How do you deal with the lack of transparency and governance in some emerging markets?

Emerging markets are full of opportunities but they also come with considerable risks, particularly in terms of transparency and governance. To navigate these challenges, investors should research thoroughly, perform careful due diligence and develop strong ties with local partners. Often there are considerable differences between what a local player would consider a normal practice vs what a multinational group or foreign investor is used to. For instance, Vietnam has not adopted IFRS reporting, which means that financial metrics under VAS are not comparable to those of international firms. Additionally, local companies can have extensive related parties transactions with minimum disclosures due to lack of detailed guidance.

To handle the lack of transparency and governance in emerging markets, it's crucial to conduct thorough research, utilizing third-party data, industry reports, and local insights to supplement missing information. Adjust valuation models with conservative assumptions, factoring in higher risks, and use an elevated discount rate to account for uncertainty. Incorporating a country risk premium in your analysis can better capture political, economic, and legal risks. Additionally, focus on management quality, corporate governance, and any red flags in financial disclosures to make a more cautious, informed evaluation.

There is no way to sugar coat this . You have to assume bad faith and bad actors . When regulatory environment goes lax on misrepresentation and withholding information there is a very good chance you will lose your invested capital . Observe the behaviour of the government when it comes to their debt obligation . Do they change the goal posts after the fact ? If they do it’s a red flag .

In navigating the challenges posed by the absence of transparency and robust governance structures in certain emerging markets, it becomes imperative to adopt a multifaceted approach. Establishing stringent due diligence procedures, cultivating strong relationships with local partners, and leveraging technology-enabled monitoring mechanisms are pivotal strategies. Additionally, fostering a culture of ethical conduct and integrity within the organization serves as a cornerstone for mitigating risks associated with such environments. Collaborative efforts with industry peers and stakeholders can further enhance collective resilience against uncertainties inherent in these markets.

Partial interests are difficult to value. If the asset is valued as wholly owned and then the minority owned percentage is just pro rated it will result in too optimistic a value. Partial interests are less marketable and usually take longer to liquidate.

Selecting the right valuation method is essential for accurate ESG integration. Here's my perspective: Each approach has its strengths: Income Approach: Focuses on future cash flows, allowing direct integration of ESG risks and opportunities. Market Approach: Uses comparable transactions, reflecting market sentiments toward ESG. Cost Approach: Considers replacement costs, relevant for assets influenced by ESG factors. Often, a combination of these methods provides a comprehensive valuation, ensuring all ESG impacts are captured effectively. Choosing the right method balances accuracy and relevance, enhancing the credibility and utility of ESG-focused valuations.

Analogamente à avaliação de uma empresa para investimento, em um mercado emergente com baixa transparência e governança, escolher o método de avaliação correto pode envolver uma combinação de revisão de documentos disponíveis, entrevistas com stakeholders locais e análise de práticas comuns. Isso ajuda na construção de uma imagem mais clara e abrangente da situação, similar à forma como um investidor avalia diferentes aspectos de um ativo para entender seu verdadeiro valor.

In emerging markets with limited transparency and governance, choosing the right valuation method is essential. The Discounted Cash Flow (DCF) Approach can be particularly useful, as it relies on projected cash flows rather than historical data, making it adaptable to environments with scarce information. Ensure projections are conservative and based on thorough market research. The Adjusted Book Value Method also provides a solid alternative by valuing assets directly and adjusting for potential risks and uncertainties. Additionally, incorporating Scenario Analysis helps in assessing the impact of different governance conditions and economic scenarios.

One should also account for lack of liquidity while valuing emerging market companies that lack transparency and good governance. Entries might take longer than usual and exits might be difficult, hence giving a discount for illiquidity will be prudent.

A common mistake is to adjust both cash flows and use a higher discount rate. This approach will lead to an overly pessimistic valuation. Either adjust the cash flows or the discount rate to reflect higher risk but not both at the same time.

Adjusting for country risk is crucial for accurate valuations in international markets. Here's my perspective: Country risk encompasses political instability, economic volatility, and regulatory changes that can impact business operations and profitability. Ignoring these risks can lead to overvaluation or undervaluation. Political Risk: Includes government changes, conflict, and corruption. Economic Risk: Covers inflation rates, currency fluctuations, and economic policies. Regulatory Risk: Pertains to legal and compliance requirements. By incorporating these adjustments, companies can better estimate potential returns and make informed investment decision.

