Is Now The Time for EtA in Emerging Markets?

So the big question is this, how are entrepreneurs who aren't scaling tech startups or building lifestyle businesses from scratch doing it? How do acquisition entrepreneurs find businesses, buy them, and then create generational wealth while taking on less risk?

Welcome to Surge Funded, the Entrepreneurship Through Acquisition podcast. I'm your host, Nick Law and today I'm going to talk about something that I've been meaning to for a while now and with current events, I think it is about as good of a time as any. Unfortunately, those of you who are regular listeners, you're probably already pretty aware of this, but the SBA has recently made some big rule changes and they've impacted all of us. All of us who are thinking of doing a self funded search in the US are probably reconsidering it or thinking about different ways to go about it. Basically, what's most relevant to listeners of this podcast probably again, because only 53% of my listeners are in America. So if you're not an American, you're not allowed to invest in a search fund deal if it makes use of an SBA loan, and you're also not allowed to search or acquire a business if you're not a U.S. citizen. Even if you are a U.S. citizen, you need to put down 5% of your own money on the loan. That that doesn't include the 10% down that could come from investors. So those are just a couple of the rules that make it harder. There are a lot more that I'm going to have someone else on, hopefully who has way more expertise than I do on this and how it impacts things. But in general it's become a lot harder to buy a business in the US through the self funded route because of these changes. I think also with the global economy influx, there's just a lot more uncertainty out there and that is why I'm going to talk about why I think it might be the time to look at ETA in emerging markets. So first of all, just a little bit about myself. I spent six years of my career living in Southeast Asia and while I was out there I got really passionate about the potential that I saw in emerging market countries. That's why I studied out there in Singapore at Insead. I also started the Insead Emerging Markets podcast after graduating, which if you like this podcast, you might like that one as well. It's on all the same platforms as this one, Apple, Spotify, et cetera, Fed, PEs, VCs, Fortune 500 executives and several unicorn founders on that podcast. So feel free to check it out if you're interested. But recently, in addition to the general interest in emerging markets, I've also started looking more into the possibility of ETA in emerging markets. And I think that there's actually a lot of potential there. Now, may not have said that a few years ago, but we're getting to the point where there is a critical mass of investors and searchers in these places, and I think that's what you need for the ecosystem to actually work. Spent the past year doing quite a bit of traveling. I was in the Middle east and the Gulf, in the uae, Saudi, Oman, Singapore, Malaysia and Vietnam and Turkey. Talked to a lot of searchers there, talked to investors there, and came away really excited for the potential that I saw in these markets. And I think up until now, you know, you're getting your 35% IRR in the U.S. why would you take the risk of investing in places where the markets are more opaque and there are currency fluctuations and there's just a lot less knowledge about what may or may not work in these places? And I do think that that is something that is really important. It gets discounted a lot in terms of what has made search funds so successful is that you're getting the mentorship from people who have already done it before. And that's why this young guy is being able to come in and really run a large business and be successful with it. But in this episode, I'm going to lay out a few of the reasons why I do think that there actually is more opportunity in emerging markets right now and why I'm looking at them. And I'd recommend that you start looking at them too. So whether or not the global economy stays in flux or totally rebounds in the next week, I mean, we don't really know what's going on these days. Emerging markets do make a great hedge against whatever may happen. A lot of these countries are much less correlated with global markets. Places like India have been consistently growing at 5, 6, 7, 8% per year, and that's mostly just been due to domestic consumption. And they have the demographics to continue that. Places like Cambodia have been growing at double digits for decades now. Again, it's because they're just coming from such a small base. But that also means that there's a lot of opportunity there for investors and entrepreneurs. And so getting to the reasons, though, why I think ETA especially is very attractive right now in all these markets, the first is there's just a lot less competition in these places, so there are fewer buyers. That means the multiples are lower, unlike the US Right now where almost every business you reach out to will tell you that, oh yeah, I've been getting dozens of emails from guys like you, but I decided to reply to you. For whatever reason, a lot of the business owners in these markets have probably never even heard of the idea of selling their business. They just thought, okay, if I don't give it to my kids or an employee, I'm going to just shut it down. Because of that, you get these really attractive multiples. You can get a healthcare company that might go for 6 to 8x profits in the US for 3 to 4x. In most emerging markets, of course, fewer buyers also means that it's more difficult to exit. There are not a lot of strategics or financials in most of these places. But again, if you're the type of person who listens to this show, you probably are going to grow the business in a way that would make it more attractive for international buyers. And there are actually very many international investors who do want to get involved in a merger markets. It's just there aren't that many investable deals that are available in most of them. And so if you're able to grow the business in the right way, I think that you could actually have a really good outcome by doing that. And even if that's not your strategy, it's actually also much easier to IPO in these markets than it is in developed markets. I just came back from Saudi Arabia. And Saudi Arabia, if your business is a little less than $3 million in enterprise value, it can IPO on the Saudi Stock exchange. So already that's the size of most search fund businesses. And so that is definitely a strategy you could employ in a lot of these places as well. But my recommendation actually would be not to exit. My recommendation would just be to buy and hold for the long term, diversify across different markets, especially with all the different currency fluctuations that they might be having. And then that way, if you have a business in India, one in Vietnam, one in Brazil, you know, one country might be doing well, the other might not be. But you can really mitigate your downside risk there and apply modern portfolio theory to your investments in a way that's not possible in a lot of other places these days. Because private market businesses in emerging markets in different emerging market countries is actually one of the few ways that you can really be successful in investing in uncorrelated assets these days. So that would be my approach. You can do it, you cannot do it. But these