Recap: 2023 Singapore CEO Roundtable - Accelerating Capital Formation in the Global South

Encouraging investments in the development of the Global South is critical to FCLTGlobal’s mission of focusing capital on the long term for savers and communities around the world. But capital flows to the region have historically been short-term oriented, flowing in and out quickly, and largely subscale. Companies and investment organizations need strategies to make significant, long-term investments in these regions.

Many countries in these areas are demonstrating strong GDP growth, but the path from “developing” to “developed” or “frontier” to “developing” is rarely a straight line. For companies and investors looking to enter these markets, a very long-term view is necessary to see progress and, eventually, returns.

The following summary reflects the opinions and insights of our participants about the risks and opportunities their organizations are confronted with, new approaches that could be employed to overcome them, and issues that require further consideration and problem-solving from across the global investment value chain.

The “Global South” is not a monolith

Though it’s become a popular turn of phrase recently, the “Global South” is not a single region and cannot be treated as such. Nor is it entirely geographically accurate. Markets considered part of this group include Latin America, China, south and southeast Asia, the Middle East, and Africa. Collectively they account for roughly 40% of global GDP and 85% of global population, with enormous variations among them.

Major regions such as Africa or Latin America are not monoliths – with different languages, resources, and competitive advantages required by investors, such as a strong rule of law, stable exchange and interest rates, and clear political processes. Understanding the risks and opportunities of each country is critical: a one size fits all approach simply will not work for companies and investors looking to break into new markets.

Investing in companies, rather than projects, is key to unlocking capital

Up to this point, many foreign companies and investors have made inroads in emerging markets via investments in infrastructure and similar project-based financing. For global investors, the selection, management, and deployment of capital into specific projects is nearly impossible at scale, as the cost of due diligence can overwhelm the returns.

Long-term companies who have built real value in developing countries have generally done so by investing in corporate structures, rather than on a project-by-project basis. The global consumer, energy, or mining industries have built global companies with local knowledge, often over several decades. And investors who can find strong companies in these areas to invest in can create value well beyond the completion of a successful project.

Working with local partners is critical to success

It’s easy for foreign companies and investors to misunderstand the regional political framework and local culture, the group said; a strong grasp of these nuances is needed to find success and strong returns. These risks can certainly be overcome – the roundtable participants were in unanimous agreement that local partnerships are essential. As one put it plainly, “Westerners do not understand the markets and need local partners. We have learned that the hard way.”

Relying on – and being a trusted partner to – local partners has produced good outcomes. There was also a sense in the room that it is the tendency, and indeed human nature, to simply stick with what’s familiar, and this precludes more capital flows to these regions, particularly in the current rate environment. “Are we overestimating the risks of developing markets and underestimating the risks of developed markets?”

Entering with an exit strategy provides a real challenge for investors

Liquidity and the lack of a clear exit strategy are top concerns that “Global North” organizations share when entering new markets. One participant described building a company in a country with capital controls; as a long-term company, they expect to reinvest that capital for decades, rather than trying to cash out. Those investors that need a clear exit strategy and strong assurances of liquidity will have few investment choices and will be competing with other global investors for those few choices.

Concessionary capital will be a catalyst, but not the core

While some impact investors, philanthropists, or governments may invest with a sub-market rate of return or an uncompensated level of risk, doing so is generally not an option for investment fiduciaries.

Concessionary capital can act as a catalyst to attract commercial-rate funding from private and institutional investors; it can provide the initial funding needed to get projects off the ground, demonstrating viability, and potentially leading to subsequent rounds of financing under more conventional terms. Participants are eager for public entities, namely multilateral development banks such as the World Bank, to use concessionary capital to “crowd in” commercial funding more effectively in developing markets.

This is especially true for climate investments, which tend to be sub-scale; growing them through pooling of projects, diversification across countries, and tranching of risk appetites is necessary to get significant capital moving. The roundtable recognized the necessity of investing in developing markets to meet climate targets, with an emphasis on transition financing for energy sectors, and utilizing traditional capital market mechanisms to facilitate such investment. Mobilizing commercial capital against the issues of the “Global South” requires a shift from a country-by-country or project-by-project approach to a global capital markets approach.

The discussion in Singapore shed light on the complexities of channeling investments into the Global South. The discussions revealed a consensus on the necessity for tailored approaches to investment, investing in companies rather than just projects, local collaboration, and a long-term outlook to navigate the unique challenges of these diverse markets. With a clear understanding of local norms and a strategic deployment of initial, lower-cost capital, investors can help drive more growth in these regions, contributing to a more equitable global economic landscape. We look forward to continuing this discussion in Davos, New York, and elsewhere in the months ahead.