Nesse setor, é automático falar sobre risco-país quando falamos de valuation. Considerar fatores como a estabilidade política, a qualidade das instituições e a situação econômica local é essencial ao operar em mercados emergentes. A avaliação desses elementos ajuda a identificar e gerenciar riscos adicionais que podem afetar a transparência e a governança. Utilizar relatórios de risco-país e ajustar modelos financeiros para refletir essas variáveis permite uma abordagem mais informada e mitigada, protegendo investimentos e operações contra incertezas e instabilidades no ambiente de negócios.

Adjusting for governance risk is essential for accurate valuations. Here's my perspective. Governance risk involves the quality of a company's management, board practices, and overall corporate governance. Board Composition: Diverse, independent boards are crucial for balanced decision-making. Management Practices: Transparent and ethical management ensures stakeholder trust. Accountability: Robust internal controls and audit mechanisms prevent malpractices. Benefits: Reduces the likelihood of financial irregularities Enhances corporate reputation and investor confidence Supports sustainable long-term growth. Challenges: Requires continuous monitoring Potential resistance from entrenched management

To manage governance risk in emerging markets, adjust your valuation by incorporating a higher risk premium into your discount rate. This accounts for potential governance challenges such as political instability, inconsistent regulatory environments, and weak enforcement. Additionally, perform a thorough qualitative assessment of local management practices and regulatory quality. Consulting local experts and analyzing external risk reports can further refine your understanding. By integrating these adjustments, you ensure that your valuation reflects the increased uncertainty and governance risks inherent in these markets.

Já ouviu aquele ditado popular “Prevenir é melhor do que remediar”? Avaliar a eficácia das estruturas de governança e garantir práticas empresariais sólidas ajuda a minimizar riscos e proteger seus investimentos. Implementar controles internos rigorosos e políticas de conformidade são estratégias eficazes para lidar com essas incertezas. Eu li e recomendo o livro "The Governance Revolution: What Every Board Member Needs to Know, NOW!" de Deborah Hicks Midanek.

When investing in emerging markets, limited transparency and corporate governance safeguards pose risks that need careful assessment. As outside investors, we're at an information disadvantage. Scenario and sensitivity analyses are useful tools to anticipate a wider range of outcomes. Scenario analysis involves outlining different plausible scenarios for governance conditions. These narratives force investors to consider important "what if" questions. Sensitivity analysis focuses on specific governance variables likely to shape risks and returns. Feeding these assumptions into financial forecasts offers a stress test of return prospects under poor governance.

Scenario analysis helps in understanding how different scenarios ranging from optimistic to pessimistic might impact the valuation due to uncertainties in governance and transparency. Sensitivity analysis complements this by examining how changes in key assumptions, such as regulatory shifts or corruption levels, affect valuation outcomes. By adjusting variables like discount rates or growth rates, you can gauge the robustness of your valuation under varying conditions. This dual approach allows for a more comprehensive assessment of risk and uncertainty, essential for making informed investment decisions in less transparent environments.

Using scenario and sensitivity analysis is crucial for understanding potential outcomes and risks. Here's my perspective: Scenario Analysis: Evaluates how different future states affect financial performance. Sensitivity Analysis: Examines how changes in key assumptions impact results. Benefits: Provides a comprehensive view of potential risks and opportunities Enhances decision-making by preparing for multiple scenarios Identifies key drivers and vulnerabilities. Challenges: Requires accurate data and realistic assumptions Can be complex and time-consuming Combining these analyses offers a robust framework for planning and risk management. It ensures more resilient strategies, thereby improving overall financial stability and performance.

Dealing with transparency and governance issues in emerging markets requires thorough due diligence and a risk-adjusted approach to valuation. This involves incorporating country and governance risk premiums into discount rates or applying discounts to cash flow projections and multiples. Investors often rely on local experts, conduct in-depth market analysis, and use scenario planning to account for various governance-related risks. Additionally, diversification across different markets and sectors can mitigate specific governance and transparency risks, making the investment portfolio more resilient.