Bangladesh forms part of what Goldman Sachs termed the ‘next 11’ most important emerging markets after the Brics, but it faces major hurdles both for investors and those who would provide them with exposure.
Still, there is a growing number of options available, from traditional active equity funds to exchange-traded products to private vehicles, as explored on a panel last week at AsianInvestor's and FinanceAsia’s Bangladesh investment summit.
Given the lack of a liquid stock market comprising large-cap names, private equity might seem the most obvious channel, and Brummer & Partners Asset Management Bangladesh has taken this route.
The firm has been running a $100 million fund for three years that focuses on a domestically focused range of sectors from retail to healthcare to manufacturing to export. “We are sector-agnostic,” says Brummer CEO Khalid Quadir.
The asset manager expects to exit deals after five years or more, typically via public listing, and hence has not yet executed any exits. Typical ticket size is $5 million to $20 million, and investors include multinational financial institutions, corporate pension funds, wealthy individuals and family offices.
There are certainly challenges, notes Quadir, who points to the difficulty of “what to leave on the table”, both in terms of capital and in terms of the level of corporate governance. For example, “the way a family had been doing business can’t usually be sustained”, he says.
"We provide advice on governance through our international network of expertise,” adds Quadir. Moreover, Brummer acts as an active shareholder on the board, but it doesn't take an operational role and always holds a minority stake.
A very different approach is that taken by db-X trackers, Deutsche Bank’s exchange-traded funds unit, which launched the first Bangladesh ETF in November last year.
The German firm also faces issues, this time with regard to the illiquid nature of domestic equities, despite the fact that it provides synthetic (swaps-based) exposure to the index. It still needs to hedge its position, however, and it is challenging to buy or sell enough stocks to do so; hence there is a limit of around $1 million on the amount of daily exposure it can provide.
Demand is growing, however, thanks to a rising number of fund managers in Europe looking to access frontier markets to boost returns and diversify portfolios, says Marco Montanari, Asia-Pacific head of ETFs at db-X trackers.
There are also active funds appearing focused on listed Bangladesh equities, with Dhaka-based SwissPro Investments readying what is likely to be the first Ucits-type product, which will target European clients.
The firm is “in the final stages” of readying a Ucits-compliant Bangladesh equity fund for registration in Europe, says managing director Christian Forthuber. “We did a lot of research two years ago and found there wasn’t a product like this out there – foreigners couldn’t access the market.
“We do fundamental analysis combined with quantitative analysis,” he adds. “We need to follow stocks very closely, that’s why we are based in Dhaka. For example, we don’t want to account for more than 25% of the ADV of any single stock.” That is obviously a tricky issue in a small equity market where there are no large-cap names.
SwissPro charges a performance fee, says Forthuber, but one-third of it will be allocated automatically to social projects in Bangladesh.
A fourth approach – pioneered by Dhaka-based RSA Capital – is that of microfinance securitisation. “Microfinance has scale in Bangladesh,” says Sameer Ahmad, founder and CEO of RSA, noting that the 150 million-strong nation is one of the few countries where this is actually the case.
The vehicle has a $180 million asset pool from 4.5 million loans over a six-year cycle, and the main issue it faces is lack of liquidity. A secondary loans market is simply not there, and there’s no benchmark or price discovery for it, notes Ahmad, although financial institutions in Bangladesh are working to remedy that. Over the next few years it is likely to be addressed.