Bangladesh has experienced a consistent GDP growth trajectory – more than six percent over the last 10 years. Cheap labour cost (one-fifth of China and half of India), and a young consumer base of 160 million with progressively higher purchasing power, have led to its development. Add to that several key fundamental drivers and we have the most valuable gem in Asia.
The macro-economy has been driven by exports and remittance, leveraging workforce – both of which have been growing at a Compound Annual Growth Rate (CAGR) of over 15 percent in last 10 years – and have accounted for over one-third of GDP. The central bank has actively managed the growth of the financial system while ensuring stability across key economic variables like exchange rate volatility and inflation.
Also the agricultural sector – contributing around 18 percent of GDP – has been growing steadily with moderate growth over the last 10 years. Socioeconomic indicators such as literacy rate and life expectancy have all gradually improved substantially relative to the peers. The literacy rate has risen from 54 percent to 60 percent and life expectancy has improved from 65 years to 69 years in the last 10 years. We believe this will have a positive impact on per capita income over time. Bangladesh is the second-largest exporter of Ready Made Garments (RMG) and the fifth-largest recipient of remittance. Also, the agricultural sector is almost self-sufficient, providing a material buffer for the economy as a whole.
Emerging from strife
Bangladesh has struggled in many aspects over the last decade. Lack of real FDI, poor infrastructure, unplanned growth in population, a scarcity of skilled human resources, corruption, poor safety standards for industrial workers and most importantly, political risks, have affected the country in reaching its true potential. Had these issues been addressed properly, Bangladesh might have already achieved double-digit GDP growth rate. The government, however, has been taking proactive initiatives in recent years to mitigate these obstacles.
LR Global has developed a time-tested and refined investment process focused on developing markets
The power generation capacity, a long-standing hindrance in our country, has improved, from 4,000MW in 2001 to 7,500MW in 2013. Additionally, Bangladesh has been working closely with several international development organisations to address these barriers to growth. It is not surprising that the country is on the radar of many institutional investors, but realisation of FDI is still poor.
The country can achieve and investment grade rating of BBB/BAA if it addresses various risk factors, including political risk. In our estimation, political risk alone costs Bangladesh at least 150 basis points more in terms of credit spreads. Unfortunately, there is lack of recognition and realisation from the policy makers, general public and politicians about this substantial cost, due to political risk alone. Nevertheless, despite these challenges, Bangladesh is expected to be on a positive growth path, albeit less than its potential.
At LR Global, a New-York based investment firm focusing on frontier economies, we realised the strengths of underlying drivers of Bangladesh early on and identified that it is on the trajectory of shifting from a frontier to an emerging economy. In order to gain a foothold in this slowly rising economy, the company established LR Global Bangladesh Asset Management to tap into the investment potential in Bangladesh.
The journey in Bangladesh started almost 15 years ago, and the firm believes that the country will achieve its potential over the next five to seven years, facilitated by reforms as well as by attracting local and foreign capital to high-potential sectors of the economy. Backed by strong fundamentals like low-cost labour, the potential to develop a skilled labour force and rising consumer demand, industries such as apparel, healthcare, construction materials, utilities, and consumer staples hold immense potential for growth.
The company has invested in various asset classes including listed equities, fixed income securities as well as high potential private equity transactions with an investment horizon of five to seven years. Leveraging its long history and local knowledge, LR Global has developed a time-tested and refined investment process focused on developing markets. These processes are calibrated to meet the specific challenges of each market.
We follow the top-down investing approach that involves holistic analysis of the economy and the financial world. The approach of top-down analysis has ensured optimised asset allocation, careful company selection based on fundamental analysis, superior investment timing and market intelligence.
These methodologies are consistent with our team’s views on certain critical forward looking factors which include macro economic analysis, industry analysis, company analysis and a proprietary valuation process. This process allows us to analyse and cover a large universe of companies leveraging a unique but dynamic investment process that is not only efficient but also scalable.
As a result, since LR Global was established, the funds generated superior risk-adjusted return compared with the benchmark – broader stock market index – and its low beta portfolio experienced significantly less volatility to the benchmark. Its public market portfolio has outperformed the benchmark with an annualised alpha of 8.7 percent over four years and around 80 percent of the out-performance has come from asset allocation decisions (see Fig. 1). With one of the strongest teams consisting of investment professionals who have expertise across multiple industries, the investment team is focused on identifying the most lucrative investment opportunities as well as managing the risk of the portfolios.
While we take a long-term investment view, our process is a fluid and dynamic one to adjust to market conditions. Our emphasis on downside protection leads us to investment in companies with attractive valuations. We believe this emphasis limits our loss potential should the investment catalyst not materialise. We attempt to build downside protection into our process by evaluating and quantifying the risks versus the reward opportunity of every investment in the portfolio.
Niche market infiltrated
There are specific private sectors that have enormous potential for future growth, and LR Global has accessed a number of these. Many companies in addition to growth capital require material improvements in areas such as business processes, corporate governance, strategic-decision making and HR development. Synergy between these private entities and LR Global can be achieved by providing growth capital, skilled human resources and allocating the right resources correctly in a timely fashion. Its material value addition is to identify gaps and provide solutions for issuers to reach their true potential.
Our services include leadership development, product development, process re-engineering and effective execution of well thought out business strategies. LR Global has a strong track record in private equity investments. We are different from other investors in terms of active involvement with management and leadership teams. We are activist investors, and from the outset we ensure a win-win structure for both parties. The sectors in which LR Global has made investments include flexible packaging, pharmaceuticals, healthcare services and financial services. To achieve higher business objectives in these companies, the company has added substantial value ranging from inventory management, management information system (MIS), marketing strategies, HR development, to financial control and risk management.
A notable example of our efficient management is Unicorn Industries, a leading flexible packaging company in Bangladesh. We identified the gaps in its business operations, and turned the company into a highly profitable venture in just two years. We also plan to bring Unicorn Industries into capital markets next year, potentially the first of such listing of a true private equity investment. The company has also managed Thyrocare – an internationally recognised brand and a true market leader in healthcare service. It’s the world’s largest preventive health care company and has a highly successful business model, perfectly suited to address the health care challenges in Bangladesh.
Despite political issues Bangladesh is already in an advantageous position to enter the accelerated phase of economic growth and development. Similar to India, the private sector is expected to play a key role to drive the country in achieving the middle-income status by 2021. Undoubtedly, our entrepreneurs have already proven themselves by their contribution to the economic stability, despite all odds. Local entrepreneurs, business professionals as well as farmers of Bangladesh have a track record of exploring technological advancements and mitigating business risks to ensure sustainable development in their own ways.
But it is the lack of resources and capital that is holding back the growth pace and depriving them to reach the potential. Their efforts will not be fully materialised unless the above-mentioned issues and challenges are handled effectively beyond foreign aid and subsidies. Institutional investors can fill the gaps by providing professional guidance and patient capital to create value that is mutually beneficial and sustainable. We believe that if the financial and intellectual capital can be linked up with entrepreneurs effectively, the economy can grow to unprecedented levels beyond the usual forecasts by experts.