countries are where the center of humanity is going to be in the future. And so I would just say buy a business, stick with them and enjoy the growth over the next few decades. And along the way you'll probably get some great exit opportunities anyway. Now, the second reason that I think that emerging markets are especially exciting right now is going back to that competition point. There's not just less competition between buyers, there's also just a lot less competition within every industry. And a lot of the industries that are way more advanced in the US are still pretty nascent in a lot of these countries. And there may just be a few players there, they may not have innovated in a long time. And if you're the type of person who listens to this show, you've probably done your MBA overseas. You might have gotten some professional experience in a developed country before coming back to the emerging market country that you came from. And because of that, you can come in and bring that experience to professionalize the businesses, digitize them, bring the latest technology and really revolutionize an industry. And by doing that, you can pretty easily become a market leader. And even if you don't become a market leader, even if you just maintain market share, these countries are just growing so quickly, not only economically, but demographically, that you can still have a really good outcome. And that's why people get VC like returns pretty easily. Buying traditional businesses in emerging market countries. The final reason why I'm really excited about the potential for ETA in emerging markets is that there's just so much more value in these places. So company that you might buy as a searcher in the US around a million dollars in ebitda. That's oftentimes just your typical above average blue collar business, your local H VAC or local LANDSC paper that has a few guys working for them. And in reality, those are often not the easiest business due diligence. A lot of cases, not everything's being done by the books. And on top of that, Most of the MBAs who are looking at buying the businesses probably don't have a lot of experience in those industries. What's really cool about emerging markets though is that a business of that size, a million dollar EBITDA business in an emerging market typically has 100 employees, accountants, lawyers, it's just a lot more professionalized. And if they're dealing with international clients, their books should be fine. Actually, places like South Africa, the accounting standards are much better than they are in the US but even in other countries, the business of size, especially one that's doing work internationally, is probably going to be not Too difficult due diligence and it's probably going to be easier for the ETA entrepreneur to run because there will be a lot more middle management and there'll be processes in place just due to the size of the business. Now, when it comes to the type of businesses that I'd recommend looking at in emerging markets, firstly just anything that's basic human service, healthcare infrastructure, those are always good emerging market investments. But particular to eta, there are a few that I'm going to recommend that are a bit more niche. The first would be professional training or any sort of certification business. I think that those are great businesses in any market just due to the nature of the business, highly recurring revenue, low capex, etc. But especially in emerging markets, they are extremely good businesses. Going back to the point of competition earlier, they often may be the only one in the market that has license to offer a certain sort of certification. I know a guy who recently bought a sales training company in Egypt and what it does is it gives a certification for salespeople that are in Egyptian corporations and they're the only one in the country that offers that certification. So despite the current currency issues that Egypt has had, despite their economic volatility, his company has done incredibly well. He has more business than he can handle just because Egyptian corporations need their salespeople trained and his company is the only one that's able to do it. So the second area that I'd recommend is actually kind of similar. It's just education, but education more broadly. Those of you who are more into VC investing, you probably know that ed tech has been a pretty good industry in emerging markets, especially in places like India and China did quite well during COVID maybe not so much afterwards, especially in China after the government got involved, but that's another story. But I think education is always just a great play in emerging markets, especially traditional education as these places grow. Myself coming from a half Indian background, I know all too well that middle class Indian consumers will not typically spend on luxury goods, but the one luxury good that they will invariably spend on, and I do consider a luxury good, is their children's education. And I think that we've seen that to be true across Asia. We are seeing that to be true in Africa as well. Now a good friend of mine, her husband started an English language school chain for professionals in Myanmar back when the country first opened up and their company is now listed on the London Stock Exchange. And I think that that sort of outcome is still possible many places in Asia, probably even more possible in Africa now if you want to try it there. So if you can find an education company in Africa or the Middle east or Asia and roll it up or scale it up, systematize it, I think that a similar result is totally possible. Now, the final industry that I'd recommend, which is a little bit more out there, but if you have the right background or you're just able to pull it off for other reasons, I think it has immense potential. And that industry is agriculture, particularly agriculture in Africa. Africa has 1.3 billion people today. They will have 3 billion by the end of and they have 70% of the unexploited arable land in the world. But despite that, they still import the majority of their food from other continents. And so if you have a background in regenerative agriculture, agriculture, technology, food processing, forestry, basically anything related to food or agriculture, whether you're an investor or an entrepreneur who wants to get involved in Africa, I think that agriculture is just an industry that has so much potential. And not only can you make an incredible financial return by doing that, you will also generate a huge impact because that is where the majority of humanity will be living in the future. And if you want to impact the future of our species, I would definitely get involved in agriculture in Africa. Well, that's about it. Hope this episode was helpful. As I mentioned, I also host the INSEAD Emerging Markets podcast. If you want to learn more about emerging markets in general, feel free to listen to that one. I'm also thinking of doing some more of these short monologues on this podcast, so if you like this one, let me know and I'll keep doing them. And I'm also going to try to interview some more guests who've done surge funds or ETA in emerging markets so you can get more of the particulars of the challenges and opportunities in each of these unique markets as there is certainly a lot of diversity across them. Thanks again. Have a great day. Feel free to reach out with any feedback or thoughts. Always means a lot.

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