Frontier market investment banking boutique, Exotix specialises in illiquid bonds and loans, equities, structured finance and capital raising. Exotix’s main areas of expertise include a specialist understanding of illiquid, distressed or undervalued debt and equity, skills in raising structured finance or capital and alternative investments. With a wealth of experience in emerging markets, Exotix CEO Philip Southwell has held several leadership roles at Bank of America Merrill Lynch (and its predecessor firms), Deutsche Bank and EFG-Hermes. He has lived in the emerging markets for the majority of the last 20 years; first in the Asia-Pacific region and currently in the Middle East and Africa region. Over the course of his career Philip has worked on capital market transactions in most major jurisdictions across the Asia-Pacific, South Asia, Middle East, Western & Eastern Europe & North American regions. At Deutsche Bank he led the equity capital markets teams in both the Asia-Pacific region and in Europe, Middle East & Africa. Philip is a Member of the Institute of Chartered Accountants of England & Wales, he graduated from Durham University and Eton College. He talks to Blue Chip about the immense potential of frontier markets.
Exotix’s sustained focus on frontier markets has proven very successful with the firm winning an array of accolades, what factors have led to the growing interest in these markets?
Phillip Southwell: “Exotix has had a very clear focus for the last 15 years since it was originally set up within ICAP. Our focus has been on the broad frontier, emerging markets space and across the assets class: we trade loans bonds, equities, and hybrids. The region of the world that we cover is huge. It is a massive proportion of the world’s population, well in excess of 100 countries.
In GDP terms these markets are growing fast. However, you construct the global macro, these markets become even more important five and 10 years from now both in terms of demographics and GDP. Yet for the majority of investors in the big wide world, they barely make the map and that just seems odd. Most big pension fund managers are looking for diversification, low volatility and for investments that are not highly correlated. If they religiously follow the large global indices and the biggest global players, they basically fly over this huge proportion of the world’s population.
We basically built a business doing what the big global banks don’t do: we focused on countries outside the G20 with the exception of Argentina. Those markets are really interesting so we are very excited about the opportunities today and in the long-term. We have spent a lot of time using the research products that we have, and to an extent, educating the market.
It frustrates me when the media talk about emerging and frontier markets as a homogenous region. The example I give is when people thought that the eurozone was a homogenous region they got a big surprise when they went to Greece and parts of Italy and Spain and learnt exactly how different they are from Germany. This region is incredibly diverse. There are small markets and large markets; there are markets with very significant domestic currency businesses and others with virtually nothing. Obviously there is a huge spread of countries across the development axis.
I think the role that we have, has become more exciting post -2008/2009 because the financial crisis has meant that banks have unquestionably scaled back. Many of the big corporates that we speak to across the Middle East, Africa and Latin America are continuing to grow quite successfully and they have long since outgrown their domestic banking market. Access to capital markets is a critical strategic weapon for these companies in their longer term ambitions to grow domestically, regionally and globally.”
Exotix has identified particular value in Africa can you elaborate on this?
PS: “The historic business of Exotix was with ICAP. ICAP’s principal shareholder Michael Spencer remains our largest shareholder through his family office. The core DNA over the last fifteen years has been fixed income. The fixed income market in a way is very easy to trade because it trades OTC. So you can sit in Islamabad or London or New York and trade in any market — you can’t do that in equities.
Exotix always had an equities business. My decision when I joined as CEO was to grow that business. In the equities business you have to pick your market: you have to trade on exchange and in local currency. For that reason we are focusing on Africa and the Middle East. We are opening an office in Lagos this quarter and will open elsewhere in that region over time. We actually save costs by opening offices in these markets because we pay away a lot of brokerage fees to local brokers to execute for global clients.
When I look at the financials of the company over the last 15 years, by and large the same key frontier and emerging markets pop up as the most important markets for the investors that we talk to year after year. It is no great surprise which ones they are, it tends to be the bigger markets and Pakistan is clearly one of those markets.
So the focus on Africa to an extent is driven by the strategy we have to build our equities franchise. Our focus is not exclusively on Africa. Since the end of March, we are able to trade 98% of the Frontier Index from our offices. That would include significant parts of South Asia, the Asean countries and Latin America; but our starting point was Africa and the Middle East.”
