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Erika van der Merwe (Erika): What would you say is the biggest myth about investing in emerging markets digital enablement?
Michiel van Voorst (Michiel): For me, it's that let's say the large international companies will be the winners in these markets. And I think that is disproven all the time.
Bryan Satterly (Bryan): Yeah, I agree. That's the biggest one.
Male voice: Welcome to a new episode of the Robeco podcast.
Erika: The Internet is shifting. There's a shift in how it's used and in where and by whom new digital technologies are created. Investors are taking notes. Amongst them, Michiel van Voorst and Bryan Satterly, who have developed a strategy around what they term the Next Digital Billion. Welcome to the podcast, Bryan and Michiel.
Bryan: Thank you, Erika.
Erika: Bryan. What is the next digital billion?
Bryan: So that's a good question. You know, it's not a term we invented, to be honest. It's a term that's been around for several years now, cited by institutions such as Google or the World Bank, et cetera. And the next digital billion refers to essentially a group of people. If you look at the new Internet users globally, over time, from 2013 to 2017, you had about a billion new people come online for the very first time. And from 2017 through the end of this year and the next billion people are also coming online. We expect that growth to continue. The next digital billion directly refers to this group of one billion new Internet users that have recently come to using the Internet. But it's more than that. You know, philosophically, it's a metaphor for the future of the Internet. And that in the very near future, the global majority of all these users will be from emerging markets because that's where the next digital billion are coming from. So it's a constantly shifting cohort of people and the story of how they are using technology in their lives.
Erika: So you say it's a shifting cohort. It's different. It's emerging markets. But is this, in fact, sufficiently different to merit a new investment approach?
Bryan: We think so, for several reasons. One, you know, when it comes to solutions that are catering to these new Internet populations, it's offering an opportunity to invest in new pockets of economic value that didn't exist before in these markets. So you're just adding to the answer to the previous question. You know, a large portion of these next billion users are coming from emerging markets. And it's not just your typical China, India, Brazil. It also goes beyond that to places like Indonesia. You know, with over 200 million people, Bangladesh, Egypt, Vietnam, Mexico, et cetera. And in these economies where there has been a pre-existing lack of commercial infrastructure, the rise in Internet users is creating sort of rapid innovation and new solutions to come online. And we think this opportunity is just too big to miss.
Erika: Do you see any blind spots around this opportunity, around this wave of innovation in emerging markets? So, for example, here's Payal Arora on that very topic. She's the author of a book entitled The Next Billion Users. She was speaking to the Bots App community. Payal Arora: Do not underestimate these markets. There is lot of condescension still, you know, in the last year alone. I say things which to me are extraordinarily obvious that, “hey, they are consumers”, right? I have to say this again and again. I think the idea is Silicon Valley innovates and disseminates to the rest still continues. And, you know, people are like, yeah, but China's not innovative. Right. Carly Fiorina just said that recently also. And I think just a year ago and this gets repeated, they don't really innovative because they're not coming up with new products. But actually, you shouldn't underestimate innovative processes because that's just as important as products, because we have a product which if I can't deliver the whole infrastructure of delivery, which is very cultural, very contextual, where, you know, you have to know the realities, most people don't have credit cards. The reasons why people fail is not because your product necessarily was bad.
Erika: So perhaps you could react to that Michiel. What's Payal’s really emphasizing is understanding local conditions, having the cultural mindset, but also getting over our biases about what emerging markets can offer.
Michiel: It's so true. And actually, I would like to highlight that with some of my own experience. I moved with my family to Hong Kong in late 2007. And when I arrived in Hong Kong and I remember opening a bank account and they asked me, do you want a cheque book? And I was like, no, not really. But two weeks later, I was back because really, that's the way things go. Across the border, 40 kms away China, at that point in time, it was still very much a cash-driven country and economy. And that's the way things go. You needed to bring your own bills. Very cumbersome. Fast forward 10, 15 years later in Hong Kong. We were still using the chequebooks, maybe slightly less than before, but still very much, you know, a traditional financial system. And then you go to China, everything leapfrogged basically from cash based in one go to mobile wallets, more mobile money. So it's a great example of a country that moves very quickly and rapidly and becomes actually leading on many fronts. So I very much relate to the statements just made. And this is China. Maybe people start to become more aware of what is happening there. But the same thing we see replicated in so many other countries. And that's what we refer to as the rise of the rest. And that is clearly what we also are trying to target here.
