The private equity market is Bangladesh’s ‘biggest opportunity’, says LR Global

Transcript

Bangladesh has seen an uptick in economic growth in the past few years, but have richer investment opportunities followed? World Finance interviews Reaz Islam, Managing Partner of LR Global Bangladesh Asset Management Company, to discuss the country’s economic growth and potential.

World Finance: Now a significant portion of Bangladesh’s economy is the export-oriented textile industry. Would you say that this strong growth is sustainable over the next five or 10 years?

Reaz Islam: The labour cost in Bangladesh is about one fifth of China, and about half of India. So that gives you a great idea in terms of the numbers.

The export – you know, I expect this to grow further. It’s about $22bn plus. So Bangladesh has reached a position in terms of value addition, and basically has become the priority, and the choice, for the importers to essentially have a manufacturing base in Bangladesh.

World Finance: What are the other industries that are likely to come to the fore in the near future?

[E]ssentially any kind of manufacturing sector will be very attractive

Reaz Islam: You have on one hand, a huge supply of labour. So essentially any kind of manufacturing sector will be very attractive, and we see has a high potential.

The second thing is the consumer base. So essentially when you have per capita income going from $700 to $1000, all fast-moving consumer products have huge potential, we believe.

The third one, which is somewhat related, is infrastructure. With this GDP growth there is a huge amount of infrastructure required in Bangladesh. Bangladesh has done fairly well in the power sector, covering that gap; but essentially airports, roads, highways, the ports and so on – we see anything related to that in terms of construction and material related companies have huge potential, we believe.

World Finance: How mature is the investment management sector in Bangladesh?

Reaz Islam: So the investment industry is actually very very small, relative to our peer countries. And there are various reasons for that.

If you look at the market cap of the mutual fund industry, which is approximately one percent of the market cap, and very very small for a country like Bangladesh, with a GDP approaching $130bn plus.

Given the size of the market, we see substantial growth potential. But Bangladesh is still a relatively new country, and the depth is less, but we expect this industry to grow significantly over the next few years.

World Finance: Now your client base includes local as well as offshore investors; can you tell me what type of investments are the latter group looking for?

Reaz Islam: Generally the offshore investors are I would say, in terms of priority, most interested in the stock market, because it’s liquid, and it’s more transparent companies.

Number two, the fixed income market. Bangladesh has recently been rated BB- Ba3 by S&P and Moody’s, and we understand Fitch is also looking at it.

Given the size of the market, we see substantial growth potential

And the spread that you get for taking that risk is substantial. The reason I say substantial is, in our view, adjusting for certain factors, Bangladesh probably deserves a BBB- rating, which is in line with India in terms of actual raw, fundamental numbers. Obviously rating agencies look at other things. But from a risk-adjusted basis, if you look at debt-to-GDP and other fundamentals. So we have seen substantial demand over the last six months to maybe a year, once this rating kicked in.

Where I think Bangladesh has the biggest opportunity, which is yet to be explored in a substantial way, is in the private equity market.

The reason is, the cost of funds is very high in Bangladesh, and most of the projects and other initiatives are funded by banks.

Recently we have seen a few private equity funds coming in, setting up their offices here, and there are one-off investments that are done in conjunction with the IFC. But the highest potential we think is there, and we think it’s on that trajectory in terms of opening up that space for foreign investors in the near future.

World Finance: How else can the Bangladeshi government work to create new international investment opportunities locally?

Reaz Islam: You’ll be surprised; if you look at the laws on the book about foreign investments, Bangladesh is probably one of the best. You can own 100 percent of a private company; the repatriation issues have been about 95 percent resolved, in terms of dividend payout and taking capital out.

Bangladesh has the biggest opportunity, which is yet to be explored in a substantial way, is in the private equity market

But the problem, or the challenge, in a country like Bangladesh, is coordination. So basically you have the Central Bank, which manages the capital account. And then you have the Board of Investment. And then you have the Ministry of Finance. And then you have the NBR, which is revenue collection.

I personally believe there must be more coordination among these regulatory entities. And me, as a foreign investor in Bangladesh, would like to see a one-stop shop so that these laws, or rules, which are actually quite attractive, are properly functioning.

So my suggestion to the government, officials, and leaders, would be: we’ve got great laws on the book, let’s mobilise this! There’s a great shortage of capital, and for Bangladesh to grow at 8-9 percent rate will require substantial foreign investments. And I think fixing some of these issues will definitely improve the plumbing to attract foreign investments.

World Finance: Reaz, thank you so much.

Reaz Islam: Thank you.