To Succeed in Myanmar, Find Solid Local Partners

By Kenneth Stevens | June 04, 2013

Over the past 18 months, I have witnessed a growing flood of foreign investors, businesspeople and trade missions pouring into Myanmar to seek their fortunes in the last great frontier economy of Asia. At this week’s World Economic Forum in the capital of Naypitaw, foreign visitors will meet with Myanmar’s best and brightest in the hope of finding local partners to help them realize these ambitions.

Most of these visitors are aware of the basic challenges of investing in Myanmar: significant corruption; untested legal systems; inadequate infrastructure; underdeveloped human resources and other issues. At Leonard Capital, we note that early investors in other emerging countries such as Cambodia and Laos faced similar limitations, but managed to mitigate these risks and make successful investments. From our experience in all these countries, the top challenge for investors in Myanmar will be finding reliable business partners who will properly align their interests with those of the foreign partner.

The first task is to screen out groups not likely to align their interests with yours or whose links to government or the military will probably supersede your interests. Most investors avoid companies that are identified on the U.S. sanctions list and those that made their fortunes in timber, gemstones and other basic resources in order to avoid negative publicity and potential problems with the international financial system and other agencies. A second consideration is to determine how much local support you require to develop a joint venture in Myanmar. The management depth of many local companies is typically thin and underdeveloped, but some groups are seriously overstretched as they operate an excessive number of businesses. Some foreign groups ultimately choose to run a joint venture themselves or bring in outside management.

Virtually all foreign partners will need to provide substantial training, technical assistance and oversee many corporate functions. There is a common misconception that Myanmar has few “investment grade” companies or that most are wedded to the military or its cronies. The reality is that Myanmar has a surprisingly large and diverse manufacturing base with many independent and reasonably successful companies.

Most business segments lack a dominant company or a clear market leader, which provides early investors the opportunity to help create the future leaders of Myanmar Inc. The companies we work with most often say their main objective in tying up with a foreign group is to obtain technical assistance, strategic guidance and access to new markets, rather than to obtain capital. Finding and evaluating a Myanmar partner is no easy task. Extensive networking and rigorous due diligence is required.

Several professional groups provide match making services for foreigners, including the Union of Myanmar Chamber of Commerce and the trade associations that represent most industries. Exhaustive due diligence is a necessary — and costly — endeavor. Character references and background checks can be conducted by legal firms, global security companies and “trusted Burmese elders.” Conducting financial due diligence on the companies and structuring deals requires an equally creative and patient approach as most Myanmar companies lack transparent financial records and are not yet accustomed to standard corporate governance practices, such as granting board seats to minority investors or establishing positive and negative covenants over company decisions.

In the end, is Myanmar really worth all the effort? Is it now ready for foreign investment? We argue yes to both points. If early investors in Myanmar employ the best private equity practices that have proven successful in other Asian frontier markets, they will win the favor of the best local partners and reap the advantages that go to the first mover.

Kenneth Stevens is a Managing Partner of Leopard Capital, which manages private equity investments in Myanmar, Cambodia, Laos, Bangladesh and other Asian frontier markets.

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