Erika: Bryan, also, I think a theme in Michiel’s anecdote is the speed at which things are developing.
Bryan: No, that's true. And it's faster than I think most people would have expected. If you look at the traditional economic development patterns that we've seen, at least in the western world. You know, it's a journey that took multiple decades. And still many portions of the economy are left non-digitized and offline. But in emerging markets, the shift is taking place so quickly, partly because of the phenomenon that Michiel mentioned. In the case of the fintech sector, people get smartphones before they get bank accounts. And so the rise of mobile Internet and through the smartphone is basically the transformative element that's helping create this quick momentum in shift. And, you know, maybe, one comment on the author of The Next Billion who we’ve just listen to the clip of, you know, she's right and what she said. It's like, oh, it's incredibly obvious to me, but not obvious to many. Well, we totally agree with that because there's so much going on in all of these markets also beyond China that most people really need to see to believe. And it's, you know, this type of, I guess, known unknown that we're familiar with that we'd like to capitalize on from an investment perspective.
Erika: We ran a poll on LinkedIn on this topic. We asked investors if they'd invest in new tech solutions in emerging markets. So looking at the responses; just under half said they were already doing so, or ‘they're ‘on it’, so perhaps they are still investigating. And the remainder weren't aware of such opportunities or didn't consider them attractive enough or thought it would take too much effort. So I think that last point is a critical one. Isn't this a hugely complex undertaking to look for these investment opportunities, spread in about 20 countries? And is this opportunity not still locked up as a venture capital opportunity? Michiel, let's start with you.
Michiel: Yeah, I understand what you're trying to say, but the way I look at it is as follows. My whole life, I've been looking at global opportunities when looking for investments. And the trick is not to try to know a little about a lot of companies, but to know a lot about a few companies. So it's very much targeting what you're looking for. And then further to what you mentioned from the poll. So I think some people are aware of some of the dynamics that we're touching upon, in some of the countries. And China is, of course, the clear case in point. But it's also about all the other countries that are showing similar kind of pathways and in some way mirroring or replicating what we've seen before, but always with a local twist or a local dimension, because, yeah, history repeats itself. But it's always slightly different, right? So it's always the local flavor that determines the outcomes and also makes it very localized markets still. So for us, it's about identifying those companies that have the characteristics that allow them to be successful. And we focus on only that group of companies without trying to follow everything outside of that. So I think, yeah, what we have been trying to do is build our own universe of companies that have all the characteristics to serve that next digital billion of Internet users, because that's what we are principally looking for. And that universe is over 300 companies listed, so not in the VC space. Surely a lot is going on in the VC – the venture capital world – as well. Very interestingly, we're trying to monitor that from a distance. But the opportunity set in the listed space is already very large. And not only in the obvious places, definitely also in the other countries that form the next digital billion.
Erika: Bryan, I know you yourself have a VC background, so that's intriguing that that's the mindset with which you come to this particular strategy. How does that shape your approach?
Bryan: Thanks for mentioning that. It's actually during my experience as a VC that I was able to witness firsthand the amazing change that's happening across the emerging world when it comes to new Internet users and companies that are being created to cater to these new Internet populations. And Michiel mentioned that we monitor very closely what's going on in the VC world, because it's very important to what shapes our publicly listed investment universe in the years to come. And what gives us confidence that many of these countries will be able to produce sustainably many local champions, some of which will be publicly listed in the coming decades, is the sheer amount of innovation that's happening and local VC dollars that are being pumped into these early-stage companies. The number of funding rounds and the total dollar volume overall has been increasing year over year, it doesn't matter what region. It's happening in places like Nigeria, it's happening in places like Indonesia. But in terms of how that background shapes our own investment thesis, one I guess key differentiator as a VC, or at least coming from that background, is just dealing with management and understanding what it takes to be an entrepreneur. It's one thing to look at a Bloomberg screen, you say, OK, stock goes up and down. Big deal. It's another thing to actually build a business. Talk to people, inspire people. Understand how operations work. Get into the deep functioning of a business model and finding that problem-solution fit. And it's that type of mindset that we try to implement when looking at investable opportunities for the strategy.
