Jeff Towson's  Instablog

For obvious reasons, Central and Eastern Europe is on the short-list of emerging markets to pay attention to. Labor costs are relatively low. CEE companies can sell directly into European markets. And they can draw directly on European talent.

In general, few things facilitate development like having a major economic power as your neighbor.

This month we spoke with Professor Darek Klonowski of Brandon University about Inter Cars SA and his +15 years of experience in Eastern Europe private equity. Specifically we asked about how private equity in the region has evolved and how he sees things today.

Note: his latest book Private Equity in Emerging Markets has just been published and is available on Amazon (I contributed a chapter).

Jeff: How has the investment landscape of Eastern Europe changed in recent years? What is different today?

Darek: Let me go through a few basic statistics on Central and Eastern Europe (CEE) PE. The average annual fundraising in the last 10 years is $1.8 billion; about 25% from fund-of funds and about 50% dedicated toward buyouts.

Capital is predominantly from European sources. Investing is concentrated on Poland, Hungary, the Czech Republic, and Romania. Poland is more than 50 percent. The average deal size is about $60 million. And the key sectors are communications and consumers goods and retail.

Investment as percentage of GDP is about 0.10 percent, compared to the EU average of 0.32 percent. Exits are mainly from trade sales and IPOs.

It needs to be stated upfront that CEE has been a stable provider of investment opportunities and returns for local private equity firms for over a decade now. According to data from EMPEA, based on research done by Cambridge Associates, the CEE region ranks well ahead of other emerging market countries. Local private equity firms that focus on CEE have been able to achieve 10- year annual returns equal to 13.9%; which exceeds the returns of private equity across other emerging markets. Asia is 7.8%. Latin America is 2.0%. And Poland is the undisputed leader in the region, with leading funds posting cash-on-cash returns in excess of 3 times.

The rest of the interview is located here

It is the China paradox. At the same time Chinese companies are growing stronger and stronger, Western investors are growing more and more
pessimistic about them.

Jim Chanos says China is "Dubai x1,000". Muddy Waters and other short-sellers are uncovering one Chinese stock fraud after the next. Western investors looking at China are seeing disturbing trends at the macro level and disturbing behavior at the micro level.

So how does one invest confidently and safely in the world's #2 economy? This is becoming perhaps the most important question in value investing today.

We spoke with Kevin Carter of Baochuan Capital about this. Based in California and China, Kevin is a longtime expert on Chinese stocks. We spoke with him about where he sees opportunities in China today and how Western-based investors can capture them.

Jeff: What is your primary approach? Industries, long vs. short, good, vs. great companies, value vs. growth. How do you position yourself?

Kevin: We have three approaches for investing in China. The first strategy is one that takes advantage of two of the key elements of China - and maybe they're not unique just to China but to all emerging markets. They are that the benchmark indexes are very flawed and that the markets are very volatile.

When people invest in China or other emerging markets, they are looking for growth. But traditional indexes for those markets actually leave you very heavily invested in non-growth types of companies, such as state-owned banks, energy and materials companies. One of our strategies is to correct for that and then take advantage of the high volatility. That's one strategy we use.

The second strategy we have, and the second fund we have, is to go long China in a diversified fashion. But again, not just taking the traditional market capitalization index but to include companies like Yum! Brands. Yum! might be classified as a U.S. company but by most measures it is growing because of its China exposure.

The third approach we take is a much more traditional value approach. As you described in the title of your newsletter, "What would Warren Buffett do? How would Warren Buffett invest in China?" To me, it really comes down to two things: great businesses and good prices.

The full article is available for download here.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

An interview with David Riedel, founder of equity research firmRiedel Research

Investing outside of the West brings a host of challenges for value investors. There are different politico- economic systems, rapidly changing economies, unfamiliar cultures, different consumer habits, different languages, limited information, weak governance, and so. These types of uncertainties can be challenging for traditional security analysis - especially when the analyst is located halfway around the world.

This month we spoke with David Riedel of Riedel Research Group about investing in such environments. Riedel Research group is an independent emerging markets-focused research firm. We asked him about where he sees opportunities today and how he deals with the unique aspects of analyzing developing economy companies.

Jeff: First question. For your group, how would you describe your focus?

David: We are a global emerging markets independent equity research firm. We are independent, in that we don't do banking and brokerage. We operate in Asia, Japan, Latin America, and emerging Europe, which gives us broad coverage of emerging markets.

It's always been our view that the most compelling investment opportunities in emerging markets are those that capitalize on the demographic and economic advantages of that specific emerging market. We believe investors should be looking for companies that capitalize on the attractive demographics and the domestic economies that are developing in these emerging economies. If you find a situation in an emerging market where you're able to take an existing developed market business model - whether that's life insurance, advertising, bundling of internet and phone services, or whatever - and apply it to a rapidly growing domestic economy with attractive demographics, that is when you get extremely high growth as a result.

We tend to focus on domestically-oriented plays in financial services, real estate, technology, telecom, consumer products, and retail. Any opportunity where the drivers of earnings are contained within the borders of that country rather than commodity-based plays. We've always said that if you want to buy oil, you might as well buy it in Canada or Australia or the U.S., rather than trying to find it somewhere where you're layering on management, political, and currency concerns on top of the exposure you're getting to the commodity.

For example, there might be a mine in Brazil or a gold mine in South Africa where that product is being shipped internationally but happens to reside in an emerging market. We don't focus on those. We feel that doesn't actually provide investors with the exposure to the advantages of emerging market investing.

Jeff: What types of situations catch your eye?

The interview is concluded here.