My Rules of Engagement for Backing Emerging Market Companies & Creating Wealth

THIS ARTICLE HAS BEEN EXTRACTED FROM BOOK “ECONOMIC WARFARE

I am often asked this question by entrepreneurs and other financiers alike….. This is my short answer

First, we at Blackhawk Partners will not fund a company in any emerging market where the top brass are not Americans. The CEO doesn’t necessarily have to be an American, but a majority of the board of directors and the senior management have to have some strong American capitalistic influence and education. Remember, the objective is to make as big a return on our investment as we can. We invest capital, we increase the profitability of the company or companies involved in the deal, and we exit in a prescribed manner with profit in hand. There has to be a basic understanding and appreciation of capitalist principles or, as any savvy global private equity investor knows, we will have difficulties down the road in execution of the plan. I don’t mind, for example, funding an Indian enterprise because there is a historical exposure to business that is independent of government involvement. Even a Chinese native who has spent significant time in the West and studied at an American school, then worked for a period of time at an American firm, is an acceptable candidate for management leadership. What is important is that this person has developed an understanding and appreciation of the American entrepreneurial ethic.

Second, we do not fund a company in any emerging market if we don’t know or have direct access to someone in the upper echelons of the government of the country into which we are investing. This is precisely why business and politics are so important and more intertwined than ever when investing in emerging markets. It is an immeasurable advantage to be able to make a phone call or send an e-mail that results in easing of the regulatory process and elimination of much of the bureaucratic red tape, simply because we have taken the time and initiative to build a global network. I recognize that I have the good fortune to have friends from my youth who have risen to positions of influence and power in different countries.

Third, we do not fund a company in any emerging market without a local investment group co-investing in the deal. Not only does this give us someone directly involved who has “skin in the game,” it also gives us access to “real intel,” which we could never have any other way. It also helps spread the risk.

Fourth, we do not fund a company in any emerging market if the participating company doesn’t have at least three years’ worth of consecutive audits by a Big Four international accounting firm. These are Deloitte, PricewaterhouseCoopers (PwC), Ernst & Young, and KPMG. It is unfortunate but often the case that a company that offers only locally audited books has usually “cooked the books.” This is where a company creates the appearance of earnings that really didn’t exist or attempts to hide liabilities that will impact the value of the company. Typically, a company will include incorrect information on its financial statements, such as manipulating expenses and earnings to improve their earnings per share of stock (EPS) or fail to record accurate equipment depreciation. We will fund only companies with at least $20 million in earnings before interest, taxes, depreciation, and amortization (EBITDA) when it comes to emerging markets, as opposed to the $5 million EBITDA benchmark for U.S.-based companies.

Last but not least, it is important to note that we would not fund any company in any of these countries without local American legal counsel totally familiar with contract enforcement in that jurisdiction. All of the big U.S. legal firms already have a strong presence in the countries on which we have focused. Our typical exit strategy consists of listing these companies on U.S. stock exchanges and bringing them to the U.S. capital markets. Since many foreign companies use questionable accounting practices and have used backdoor methods to access the U.S. capital markets, we are extra diligent in making sure such companies have passed a most excruciating due diligence examination by my team of experts. This is the reason why we use only U.S. accounting, legal, and banking standards to facilitate the process.

One of the more serious issues that my partners and I have encountered, for example, are private foreign companies merging with U.S. shell public companies to raise capital. Many of these companies have been Chinese. In some cases they have used a procedure known as a reverse merger to bypass the due diligence of an initial public offering. Since January 2007, there have been over 600 backdoor registrations of this nature by foreign companies, 150 of which are based in China. This is something we are very aware of and take great precautions to avoid at all cost when we venture into such territory.

Hope this sets the record straight…. Share your thoughts

 

Thanks

Ziad Abdelnour
Ziad K. Abdelnour is President & CEO of Blackhawk Partners, Inc. , http://blackhawkpartners.com/ , Founder & President of the Financial Policy Council http://www.financialpolicycouncil.org/ and Author of Economic Warfare: Secrets of Wealth Creation in the Age of Welfare Politics http://www.amazon.com/Secrets-Economic-Warfare-Creating-Regulation/dp/1118150120/ref=sr_1_2?ie=UTF8&qid=1311437307&sr=8-2

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