Erika: You both now refer to local champions, local solutions. Is this, though, necessarily attractive from a sort of a global investment management perspective? I'm just thinking of the scale. Are these local solutions necessarily scalable at a national level? Is that important to you?
Bryan: Maybe I'll still jump in on that one. Well, certainly scale is important. You know, some people would argue that the riches are in the niches, right. So niche business models could still make money. That's true. We buy that. At the same time, the beauty of technology, businesses and tech-enabled businesses is that the model is inherently highly scalable. And many of the markets that we target are what some people call literally scale markets. Right. Hundreds of millions of people. So we want to make sure that these companies can have this large enough total addressable market. Now, it really depends on which market. Right. Some markets are larger than others. And a lot of companies attempt to be pan-regional. Right. So maybe they start in Brazil and they want to be pan-LatAm and go into a dozen other countries. And while that's fantastic, sometimes we also prefer a concentrated approach. Let's master that business model in a place like Brazil first and then maybe expand beyond there if the problem-solution fit enables it to work in the next geography. But they're not all created equal. Right. And I think that's the one thing people have to remember when looking at emerging markets in particular, these markets that cater to the next digital billion, is that it's not one size fits all.
Michiel: If I may add to that, it's also just by observing, right? Clearly, some of the large US tech platforms have tried to go abroad and they successfully did. But if you really look at it: there are successes in some of these emerging markets. We see that that is going much more slowly than one would think. And they sometimes fail altogether. And in a similar fashion also, the Chinese platforms that have been basically growing up behind their own Chinese wall, if you will, and then be able to become very competitive. If you look at some of their attempts to go abroad, you also see them stumble and the lesson from it is, it's not always one size fits all. There are of these local dimensions, be it cultural, be it technological, that form stumbling blocks. And you see time and again, local approaches becoming the winner, despite the fact that they are competing against some of these, you know, deep pockets from the US or China. So we find that fascinating. And as Bryan also mentioned, sometimes the niche strategy also becomes very successful, but then you need a very large market. But remember, some of these countries are huge and we tend to underestimate how big they are and how much latent demand is there.
Erika: Now talking about local and global, you're both global citizens, which naturally informs your investment thinking. Bryan, I believe you speak four languages and you followed love to move from the US to the Netherlands. Michiel, you left the hills of Hong Kong to return to the Netherlands around the start of Europe's lockdown. So, I'm intrigued. So let's take a few minutes for some rapid-fire questions on your respective investment backgrounds. Bryan, what's the emerging market country that you'd most want to live in?
Bryan: That's a tough one. There's a lot. Rapid fire, I'd say Brazil. I love it. Fabulous culture, very energetic people. Lots going on there when it comes to new technology, new solutions. And it's a big market, right. And it's you know, it's very different in Rio than it is in Brasilia, etc. So there's a lot to learn and, I think, for the rest of Latam that Brazil has to offer. So, yeah, Brazil,
Erika: Michiel, I'm going to ask you the same question here, and it has to be different. Not Copacabana.
Michiel: No, but clearly, given my background, having spent 12-plus years in Asia, it has to be Asia, right. So I actually of all the cities, Hong Kong is very special to me. And I spent a lot of time there. My kids grew up in Hong Kong. But it's not really an emerging market, right. So I would say Bangkok, because it's vibrant and fun. And it's also half a gateway to Southeast Asia where I feel a lot of this, yeah, the things we're talking about, is happening as we speak. And to some extent, you could even argue that Thailand is a kind of a hunting ground to develop new strategies catering to the southeast of Asia.
Bryan: Can I change my answer? Because that was a good one. Bangkok's a fabulous city.
Erika: Bryan, when did you first know you wanted to be in investments?
