Beijing-based private equity firm Origo Partners is talking up the investment merits of Mongolia as it prepares to launch an open-ended Mongolian liquidity fund to capture trading opportunities.

Origo’s Mongolian Stock Exchange (MSE) Liquidity Fund is to start trading on October 1. Primarily it will be invested in the top 10 companies on the MSE by market value, as well as targeting undervalued stocks.

It will be co-managed by Luke Leslie, Origo’s head of Mongolia and mining investments, and Eric Zurrin, CEO of ResCap, a local security broker 35% owned by Origo. Both managers are based in the country’s capital, Ulan Bator.

“In the last six months we have received enormous interest from institutional and individual investors globally in accessing the MSE,” says Zurrin. “The fund will give investors direct exposure to Mongolia in a way which has been previously unavailable.”

Certainly, frontier markets have been attracting the attention of Asia’s private equity specialists. The MSE soared over 130% last year and was up again in the first half of this year amid extreme volatility in equity markets worldwide.

The country’s economy is primarily driven by the development of its largely untapped reserves of bulk commodities and base metals, including coal, iron ore, copper, gold and uranium.

Zurrin for one is confident in the fundamental sustainability of Mongolia’s economy. “It is a young country with abundant resources sitting on China’s doorstep,” he notes.

Given that the total capitalisation of the MSE is just $1.7 billion, Zurrin acknowledges the liquidity risk for investors, but finds comfort that Mongolia is evolving quickly and has signed a strategic partnership with the London Stock Exchange (LSE) this year to help it restructure and develop.

This partnership will see international investors able to trade the MSE electronically within a few months, in the process presumably bringing more international capital inflow.

The LSE is providing advice on factors such as capital market infrastructure and legislative framework, as well as market rules and the expansion of tradable asset classes (derivatives and ETFs).

“The timing is good for us,” Zurrin adds. “The MSE itself is nascent and the transformation of this young and small exchange is being done now. If you enter when everything is fixed, then you may have missed the opportunity.”

Last month, Singapore-based Khan Investment Management launched its Khan Mongolia Equity Fund investing in companies with significant assets and operations in Mongolia listed internationally and on the MSE, while opportunistically participating in Mongolian IPOs.  

While Khan’s Mongolian fund is purely equity based, Origo’s fund will also serve investors’ cash management needs by accessing the high deposit rates offered by Mongolian commercial banks.

“The posted deposit rates range from 13% to 15%, depending on the size of investment and overall scale of the account, which are extremely appealing to international investors,” notes Zurrin.

Moreover, Origo Partners expects the Mongolian Tughrik – among the best performing currencies against the US dollar last year – to continue to appreciate as China’s demand for resources boosts Mongolian exports and, in turn, benefits its currency.

“This year the government has increased the money supply by 67% to stabilise the currency. But the government can only manage the currency for so long. Mongolia is forecast to move sharply to being a net exporter by mid-2012 with significant foreign demand for the currency.”

Administered by Apex Funds, the MSE Liquidity Fund is open ended with a minimum subscription of $10,000.