Is Now The Time for EtA in Emerging Markets?

New SBA rules are making self-funded search tougher—especially for non-U.S. citizens. In this episode, we explore why it might be time to look abroad and my personal reflections after spending the past few months traveling through the Middle East and Southeast Asia. 

Links to INSEAD Emerging Markets Podcast: Spotify, BuzzSprout, Apple. 

Nothing in this episode should be interpreted as financial, legal, or investment advice. Please do your own research or consult a professional.

Transcript

Welcome to Search Funded, the entrepreneurship through acquisition podcast. I'm your host, Nick Lall, and today I want to talk about something that I have been meaning to talk about for quite a while now. And I think with current events, it's as good of a time as any. Unfortunately, those of you who are well tapped into the search fund world, probably most of my listeners, especially if you're a self -funded searcher, there have been some big changes recently. The new SBA rules have come out and they've made it much more difficult to do a self -funded search if you were going to make use of the SBA loan, which most of us probably were. If you're not a U .S. citizen, it makes it even harder. Basically, it's impossible to do it now as an investor or a searcher that's not a U .S. citizen. And then even if you are from the U .S., you need to put 5 % down of your own money. That doesn't include the 10 % down. That could include investor capital. And so those are just a couple of the rules that make it harder. And I'm hoping to have someone who has more expertise on to discuss all the different rules and how they may impact self -funded searches. But in general, it just becomes a lot harder for all of us.

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And so that's why I think whether you are an investor or a searcher, it might make sense to look overseas and look at investing in EtA internationally at this point. The slight majority of my listeners are American, but there still is a huge international listener base. And so this episode may be a little bit more relevant to them, but it's really relevant to anyone who's interested in investing in emerging markets. So just a little bit about myself. I spent six years living in Southeast Asia as an adult. And in that time, I became really passionate about the potential in emerging markets. I also host the INSEAD Emerging Markets podcast, which is on all the same platforms this one is on. So check that out if you're interested in it. I've had PEs, VCs, Fortune 500 executives, and several unicorn founders on that podcast. If you like this one, you probably will like that one as well.

a little bit about

Recently, I started getting more interested in surge funds in emerging markets. I spent the past half year traveling, was in the Gulf in Southeast Asia again, and came away really excited for the potential in these markets. I think up until now, it may not have made a lot of sense where people invest internationally. You're getting a 35 % IRR in the U .S., so why would you take the risk of investing in a place where markets are more opaque and there are currency fluctuations? And there's just a lot less knowledge about what may work, what may not work in these places. And so this episode is one of a few that I'm going to start doing myself as well as interviewing people who are doing things in emerging markets just to bring more information to people who are interested in doing something in them.

and came away really

So despite everything I've mentioned, I think emerging markets are actually really exciting for surge funds. And I'm going to go into a few of the reasons why, as well as some industries that I think might work particularly well for ETA in these markets, especially as the global economy is in flux. The good thing about emerging markets is that they are generally less correlated with the global market. Places like India have been going at 5%, 6%, 7%, 8 % per year pretty consistently, despite being such a huge country. And that is mostly just because they are fueled by domestic consumption. They're not an exporter that's grown through manufacturing like China. Places like Cambodia have been going at pretty much double digits for decades now. And that's just, again, you're going for a much smaller base. It's easier to do that. But that also means there's a lot of opportunity in these places. So the first reason that I think ETA becomes really attractive in these markets is that there's just a lot less competition. There are much fewer buyers in all of these markets. That means you can come in and get a much lower multiple. Unlike the U .S. where every seller that you speak to has probably gotten tons of emails at this point from different searchers, a lot of the business owners in these markets probably never even heard the idea of selling their business. because of that multiples are much lower a healthcare company that might go for six to eight x profits in the u .s would probably be going for three to four x in most emerging markets of course that also makes it much more difficult to exit there are fewer strategic and financial buyers in all of these markets but again i think if you are the type of person who listens to this show you're probably going to grow the business in a way that would make it attractive for international buyers and there actually are a lot of international investors who do want to get into the emerging markets it's just that there aren't enough investable deals therefore them and so you might actually have a really good outcome if you're able to do that and even if that's not your strategy and that doesn't happen it's actually much easier to IPO in a lot of these markets I was just in Saudi Arabia and a business that's less than three million dollars enterprise value can IPO in Saudi Arabia so I mean most search fund businesses are already at the stage in a lot of these countries where you could IPO them if you really want to and finally it really depends on the person but