Bryan: Since I was a kid, I guess. I always knew I wanted to do something in business. Internationally, emerging markets was really always my passion. But then when I started to combine that with learning of what people were doing in the VC world, it blew my mind because it's really, it was adventure finance, right, it was something that involved high levels of risk, but just high levels of learning and opportunity. So it goes back a while for me, but hard to pinpoint an exact moment.
Erika: Michiel, a different question for you. Tech aficionado or a Luddite. So are you yourself a confident and avid user of technology, seeing that you invest in it?
Michiel: Well, I guess it depends who you ask. So I like to think ‘yes’. But then if I ask my kids, they tell me I'm totally out of it. You’re so slow, Dad. I hear that often. So, yeah, it depends.
Erika: Bryan, name a country represented in your investment strategy that would surprise many people, perhaps because the country is not considered to be especially tech friendly.
Bryan: Egypt's easy answer. I mean, this is a country with 90 million, close to pushing 100 million, hopefully soon, population. People think of Egypt, they think pyramids, they think the Sphinx, they think history, but they don't think tech. Right. They think desert. Well, there's a bit of a silicon oasis happening in Egypt as well, despite what people might not believe. But there you have a country with Internet penetration that's just surpassed 50% in the past few years and growing at four or five percent per year. So you have a rapid Internet adoption; tech companies that have been funded in the private market, some of which have gone public and are already worth multiple billions of dollars in terms of market capitalization. So I think we'll have a lot to see that's going to come out of Egypt..
Erika: Michiel, what's been the toughest part of developing and launching a new investment strategy?
Michiel: Well, it's always finding your first investors, and it's clearly like the first 50 million is so much harder than going from 500 to a million to one billion. So the yeah. Convincing the early investors to trust you with their money and take them on the route of your vision. That is the most difficult thing, but also the most rewarding thing. Growing up your own strategy from the nimble beginnings to a successful result is so rewarding. I've done that before, when I launched one of Robeco’s Asian products, I think back on that event with so much pride and pleasure. And becoming the father of a strategy is fantastic.
Erika: Bryan, what's your top investment read or podcast? And do you watch, listen or read it while exercising?
Bryan: Yeah, I don't read while I exercise anymore…
Michiel: I totally do!…
Bryan: You do that? Maybe if you ride a stationary bike or something. But if you're running, I guess you have to listen, using weights it's not really possible. Best investment read… I don't listen to podcasts that often, despite the fact we're recording one. Yes. I'll listen back and see how silly I sound. But best investment read... Maybe it's “Fooling some of the people all the time” by David Einhorn. His story of one of his more famous shorts, and that just always reminds me to keep digging. Right. Just keep digging because you never know what you're going to find. And that doesn't always mean negative, right? That can really mean positive. Sometimes the best opportunities come in the places you least expect it.
Erika: And then, Michiel, the last question for you, the same question. What's your best source of investment research or inspiration?
Michiel: Yeah. Apart from the fact that we are of course, we have access to some of the most sophisticated research, I actually do feel that social media to me also brings an additional angle to it. Right. So I'm using YouTube, I'm using Twitter, and I see plenty of interesting stuff there, too. And to your earlier question to Bryan, I indeed love to put on, you know, a YouTube interview or a podcast and run for an hour. And that seems to work for me. And I find it a great way to combine two of my passions: working out and learning more about the world.
Erika: So back to the serious questions now that you warmed up. How do you avoid overpaying for blue sky?
Bryan: Well. Expensive is a relative term. Right. I think growth at the end of the day is the most important thing, period. I think what some people might look at as an expensive multiple, if you're looking on an earnings basis or an income basis, you can't look at a fast-growing tech company that way, particularly if they've been venture backed over several rounds with various syndicates of institutional VC investors, because this company, the way it's been built in a theoretical scenario, has proven that it can show positive unit economics in whatever business that it's pursuing, but will burn into its growth. And so it's very easy to sometimes look at cash burn numbers or, you know, a negative bottom line and say, oh, this is ridiculous. But it's important to look beyond that and say, hey, you know, at its core, this business is incredibly attractive. The margin profiles are super high. And when it gets to that scale, it's going to crush it. And so we look at growth probably over most other metrics, but still look at operational metrics as well. So what are the real operational drivers of these companies and incorporate that into our valuation analysis.