What are your views on the regulatory frameworks in these markets?
PS: “The regulatory framework to an extent is easier because we make sure we comply with all the rules. We spend a lot of time talking to regulators and major stakeholders in the finance ministries, central banks and stock exchanges because we have a common objective of developing those markets. Everyone understands the benefits of developing capital markets. If rules are put in place which are familiar to international investors with protections for them, by and large they will invest because there is appetite.”
What about countries perceived as corrupt or unstable?
PS: “It is difficult for people to become experts on every country so I understand that. However as you investigate these markets you will find very cheap stocks, very well run, very little leverage, very high growth — perfect companies to invest in.”
What impact do you think extended QE will have on these markets?
PS: “Again very varied. There are lots of factors but I think clearly a lot depends on the nature of the underlying economy: for a very resource rich country with a net debt of zero and a fiscal surplus, the effects of QE are very different from a country that needs to import all of its resources with a significant sovereign debt as a percentage of GDP and operating a large fiscal deficit. So there are big differences.
Frankly, I think QE is going to expand the opportunity universe for Exotix in the same way we were able to expand our opportunity universe into markets like Greece and Cyprus over the last few years. As they became un-investable we recognised value in them. It has been a huge part of our business. The business has a really good track record over the last 15 years in identifying, analysing and working out how to invest in those types of markets. We have a very big Paris Club business and Exotix has been very strong around these sovereign distressed types of situations.”
Exotix is participating in landmark infrastructure projects in frontier markets, what are your views on this?
PS: “Infrastructure is a big space with massive opportunities where there is very little finance available. We think that developing the capital markets for long-dated infrastructure projects is very important. I have spent time in Dubai talking to one of the big development banks discussing how they can do multi-billion dollar investment projects in Pakistan. This is hugely important, but how do you finance that? In the financial crisis, I think we have seen a really significant inflection point where most global banks that were active in project finance came to a halt. With Basel III Rules for banks and Solvency II Rules for insurance companies, there are genuine restrictions on lending long-term.
My response was to build a very high quality team and base them in the Middle East. We have listed a company in London and through that company were able to write long-dated cheques so we can lend for 15 or 20 years. We can benefit from all the structural aspects: project finance is very well understood from a legal perspective. You can work on project finance deals in Saudi Arabia, Oman or wherever and they all operate under English law. We can structure ourselves around that and find ways of enhancing the capital structures of those projects, recycling equity for the infrastructure owners and allow them to then recycle that into new projects. We listed a company and within 3 to 4 months all the money raised will be fully invested; we will then seek to grow that over time and we have plans to do that across other emerging markets.
We feel that this is an incredibly exciting business opportunity. We also think it has incredible benefit both to the operators in the countries that we talk to and to investors because investors are able to invest in a pool of assets across a diversified group of infrastructure companies, get inflation protection by investing in a floating rate product, lock in interesting spreads versus their domestic sovereign spreads, are able to trade any time they like because these companies are listed on the London Stock Exchange. We feel that these types of asset classes are very important and we will look to replicate this across different regions of the world and across different asset classes where banks and insurance companies historically provided finance and debt.”
Exotix significantly expanded its team with several new hires, can you elaborate on this?
PS: “The last New York hire was from JP Morgan, from the sales trading side people came in from Goldman Sachs, Merrill Lynch, Standard Bank, Rencap, and from Citi. I think as most of the big banks focus on their home markets and the big countries within the G7 and to an extent the G20, their focus is not on the horizon, frontier and other emerging markets and their employees know that they are on the fringes, away from the central decision making.”
What are your views on global investment appetite?
PS: “From our experience the investor demand is there and is looking for somewhere to invest. To an extent we are just providing that conduit. From the fourth quarter of last year we worked on a large rights issue for Hellenic Bank in Cyprus; we found investors for the bank in a very difficult market because of all the things that had happened to Cyprus. We worked on a very large Angolan sovereign bank loan for which we found very significant investor demand; we worked on an infrastructure IPO; we were working on Tier 1 and Tier 2 for Nigerian banks for which there was very high quality investor demand. It is about making investors aware of those opportunities and making sure there is some degree of liquidity. Investors are looking for those opportunities and are struggling to find them.”
