Each year, participants of EADA’s International Master in Finance attended electives in the strategic specialisations in the third trimester. The specialisations include 12 electives divided into three areas focus aras: corporate finance, investment banking and FinTech. Here we talked to visiting professor Carlos Reyes, who led the course Investing in Emerging Markets Private Equity.
Carlos Reyes holds an undergraduate degree in Economics (University of Barcelona, Spain) as well as a master’s degree in International Transactions/Public Policy (George Mason University, U.S.) and an MBA (Yale University, U.S.).
Mr Reyes is currently a managing director with Palladium Equity Partners, a U.S.-focused middle market private equity firm with approximately $3 billion in assets under management, leading the integration of Sustainability/ESG best practices across Palladium’s portfolio. Prior to his current role at Palladium, Mr. Reyes was principal in the IFC Asset Management Company (AMC), a private equity firm co-investing alongside the IFC in equity projects within emerging markets. Within AMC, he worked with the Africa Latin American and Caribbean Fund (ALAC), where he was broadly responsible for investments in the energy/natural resources sector and across all sectors for the Sub-Saharan Africa Region.
Prior to joining AMC, he worked at BP in a wide variety of executive roles including Gas Commercial Lead (BP Algeria), Director (BP Energy Financial Services), Strategy Advisor (BP Strategy Group) and Project Manager (M&A Group).
Every day is a surprise when you work in emerging markets.
What attracted you to emerging markets?
I was attracted by the ability to achieve a double bottom line, financial returns that exceeded, in my opinion, the returns on a risk-adjusted basis of developed markets, and the ability to have a positive impact in the communities in which I invested by being able to provide basic goods and services where there were none.
What is most rewarding about investing in emerging markets? And the most challenging?
I think it is always rewarding when you see an investment thesis that you have in your mind proven true, regardless of if you are in emerging markets or developed markets.
In emerging markets, it is particularly rewarding to bring a company’s corporate governance practices to an international standard level. There have been circumstances in which I have invested in companies without a board, for example, and then we had to develop a board, set up procedures, and board sub-committees.
The biggest challenge is that every day is a surprise when you work in emerging markets, and you have to roll with the punches. There might be circumstances in which the company is doing very well and the management is very professional, but all of a sudden, there is an external event -like a big devaluation or a political event- which significantly hampers the ability of the company to grow and deliver on the investment thesis.
Risk in emerging markets is amplified by the fact that there are risks that you simply cannot control.
How does investing in emerging markets different from investing in developed markets?
Investing in emerging markets is more about operational leverage. In developed markets, you have a greater ability to do financial engineering – you have mezzanine capital, subordinate financing, bonds…You have an incredible array of financial instruments to finance the acquisition (different tranches of senior debt, subordinated debt, longer maturity dates, etc.), which are not available in certain emerging markets where you simply have senior debt with very short maturities, i.e. less than 5 years.
Therefore, the growth in a company that operates in Emerging Markets often must occur through pure operational leverage. That means that you really, really have to sweat the assets.
What role does risk play in emerging markets?
The rates of return that you require for investing in certain emerging markets have to account for the inherent macro, regulatory and political risks. For instance, macro-risks like foreign exchange. When you are an international investor, the capital to invest is provided in hard currency like dollars or euros. When you invest in emerging markets, if the business is focused on the local economy, you are significantly exposed to the ups and downs of the local currency, and when it is an equity investment, it is very difficult to hedge the currency exposure.
What qualities are important for professionals in investing?
I would start by saying that you have to see investing as an apprenticeship – you learn deal by deal, and you get the so-called “pearls of wisdom” from one deal that you apply in subsequent deals. It is very difficult to say, “I’m going to learn investing” the same way that you would learn accounting.
A good investment professional should have intellectual curiosity, determination and grit. And always remember that Investing is a people’s business. Sometimes when you invest in companies and you deal with people, you not only have to be a financial professional, but you have to be a psychologist, a marriage counsellor, a friend, a disciplinarian…sometimes you have to let a management team go, or you get a call from the CEO saying, “My CFO has left, what do I do?” You need a special set of skills to deal with a wide variety of issues.
If you are looking for growth, you go where the demographics tell you to go and where your services haven't already reached the majority of the population.
What role do emerging markets play in global growth?
Emerging markets are going to be at the forefront in terms of growth, there is no question about it. To me, the question is, how you can capitalise on that growth. The basis of growth starts with demographics, and demographic growth is happening disproportionately in emerging markets. For instance, if you are in the diapers industry, and you want to see where the growth markets are for your products, is it going to be in Europe? The annual birth rate in Nigeria is equivalent to that of the whole European Union.
You also go where your services haven’t already reached the majority of the population. If you are in the mobile business and penetration in the developed markets is 90%, how much more penetration can you achieve?
How do you keep up in emerging markets that are constantly changing?
It is very important to develop your own network of trusted advisors. Having a local presence helps a lot – the IFC has a hundred offices all over the world.
In terms of your personal network, you will end up with some friends at the end of every deal. Those friends in the industry are people that I often call upon for guidance or advice. Whenever there is a challenge in “country x”, I contact the people in my network and try to get information beyond what is on the news to find out what is going on “on the ground”: What does it really mean? What has the impact been?
In class, I share my experience and emphasise that we are in a business that requires people skills.
How has your professional experience informed your teaching at EADA?
I try to focus the class very much from the point of view of practical experiences. I start out assuming that everyone knows how to do a DCF (Discounted Cash Flow) and that everyone understands financial statements. But I stress that students have go beyond that – they have to understand which things will move the different stakeholders in a deal. I try to share that experience and emphasise that we are in a business that requires people skills.
What is most rewarding part of teaching the next generation of finance professionals?
For me, the best part of afterwards – it is the pride of seeing people that you have befriended out there growing professionally. This is the fourth of fifth year that I have been teaching at EADA, so I am connected with many alumni on LinkedIn. It is rewarding to see how their careers are advancing and blossoming.
I wish that someone had told me that when you look at a 30-year career, your first deal is going to be just a few pages.
What do you know now that you wish somebody had told you when you started your career?
I think it would have been helpful to have some perspective. When you start your career, you look at things very much on a short-term basis. I wish that someone had told me that when you look at a 30-year career, your first deal is going to be just a few pages. In perspective, the highs are not that high, the lows are not that low.