When Blackstone comes to Bangalore
Why institutional capital is flocking to the developing world.
One of the great paradoxes in today's global economy is how developing countries, which require massive capital investments to achieve their full economic potential, have a harder time attracting that same capital than their developed counterparts. This dynamic is born out of a scarcity of information about often complex and fast-moving developing economies, as investors shy away from potentially lucrative but uncertain investments in favour of the lower returns and stability of the First World. This is the reason why low-growth Britain received over five times as much foreign investment in 2016 as the burgeoning Indian economy ($253 billion vs $46 billion)
However, a new class of institutional investor is upending this inefficiency, using technology and local expertise to identify promising opportunities in upcoming markets and deploy the developed world's capital to finance them. Such investments are a global win-win: First World investors earn outsize returns compared to their domestic opportunities, and up-and-coming economies receive a shot of much-needed capital to fuel their remarkable growth. Why the Money Stayed Home
Traditionally, institutional investors have tended to stay within their respective domestic markets due to their extensive expertise in their home country's investment opportunities and peculiarities. This makes sense in an environment where information is scarce; if an investor has a choice between an opportunity that could be quite profitable but could also be a complete bust, and another option where a lower rate of return is more or less guaranteed, they will tend towards the latter option.
Further exacerbating this dynamic is the fact that, in emerging economies, investment markets tend to favour supply over demand. In layman's terms, this means there are lots of opportunities that require significant funding, and relatively few investors who possess such large war chests. This leads to high cost of capital for large projects, making them less viable when in fact the country needs such projects even more than the developed world. Another problem is the difficulty in determining which investment is worthwhile, and which will bottom out. For someone sitting in, say, London, finding the correct investment in a place like India is like finding a needle in a haystack. Say this person wanted to add residential real estate to his portfolio. Such an investor would be more likely to finance an apartment complex in Bristol than parse through the hundreds of high-rises coming up in Bangalore. The tragedy is that the Londoner could make more money in Bangalore, and Bangalore needs the funds more than Bristol.
An Age of Information Abundance
All this changes, however, when information is no longer a scarce resource. In today's ultra-connected environment, sophisticated investors in Manhattan are able to find and participate in the most promising opportunities in Jakarta or Nairobi without the massive amount of legwork required in the previous analog era. This dynamic is made possible in large part by a wide array of globally-oriented private equity firms that combine extensive local expertise in developing markets with the deep pocketbooks of investors in wealthy countries.
In absolute terms, foreign direct investment has increased approximately 350% over the last 20 years, and a total of around $1.8 trillion dollars was invested between countries in 2017. Developing economies have increased their share of the pie substantially over the past ten years, going from 35% of global FDI in 2005 to around 60% today.
Sovereign Funds and Smart Owners
Much of this increase is due to the monolithic mega-funds pouring enormous amounts of capital into global up-and-comers. Blackstone, for example, has recently become the largest office-space landlord in the world after closing several massive deals in India, a particular FDI hotspot in 2017. Sovereign wealth funds and pensions funds, like the Canadian Pension Plan, Singapore's GIC, and the Qatar Investment Authority, are also scouring the globe for promising projects, with China dominating investment cycles for much of the early 21st century. In recent years, large institutional FDI has diversified into various emerging markets, with India and Indonesia frequently cited as the most promising destinations.
However, it's not just the juggernauts of finance who are deploying the developed world's capital. A number of cutting edge financial technology (or 'fintech') firms have come up with innovative business models targeting a very different market segment. These firms allow discerning investors - who don't have billions of dollars to throw around - to access the same high-return opportunities as their institutional counterparts. Often, these companies will specialize in a particular country or vertical, leveraging local expertise on a global scale.
Take India. The South Asian powerhouse boasts the world's largest diaspora, with some 30 million Indians living overseas. With India undergoing economic expansion on a massive scale, these non-resident Indians (NRIs for short) are keen to invest in their home country, especially in the booming real estate sector. However, the sheer scale and multi-layered nature of the industry makes finding a reliable investment a difficult endeavor.
Difficult for a person, that is - but not for a company. SmartOwner, India's largest property marketplace, specializes in identifying and funding the top 1% of the country's upcoming real estate projects, and passes these deals along to investors around the globe. Ticket sizes for their investment products range from $15,000 to several million, bringing highly curated opportunities in the developing world to investors in the West and beyond. With clients in 43 countries, it's a business model with widespread appeal, indicating that it's not just the titans of finance who are looking for higher returns abroad.
In fact, Vikram Chari, SmartOwner's CEO, believes that the majority of the wealth created over the next few decades will be in emerging markets, and that capital will become less and less country-specific as information abundance levels the playing field. Chari explains that, "300 million people - the equivalent of the entire United states - will move to cities by 2050 in India alone. With such an extraordinary opportunity for wealth creation, it's no surprise that Western investors are deploying more and more funds abroad." In fact, he sees such capital as potentially transformative to the fundamental development process: "If you can offer investors a predictable and safe 12% IRR, there's no limit to how much capital they can invest. An entire country can be lifted out of poverty with the right incentives."
Whether it's giant PE funds or innovative fintech firms, more and more investors are finding their footing in investing abroad. As the global economy continues to transition into one of information abundance, it's likely that the single biggest determinant for a good investment will not be the country where the investor is situated, but the underlying fundamentals of the opportunity. For both developing economies and discerning investors, this is undeniably a good thing. Developing countries get much needed funds at a more efficient cost of capital, and the aging populations of the rich world gain access to fast-growing markets that can help pay for their retirement.