Investing in emerging markets comes with a distinct set of challenges and opportunities. The journey often involves longer timelines for building and exiting companies and requires resilience to navigate economic and macro volatility – setting it apart from developed markets. At VEF, we’ve learned that patience and choosing the right markets are essential. Discover more insights from our CIO, Alexis Koumoudos.
What are the main learnings from your experience and career investing across emerging markets?
From my perspective, the biggest learning has been that the path to building and exiting a large company in emerging markets is longer than in developed markets. However, patience is often rewarded with huge outcomes, particularly given that most emerging markets experience lower competition of capital chasing quality opportunities. VEF’s permanent capital structure enables us to embrace this approach: we take a long-term view, provide support to portfolio companies throughout their growth journey, and can take advantage of the outsized returns these markets can deliver.
What factors contribute to the longer timelines for building and exiting companies in EM?
Companies in emerging markets often take longer to build and exit largely because economic cycles can be more frequent and severe, which makes access to capital less predictable. As a result, it is rare that tech companies can afford to J-curve as steeply as might be tolerated in developed markets. Building successfully in these environments involves keeping a firm grip on the controllables surrounding capital, runway and self-sustainability.
On the flip side, these challenging conditions breed highly resilient entrepreneurs. Home-grown operators tend to be very conscious that the next crisis could be just around the corner, leading them to build appropriately and with adaptability in mind. When faced with challenges, they are often better equipped to naturally adapt to the new environment.
What are some other factors to consider when evaluating investment opportunities in EM?
Currency volatility is one. Great teams, with bold visions, employing fundamental problem-solving from first principles can lead to very large outcomes. While opportunities in emerging markets are huge and are often driven by innovation in uncharted territory, the total addressable market (TAM) must be large enough to overcome headwinds brought about by FX volatility. At VEF, some of our best USD returns have come despite very meaningful local currency depreciation – such as Iyzico, which delivered a 57% IRR despite a 50% depreciation of the Turkish lira – because the TAM was sufficiently large.
In addition, it’s crucial to spend time evaluating potential exit strategies, especially in the context of venture capital in emerging markets. Some scale opportunities in these regions are met with poor prospects for exit. At VEF, we focus on markets and opportunities where we can confidently map out a path to realizing substantial returns. This is one reason we have concentrated our investments in countries like Brazil and India, which have well-established, liquid capital markets that offer viable exit paths through IPOs and strategic sales, attracting both local and international investors.
In our next piece, we’ll explore the key trends and drivers shaping the fintech industry today, including the evolution of disruptors and incumbents, the exciting potential of AI, and the tailwinds for credit businesses.