When the World Bank needed someone to run its emerging markets infrastructure fund, it turned to a little-known Montreal firm called Cordiant Capital. Winning the World Bank deal last year was a huge coup for the team headed by David Creighton, a former Canadian investment banker in London who travels the world looking for projects to back. After 10 years of encountering skepticism, even derision, about his emerging market focus, Mr. Creighton, 51, feels the world is finally marching toward Cordiant. Here is his insider's look on the rising players, with insights into China, Africa and Brazil.
How has the economic crisis affected you?
It's been a great opportunity for the public to realize, "Look, this emerging market stuff is real." These countries came out of [the crisis]so fast - led by China, but all the other countries that are not necessarily beholden to trade with the United States. There is a lot of domestic growth happening. India, for example, is this domestic machine with all these people moving from one class up to the next.
What do you think about investing in China?
Investors talk of getting exposure to emerging markets and they find the China story so compelling - 1.3 billion people and all that growth. My response is that, based on our 160 investments in 55 emerging countries around the world, eight are in China and seven of those are giving us a headache. We've never lost any money in China, but we're having to deal with issues.
People ask, "But what about Russia?" - and we've never lost a cent there. Russia is just fine. You can engage with Russia. If you sit down with a Russian partner, or a Ghanaian partner or a Nigerian partner, and you engage with them, you can come to an agreement and you are partners.
But not in China?
In China, you sit down and you say, "We're partners." They say, "absolutely." You write a cheque and the partnership is over. They go off and do whatever they want. We have covenants, contracts and all these things, but in China, if you want to take a contract to a local court, your chances of coming out with anything are very slim.
So when these things happen in China, they just require a lot of cajoling and trying to just breathe some sense into them. What we're doing in many cases is just trying to accelerate the loans and get out.
Is it a matter of the Chinese having their own agenda?
It's all about themselves. They are first-generation capitalists, unlike in India, where there are multi-generational businesses. In China, they are coming out of the gates and these guys are naturally aggressive. They're enchanting, the stories are wonderful, and I've had a lot of success working as an investment banker in China. But making investments is something you have to be really careful about.
A lot of people are investing in Chinese companies and going through regulatory authorities. Well, the regulatory authorities are not the same as the SEC or other Western groups. Perhaps, what you expect to happen in Canada is not necessarily transferred to what is happening there. It's a really great story but tread carefully.
Are you still a bull on Brazil?
I was on some panel two years ago and asked what country I would choose, and I said Brazil. [Brazilian President Luiz Inacio Lula da Silva]did two terrific things: He reassured the international community he would make good on his debt and he really started to get people at the bottom of the pyramid working themselves up.
So you've got a wonderful domestic growth story, where people are buying their first car, bicycle, motorcycle or house - all that demand. And there are commodities - soybeans, sugar cane, even timber, which is getting a little ahead of itself now. Now there is this offshore oil find - a deep well that is being managed properly.
Where do you see more change coming?
I see it from a private equity perspective. Brazil for so long was an economy based on debt, not equity, because interest rates were so high. Debt was where the yields were. When interest rates started to come down with the fall of inflation, suddenly people shifted to the realization there is something to this equity story. You have all these multi-generation businesses that are tidying themselves up, running one set of books, and thinking of an IPO and taking a bit of cash off the table. It's a great story and the regulatory body is of high quality.
Aren't there still concerns about the commitment to capitalism?
If it were a clear runway, everybody would be there. There are always worries. Yes, there are questions about the handover of the government, and whether it will fulfill commitments in education and infrastructure - and there is corruption. But to be perfectly honest, I find there is corruption in our own backyard.And what about Africa?
It's the frontier, it's way out there. We've never lost money in Africa on any of our loan funds, maybe because we're lenders of last resort and maybe they see the benefit of having to keep us as a Western financier so they can grow. They are also very keen on trying to learn from us and engage on how to develop their business.
Can you give an example?
Before I made any investments in Nigeria, I went there with trepidation - all those e-mails [asking for money] I got there and realized there are 130 to 150 million people and, unlike in some other countries, when you are cruising around Lagos and even in the countryside, everybody is working. They all believe if they work, they can get ahead, whereas in so many other places, by the afternoon, all the men are sitting around drinking beer and complaining about life. Nigeria is an incredibly industrious society.
When we send analysts into the field to look at potential investments, I say, "Take an afternoon, walk around, go to the market, see what people are doing. Are they focused and excited about what they are doing or are they just hanging around?" That's eventually going to affect our business because, ultimately, it is the people. We've done business in 16 African countries and that is part of the due diligence.
What mindset do you need to deal with corruption in emerging markets?
If someone says they need a payment to speed things up, we say, "Sorry, we can't do that. We are around for a very long time and if you want to work with us, we're willing to wait but we're not going to try to speed things up." We just won't pay any bribes. If you pay a bribe, that is not the last one you will pay. Slowly but surely it will begin to eat away at your business. The bribes will get bigger and from a broader base. It's a bad business model.
Sure, you lose some business that way but with the number of great businesses out there, it is a matter of sifting through all the noise. The number of opportunities is massive. Why bother engaging with somebody you don't like if there are a lot of people you do like?
Are you driven by idealism or just good business?
It's both. This movement to socially responsible investing is something that has legs, particularly from our point of view because we do direct investments. Being able to consider social and environmental issues is not just nice - it allows us to look at a broader range of risks. When we look at a business, we consider the sovereign risk, the foreign exchange risk, and governance factors, but also, are they treating employees properly or pumping nasty things into the water table?
Because we take a five- or 10-year position, if we don't consider these risks at the outset and manage them, they're going to come back to bite us and affect our returns.
So the conscience side is actually just business. At the end of the day, if our business is going to be a success, it has to be economically viable. We have to be able to demonstrate a good risk-return profile, and we do that by looking at all the risks.
****
David Creighton
Title: President and CEO, Cordiant Capital Inc., Montreal
Born: Oct. 8, 1958, in Montreal
Education: Degree in agricultural economics, University of Guelph
Career highlights:
Coming out of university, joined Richardson Greenshields in Toronto.
Worked 13 years in London for investment bank Burns Fry, later BMO Nesbitt Burns.
Expanded the firm's institutional European, African, Middle Eastern and Asian business.
In 1999, returned to Montreal to work with money manager Carl Otto in launching Cordiant's first fund.