The consumer market is attractive. Currently, Myanmar’s market is dominated by small, localized brands, says Hugger, so private equity could build a chain of convenience stores or supermarkets that will one day be a household name. The countries pristine beaches, forests, temples, and pagodas mean tourism is also ripe for transformation.

But challenges are also abundant. It’s not easy to find a local partner to trust—culturally, the business population may be reluctant at first to engage with foreign private equity. Overvaluation of deals is another risk, considering the work required to get companies up to speed. Exits are complicated by rules that require multiple levels of approval to repatriate profits.

Corruption is rife. Myanmar ranked 147th out of 168 countries in Transparency International’s 2015 Corruption Perceptions Index, sharing a position with the Democratic Republic of the Congo and Chad. In 2014, 60 percent of Myanmar firms surveyed said they had to pay bribes for registrations, licenses, or permits.

“Unfortunately, bribes and corruption are just part of the game in many frontier economies,” Hugger says. “It’s everywhere, in every corner. I worked for a private equity firm in Cambodia and we had to bribe the tax man just to pay our taxes. That’s crazy.”

Still, Myanmar remains a very large opportunity. Agriculture and resources are rich. Strategically, the nation is located at the nexus of China, India and Southeast Asia.

“I think the first move will be Asian investors from South Korea and Japan,” Hugger says. “I see Europe and U.S. funds showing interest and I’ve heard rumblings about KKR and Blackstone scouting opportunities. This is one of the few greenfield opportunities left in Asia.”