Investing outside Wall Street may hold best chance for success

NEW YORK -- A growing number of emerging market investors are speculating that the big returns of the future will be made investing outside stock and bond markets.

Buying stakes in private companies before they sell shares or bonds is "where money's moving," said Frank Fernandez, a money manager at Global Emerging Markets Advisers LP in New York.

Five years after emerging markets began to catch on as an investment phenonmenon, the shift reflects an attempt by aggressive money managers to ferret out bargains before they are discovered by the big U.S. mutual funds.

It is also a sign that some investors figure that to keep capturing rich returns, they will need to assume much more risk. That will mean buying stakes in shopping malls in Turkey and electric utilities in Peru that can't be sold easily.

According to a survey by Frank Russell Capital Inc. and Goldman, Sachs & Co., private equity investments in developing countries by 57 money managers increased to $2 billion at the end of 1995, up from virtually nothing four years ago.

"In 1992, emerging markets weren't even on the radar" for money managers making private equity investments, said Donald J. Hardy, a managing director at Frank Russell.

The strategy has attracted money managers ranging from George Soros, whose Quantum Fund has invested in a Moroccan phosphate company and Argentine real estate, to Boston-based Advent International Corp. Advent has set up country funds to invest in private firms in Argentina, Brazil, Chile and the Middle East. Even Nicholas Brady, the architect of a debt restructuring that bears his name, has a firm to make direct investments.

Money managers say direct investment will bring greater rewards than the public markets, which will no longer be seeing such gains as 1993's 44 percent surge in Brady bonds. Brady bonds are the dollar- denominated securities created from troubled bank loans.

"We expect the returns to be much higher. That's the only reason someone would go through all the trouble," said Siguler Guff Inc. money manager Mona Aboelnaga, manager of the Middle East-North Africa Partners Fund.

The reason direct stakes can be more profitable is that they can be "done at cheaper valuations," she said.

For example, Aboelnaga said a public company in Tunisia could sell for as much as 20 times earnings and 13 times earnings in Morocco while a private equity investment could be made for as little as four times earnings.

Fernandez said the crisis sparked by Mexico's devaluation of the peso in late 1994 has helped create opportunities. "They're capital- starved right now,' he said. "Many banks have capital adequacy problems and can't make loans."

To scout out opportunities, Fernandez has been prospecting in Mexico's northern state of Guanajuato, where numerous small auto parts makers supply multinational car manufacturers such as General Motors Corp., yet can't raise the funds to grow.

Ziad Abdelnour, managing director and principal of the New York- based venture capital firm Interbank/Birchall Partners LLC, is going farther afield, investing in a shopping mall built on a pier in the coastal resort of Izmir, Turkey. Abdelnour said he typically hopes for returns of 30 percent on investments.

Some of the managers are focusing on specific regions. Van Eck Associates Corp. of New York began its Andean Fund to seek out investments in the Andean Pact nations of Bolivia, Colombia, Venezuela and Ecuador and Peru. There, a regional trade association has begun increasing exports within the zone.

Just this week, the Czech Republic's Harvard Group and Bahamas- based investor Michael Dingman's Stratton Group said they merged their Czech and Russian holdings into a venture that will buy controlling stakes in Eastern European companies. Harvard had recently merged its six stock funds into an industrial holding company.

Many of the new emerging-market investments will focus on small companies that need to expand. Indian cement makers threatened by cheaper imports, Middle East water bottlers, Russian cola franchisers, media and appliance makers -- all could be good bets, said Mahmoud Mamdani, managing director at Morgan Stanley Asset Management in charge of emerging markets private equity ventures.

Some of the best opportunities, the investors say, are in regions such as Latin America and the Middle East where private companies are often controlled by families wary of selling shares publicly and yet in need of capital to expand.

Expanding the number of potential investments will be programs to sell state-owned assets. Egypt, for example, unveiled plans this year to sell what it values as $7 billion of state-run companies. Morocco expects to sell about $500 million in state assets this year, officials have said.

"There's a chance in Egypt to turn around inefficient, uncompetitive industry, where the public sector has been protected from competition," Aboelnaga said, "and in Morocco, to de- conglomeratize" huge state-owned holding companies.

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