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Private Equity in Emerging Markets Class Gives Students Inside Look at Growing
Field
When today's students drool over the über-hot field of private equity, they don't typically ponder the possibility of investing in chicken farms. But that sort of basic business is the wellspring of emerging-market investing, according to the two professors who teach Wharton's course on the topic.
When you do private equity in the developing world, "you're generally making investments in businesses that are fundamental to an economy," explains Steve Sammut, a Wharton lecturer who was instrumental in the creation of the course. "It's not high tech like we see here. It could be food distribution, building-materials makers or beverage producers. It's things that are basic to everyday life."
Sammut, who now teaches the course at Wharton West, and Roger Leeds, who began teaching it this year on the Philadelphia campus, both say that that reality can make emerging-market private equity more challenging but also more personally rewarding than its developed-world counterpart. Emerging-market ventures can make a hefty, obvious difference in the quality of local folks' lives. At times, they can even aid in the delivery of necessities like clean water and basic healthcare.
The desire to combine a good living with good works is increasingly attracting students to the field, the professors say. Wharton's emphasis on globalization and the international diversity of the student body have made students more attentive to opportunities abroad.
In fact, a group of students asked Sammut to create the class and helped to determine its content. About five years ago, MBA students John Morton and Tony Estrella approached him about overseeing their independent-study course. At the time, he was consulting with the International Finance Corp., the investment arm of the World Bank. Sammut agreed.
Within a day, Morton and Estrella told Sammut that a couple of their friends were also interested in joining the class. He agreed to that, too. The students volunteered to find a classroom in which they could meet. "The time came for the class, and I went to the classroom and there were 60 students there," Sammut recalls. "I thought that I might be in the wrong place."
"We spent the next three hours brainstorming as to what they wanted to do," he continues. "Essentially the students created it—it was a group independent study. I put together the reading packs and assignments and called my friends at the IFC, and they said they'd love to help. We hired a bus and went to Washington for a full-day seminar at the IFC."
Sammut met Leeds, a professor of international finance at Johns Hopkins University's School of Advanced International Studies, through his work with the IFC. Leeds signed on to teach the main-campus version of the private-equity course starting this year. He also still teaches at Johns Hopkins, where he directs the Center for International Business and Public Policy.
Leeds has spent much of his career as a practitioner. Besides serving as a senior staffer at the IFC, he has worked at Patricof & Co., a New York venture-capital and merchant-banking firm; KPMG; and Salomon Brothers. He earned his doctorate at Johns Hopkins.
Like Sammut's class, his version relies heavily on the case method, asking students to assess potential investments as if they were professionals in the field. "The premise is that private equity in developing markets is fundamentally different from in developed markets," he explains. "You have country risk—more political instability. The companies don't have as much transparency. The financial markets are weaker, and the human capital pool is different."
But he adds, "The upside potential is enormous because private equity is an underutilized financing mechanism in developing countries."
Probably the biggest challenge is the lack of transparency and western-style corporate governance. Managers in emerging markets are unaccustomed to the level of outside scrutiny common in the developed world, and many companies are family owned. "Most companies have never been accountable to anyone but themselves," Leeds says. "They haven't had boards or worried about accounting practices. It can be a dramatic cultural shift for them."
Leeds remembers one of his investments, in Brazil, where, despite being one of the larger players in the tourism sector, the firm hadn't paid taxes for several years. No prudent investor would risk investing money that the government could end up seizing, he points out. His investor group therefore "convinced them to come clean in the way that they approached their relationship with the tax authorities," he says.
As a result of interactions like this one, Leeds has come to understand that private-equity investors can contribute critically to the maturation of the companies in which they invest and thus the economies where they work. "Private equity forces companies to update their business practices on every level," he explains. "Remember that it's patient capital—it's there for a long time. So the incentives of the investor and the management are closely aligned—both want to enhance performance over the long term."
As a bonus, the field also enjoys an Indiana Jones élan that's typically lacking in the button-down world of developed country finance.
"Sure, I've visited a lot of chicken and shrimp farms," he adds. "But I've also done a lot of work in rural environments where you go deep into the interior of the country. I've been all over China, Russia and Kazakhstan."
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