Michiel: And let me build on that, because actually it's a good question. And we do spend a lot of time understanding what the market is pricing in in terms of expectations. And so we do a lot of work on how to value the company. But to Bryan's point, yeah, just observing a headline ratio, PE or what have you, does not do justice to these businesses. And that's, you know, the lessons we learned from observing the big tech platform from the US and from China. If that's your metric, you're going to miss out.
Erika: Emerging markets are risky. What about the potential short-term risk factors that could cause volatility for a portfolio? So, Covid-related troubles, disappointing growth, politics. Then there are also the longer-term concerns: institutions that fail whether it's around regulation and robustness of education systems, general infrastructure. How do you approach these potential risks in the strategy?
Michiel: Let me kick it off, because you're absolutely right. In the short term, there is volatility and more volatility in emerging markets than in developed markets. It would be foolish to deny that. But, you know, having observed many of these countries from very close by myself, what always struck me is for the companies operating in these countries, it's basically that's their modus operandi. Right. They're used to operating in volatile environments and they're adaptable to whatever is thrown at them. And then ultimately what you see is that the good companies actually thrive in those environments because they're strong and they have holding power and they are visionary and they tend to come out of every bout of volatility in a stronger fashion. And if you look over a longer period of time, you see that that short-term volatility doesn't really impact the outcomes of your investment. But in the short run, yeah, you can have a nasty surprise and that could impact your company and the stock price of the company in the in the short run. But in the longer run, I do believe that these companies grow through that and you won't see it. It's just a blip in the chart.
Erika: So it talks to investment horizon and also diversification, Bryan?
Bryan: Michiel answered that question very well. I think, the companies that we're looking for are targeting trends that are structural and secular, right? So, waves of up and down when it comes to macro don't necessarily tend to affect the actual revenue and operational growth of these companies, because there's just a huge demand for what they're offering. As it relates to diversification, you know, it's clearly something we look at and consider. We prefer a more high-conviction approach to really just double down and invest in the companies that we believe in most will be the winners. But at the same time, diversify by not only looking at country, but also subtrend. And so we're opportunistic in a sense where we can look at, let's say, online healthcare in China and fintech in Brazil in the same portfolio, because we believe that, you know, now's the time to capitalize on both of those trends, depending on the country, because it really varies on a case-by-case basis.
Erika: Finally, one closing question. What would you say is the biggest myth about investing in emerging market digital enablement?
Michiel: For me, it's that, let's say the large international companies will be the winners in these markets. And I think that is disproven all the time.
Bryan: Yeah, I agree. That's the biggest one. People say, why bother? You know, software's eating the world. It all comes from California. That's the wrong way to think, right? Silicon Valley isn't alone anymore. Maybe it's still a Mecca for tech. No doubt about it. But, you know, there's Silicon Valley's popping up in India and Indonesia, in Nigeria, et cetera, with talent that maybe didn't have access before to create these companies. That's really one thing I want to mention also. I know it's the last question, but, you know, when it comes to building these businesses, it's about people, at the end of the day. And the thing was, you know, 20, 30 years ago to be a tech entrepreneur, maybe you had to go to Stanford and be in California where everything was happening. But now with universal connectivity and new Internet users coming online, people can access education in places where they didn't exist before. So you can have a new generation of entrepreneur popping up in these markets that maybe are equally capable of building big businesses, but didn't have the same kind of formal training that entrepreneurs had in the US context, for example. And that's what people continue to underestimate. And I feel like this talent that's being unlocked across the emerging world is going to produce so much value. And it's that talent at the end of the day that we're looking for.
Erika: Well, thank you, Bryan and Michiel, talking about talent. Super getting your insights and hearing about your plans and dreams. And to listeners, thanks for being part of this conversation. We'd love to hear from you. So please do send us your comments, feedback and suggestions to Podcast@Robeco.com. You'll find all of our podcasts on your favorite podcast platform, as well as at Robeco.com.