Evaluating Private Equity Investments in the Emerging Markets
6/10/2014 1:19:00 PM
An Overview of the Investment Approach Used by Logan Cheek, AB ’60, Sr. Managing Director, Trailblazers Management
Students at Cornell’s Johnson Graduate School of Management were fortunate to hear Logan Cheek, AB ’60 on April 22, 2014. If someone had to give Mr. Logan Cheek`s speech a subject, it would definitely be “The Emergings are Different”. Mr. Cheek has diverse and tremendous experiences in the emerging world not only as an investor but also as a Captain in the US Army.
Mr. Cheek has a phenomenal investment approach and as a proof of that, his company, Trailblazers Capital Management, a venture capital and business development firm, ranked for the last three years by PREQIN as one of 4 VC firms in the world as #1 in consistently high performance investment firms.
Emerging markets provide new investment opportunities, such as elevated economic growth rates, higher expected returns and diversification benefits. But there are risks - both to residents and foreign investors. The purpose of the speech was to give students real world problems and solutions and to help them understand the risks and basic dynamics taking place in Emerging Markets, such as politics, culture, human capital, language, corruption, and currency. Trailblazers Capital Management is so called as a venture capital and business development firm but in emerging markets, the company does not like to act as a Venture Capital firm since they see a lot of risks in Venture Funds investments. Instead, the company follows the Technology Transfer approach. The idea is very simple, if something worked in one place, it would work in other places too under similar/same conditions. Mr. Cheek believes that technology transfer approach fuses the benefits while avoiding the risks in other two models which are VC and Buyout. He gave a very simple example for this approach; if someone has to solve the air pollution issue in Beijing, he/she just needs to find a place where air pollution had taken place in the past and had been solved successfully. Then all that needs to be done is inject the technology into either an existing Beijing company or a new company built from scratch.
As someone from an emerging country, Turkey, I can definitely say that tech transfer approach is very wide in emerging countries. Most of the times, those solutions are regarded as innovative in those countries even though globally they are not. But they often work and solve problems.
Mr. Cheek started his speech by sharing his opinion on the investment risks coming with different investment funds and strategies. Then he gave couple examples and cases from his own experiences. In one case, Mr. Cheek spent 14 months in Kazakhstan just for due diligence because there were many risks and special conditions which needed evaluation. He further explained there are not only risks coming with an Emerging market investment but also risks directly related with the country.
For me, the most striking of his examples was Air Asia. Singapore is the flight hub in Asia but did not have cheap flights even though there is potential segment for that strategy. He looked at the problem and then asked who had a similar problem and how was that problem solved. For Mr. Cheek, the answer was so simple. The solution was Ryan Air and there was no need to invent the wheel again. He just took the idea and injected it into Air Asia. It worked perfectly. This was a perfect example proving the success of his “technology transfer” investment thesis.
As a very successful investor, Mr. Logan Cheek has a check list to make investment decisions. In his checklist, there are 16 items and violation of any of these items may result in the decline of any investment opportunity. To name some of them, if the investment does not fit his firm`s expertise or does not rank as a “major problem” and “major solution”, Mr. Cheek simply declines the investment offer. Each item in the list was significant and important but one of them, the last one in the list, requires very strong business sense and remarkable experiences in the business and in emerging markets. That is “Smell Test”. He mentioned that there is no evidence based method to measure this test but only someone who has done many deals and has spent enormous time working on emerging market deals/projects can sense and feel whether the deal passes the smell test or not.
Mr. Cheek has more than 50 years of business experience, including management consulting at McKinsey, Group Program Manager and executive in Xerox, and as a founder and Sr. Managing Director at Trailblazers Capital Management. Listening to Mr. Cheek and learning more about his experiences was a privilege for all attendees. His speech was a perfect guide and very helpful for anyone who wants to pursue business in the Emerging Markets.