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if that's not your strategy and that doesn't happen it's actually much easier to IPO in a lot of these markets I was just in Saudi Arabia and a business that's less than three million dollars enterprise value can IPO in Saudi Arabia so I mean most search fund businesses are already at the stage in a lot of these countries where you could IPO them if you really want to and finally it really depends on the person but My recommendation is if you are an ETA investor in emerging markets, the buy and hold strategy might actually work better for you, especially with all the currency fluctuations in these markets. What I would do is have buy and hold for the long term across several different emerging markets. If you have businesses in India, Vietnam, Brazil, you know, one country may be doing well, the other may not be, but apply modern portfolio theory to your investments and private market businesses and emerging markets. And different emerging markets is actually one of the ways you can actually be successful doing that these days because... the businesses will be much less correlated with each other than most investments are these days. Now, the second reason that I think that a merchant market's really exciting is not only is there less competition between buyers, there's also just a lot less competition once you actually buy the business. Oftentimes, whatever industry you're in, in the merchant market is relatively nascent. There may be just a few players. Even if it's been around for a while, there may be just a couple players, and a lot of them are just... resting on their laurels they haven't done much in a long time they've been able to be successful and if you're the type of guy or girl who listens to this show and you've probably done an mba you may have worked overseas in a developed market you can come back to your merchant market country that you're from bring the best practices bring the technology that you've become familiar with and you can really revolutionize an industry and likely become a market leader and oftentimes leapfrog ahead of what exists in the developed markets just because the tech stacks and the infrastructure in emerging markets is more modern in a lot of cases because they're not tied to legacy systems. But even if you don't do that, even if you just buy a business and maintain market share, you'll still do pretty well just because a lot of these markets are growing so quickly. And that's how you see people give VC -like returns in these emerging markets by buying traditional businesses just because, again, the markets grow quickly and your business compounds with them.

can really revolutionize

And then the final attribute that makes emerging markets really exciting for ETA is the value that you get in these countries. So in the U .S., the typical business that a self -funded searcher might look for, one that's doing a million dollars in EBITDA, that's... oftentimes just your typical above average blue -collar business, your local HVAC that has a few guys working for them, and those are actually not the easiest businesses to diligence in a lot of cases because a lot of the people who are buying these businesses aren't so familiar with these industries, and there are also just a lot more tax games that go on with these sort of businesses in the U .S. In an emerging market company of that size, one doing a million in profits, is probably one that's got 100 employees, accountants, lawyers. It's just a lot more professionalized. In places like South Africa, actually, the accounting standards are even higher than they are in the U .S. But even if you are in a country where that's not the case, a business of that size will generally be not that hard of diligence, especially if it's one that does business with the international markets. And so now when it comes to the types of businesses that I'd recommend looking at, First of all, anything that's just a basic human service, healthcare, infrastructure, those are always good investments in these countries. But when it comes to ETA, there are a few industries that I think make especially good sense. And so the first one would be professional training or any type of certification business. I think that those are great businesses in any market in the world, just due to the nature of the business, highly recurring revenue, low CapEx, et cetera. especially in emerging markets, I think that they are extremely good businesses. And that's because, going back to some of the points I made previously, they're usually the only one or one of a few that has the license to offer a certain certification in a country. I know a guy who recently bought a sales training company in Egypt, and what it does is it gives a certification for salespeople in Egyptian corporations, and they're the only one in the country that offers that certification. And so despite the currency issues that Egypt has had, despite their economic volatility, his company has done incredibly well. He has more business. and he can handle it just because egyptian corporations need to get their sales people trained and his company is the only one that's able to do it now a second area that i'd look at which is related to the first is education in general those of you who look into vc investing you probably know that edtech has done pretty well in emerging markets places like india and china especially during covid and maybe not so true in china anymore after the government got involved and that's another story but

a second area that i'd

I think education, traditional education, actually even probably better than ed tech, is just always a great business in emerging markets. Myself, coming from a half -Indian background, I know all too well that middle -class Indian consumers will not typically spend on luxury goods, but the one luxury good that they will invariably spend on, and I consider a luxury good, is their children's education. And I think that we've seen that to be true across Asia. I think that we are seeing that to be true in Africa as well now. A good friend of mine started an English language school for professionals in Myanmar back when the country first opened up, and it's now listed on the London Stock Exchange. And so I think that this sort of outcome is actually still possible in Asia. It's even more likely to be possible in Africa now. And so if you can find an education company in Africa or the Middle East and roll it up, scale it up, systematize it, I think a similar result is totally possible. Now the final industry that I would recommend, which is a little bit more out there, but if you have the right background and can pull it off, there's just immense potential, and that is agriculture. primarily agriculture in Africa. Africa has 1 .3 billion people today. They will have 3 billion by the end of this century. And they have 70 % of the unexploited arable land in the world. But despite that, they still import the majority of their food from other continents. And so if you have a background in regenerative agriculture, food processing, anything related to food, agricultural technology, for example, whether you're an investor or an entrepreneur who wants to get involved in Africa, I think that agriculture is just an industry that has so much potential. And not only can you make an incredible financial return by doing that, you will also generate a huge impact because that is where the majority of humanity will be living in the future. So if you want to impact humanity, I would definitely get involved in agriculture in Africa. Well, that's about it for now. I hope this episode was helpful. As I mentioned, I also host the INSEAD Emerging Markets podcast. So if you want to learn more about Emerging Markets, feel free to listen to that one. I am planning to do a few more of these short monologues in this podcast. So if you enjoyed it, let me know and I'll keep doing it. I'm also going to try to have some more guests on that have done things. In emerging markets, you can get into more of the particulars of the challenges and the opportunities in each of these unique markets. There's a lot of diversity across emerging markets. I mean, it is most of the world after all.

not only

Anyway, thank you again for listening, and please feel free to reach out with any feedback or thoughts.