Bad country, good exit? The need for nuance in compromised economies. By Martin Soderberg, Partner, Spear Capital

Anyone who follows sports knows that, occasionally, you get a world-class player in a mediocre (or even poor) team. Gareth Bale and George Best, for example, are two examples of footballers who are legends at club level but whose national teams often struggled to even qualify for international tournaments. The same is true in business.

More specifically, you can get businesses that are shooting the lights out despite operating in struggling economies. In fact, there are more of them than you’d think. I should know too. Together with my colleagues at Spear Capital, I’ve spent the past decade identifying and investing in them.

Were these companies based in countries with booming economies, they’d be serious acquisition targets. But for a variety of reasons, they often have to overcome barriers that their counterparts in other markets don’t have to. And by keeping those barriers in place, investors are missing out on the potential for serious returns.

Private equity in times of economic crunch: Of course, in many ways it’s understandable that businesses in struggling economies have to work harder to achieve good exits. In times of economic uncertainty, no matter where you are in the world, exit options generally reduce and valuations drop. It should hardly be surprising then that bad economic overviews can significantly decrease exit options. It’s not the individual company’s fault, this logic dictates, but the primary market it’s based in. How much can a retailer grow, for example, if its potential customers aren’t getting wealthier and able to spend more at its stores?

But there are inherent flaws in this logic. Just because an economy is struggling, doesn’t mean that a company can’t do well or grow. Take the UK, for example. Brexit and political turmoil have only worsened its already moribund growth rates. And to a degree economic outlook made firms wary of doing deals in the UK. But there are many good companies in the UK whose economic trajectory was untouched by the waves of Brexit, or even, companies who innovated and excelled in the face of uncertainty. In fact, 2021 (when the country was still experiencing varying levels of lockdown) saw mergers and acquisitions reach record levels.

Why then shouldn’t the same be true for frontier markets in places like Southern Africa?

Overcoming biases, understanding the potential: Some will argue that it’s because those markets have a less-established track record, meaning that any economic ructions are likely to impact businesses more severely. That may be true at a macro level, but I’ve seen thriving businesses in such economies time and time again over the past 10 years.

It’s also likely that familiarity bias plays a role. This tendency for investors to favour investments in sectors and markets that they’re familiar with and comprehend is understandable, especially when it comes to risk mitigation. But it’s still a bias that investors need to be wary of. That’s especially true when you consider the potential investors are missing out on by holding onto the above logic and biases.

The economic difficulties in many of the countries that investors are wary of won’t last forever. And when their fortunes turn around, they’ll likely do so in a very big way. That’s because they have a lot of things going in their favour that even the most developed countries don’t right now.

Take population demographics for example. As many developed countries struggle with ageing, shrinking populations, these frontier markets will keep growing. By 2050, for example, half of Sub-Saharan Africa’s population is expected to be under the age of 25. And in 2021, the region’s population grew by 2.6%. By comparison, Europe’s population is expected to be just 0.6% higher in 2026 than it was in 2019.

Those young people won’t just be vital from a labour perspective. They also represent an increasingly connected and savvy consumer base (to say nothing of the potential wealth that’ll come from the region’s renewable energy resources). And the best way to reach them is by acquiring the companies that’ve already succeeded in those markets.

Move now or regret it later: By the time that becomes obvious to most organisations in a position to make an acquisition, they’ll already be a long way behind those that weren’t afraid to invest early and aggressively. So, next time someone pitches you on a great company in a struggling economy, don’t get caught up in the barriers to investment. Instead, focus on the rich opportunities and how you can grab hold of them before anyone else does.