Fund managers see potential in North Korea

Emerging Markets, ADB editions, Madrid, May 2008

 One Asian nation is, as usual, an absentee from the ADB’s meetings despite a key role in world political debate: North Korea, which lacks even observer status at the bank meetings. Following links with nuclear development in Syria, the country is once again in the headlines for the wrong reasons.

 But that hasn’t stopped the emergence of an infant fund management industry which believes it can make money from it.

 An example is the Chosun Development & Investment Fund, a UK-incorporated, privately structured, limited partnership fund founded by Colin McAskill, a businessman active with North Korea since the 1980s. The idea of this fund dates back to a Honolulu conference in 2000, when he was encouraged by the US state department to set up an investment fund to help western engagement with North Korea; since then the focus has shifted from US to East Asian backers, and the fund’s manager, Anglo-Sino Capital Partners, was finally authorised by the UK’s Financial Services Authority in May 2006.

 The fund, which is trying to raise EU50 million, has yet to take in money, much less make an investment, but its formal incorporation indicates willingness among entrepreneurs to give it a try. “We have seen considerable evidence of the reform process which was originally initiated by the DPRK leader, Kim Jong-il,” says McAskill, who is a partner in the fund, a director of the fund manager, and senior partner of Koryo Asia Limited, the fund’s sole and exclusive investment advisor. Internal reforms were introduced in North Korea in 2002 with the intention of ushering in a more market oriented economy, although not everyone shares McAskill’s view about the level of progress that has been made since then.

 Since North Korea lacks a stock market and a legal infrastructure to protect investors, the fund won’t invest directly in North Korean companies, but will be “a transaction based fund concentrating initially on the DPRK’s substantial mineral resources,” which he says have “a proven past history of foreign currency earning potential to provide valuable, much needed, cash flow for the country.” Later, “especially after the resolution of the nuclear issue”, the fund will focus on a wider spectrum of economic activity.

 And that’s the point. Six party talks continue to aim at ending North Korea’s nuclear programme, but progress is slow and the Syria situation has not helped. Additionally South Korea’s new president, Lee Myung-bak, was elected on a conservative agenda including a tougher negotiating style with Pyongyang. Without resolution of these points, opportunities are likely to remain elusive.

 Nevertheless Chosun is not the only place to see a bright future. Fabien Pictet & Partners, another London-based manager, has been reported as planning a fund to invest in joint ventures in North Korea, and already has a hedge fund that invests in South Korean companies that do business with the north (though not as the main focus of the fund). Another company, Phoenix Commercial Ventures, has several joint ventures with the country. Neither company responded to written interview requests from Emerging Markets.

 These managers believe in the prospects of a new market of 24 million people, with a desperate need to modernise, substantial natural resources, and prosperous trading neighbours.

Author’s note: this story was amended from a feature which did not run but is appended below for reference

When it comes to inaccessible markets, it’s tough to top North Korea. It has no stock market, nor any sovereign debt. It has no legal code worth the name to protect investors. And it remains deadlocked in a dispute with much of the world over its nuclear programme.

But there are tentative signs of investors trying to move into the Democratic People’s Republic of Korea, as the nation calls itself.

Any such venture takes time. Take the Chosun Development & Investment Fund, a UK-incorporated, privately structured limited partnership fund designed for investment in North Korea. This fund’s manager, Anglo-Sino Capital Partners, was authorised by the UK’s Financial Services Authority in May 2006, but in fact the idea behind it goes back to a conference in Honolulu six years earlier.

At this conference Colin McAskill, a businessman who had been dealing with North Korea since the 1980s, was encouraged by the US State Department to set up an investment fund to help western engagement with the country. He go to work and the fund was ready to go in 2002, before political relations deteriorated and several US partners pulled back. Over subsequent years the backer focus has shifted to East Asia and the fund’s  investment advisor is now in Hong Kong; its most recent shift in approach was to change its target capital raising from US$50 million to Eu50 million, with an option to increase to Eu100 million.

Even now, eight years after the Honolulu meetings, the fund has not yet taken in any money, much less made an investment. But its formal incorporation is a sign that there is a willingness among entrepreneurs to give it a try. “We have seen considerable evidence of the reform process which was originally initiated by the DPRK leader, Kim Jong-il,” says McAskill, who is a partner in the fund, a director of its FSA London-registered fund manager, and senior partner or Koryo Asia Limited, the fund’s sole and exclusive investment advisor. Internal reforms were introduced in North Korea in 2002 with the intention of ushering in a more market oriented economy, although not everyone shares McAskill’s view about the level of progress that has been made since then.

But how do you run a fund in such trying circumstances? “ChosunFund is not a private equity fund and will not be making equity investments in DPRK companies or institutions,” he says. “It is a transaction based fund concentrating initially on the DPRK’s substantial mineral resources,” which he says have “a proven past history of foreign currency earning potential to provide valuable, much needed, cash flow for the country.” Later, “especially after the resolution of the nuclear issue”, the fund will focus on a wider spectrum of economic activity.

This last remark is perhaps the most important point: the idea that if the nuclear dispute can be resolved, real opportunities will become a lot more easy to address. Chosun is not the only place to see a bright future. Fabien Pictet & Partners, another London-based manager, has been reported as planning a fund to invest in joint ventures in North Korea, and already has a hedge fund that invests in South Korean companies that do business with the north (though not as the main focus of the fund). Another company, Phoenix Commercial Ventures, has several joint ventures with the country. Neither company responded to written interview requests from Emerging Markets.

Earlier this decade there was a flurry of interest from foreign brokers who sensed the country beginning to open up. HSBC, for example, put out detailed analyst reports on North Korea through its currency strategist Mike Newton; CLSA’s founder and then chief executive, Gary Coull, led an exploratory team to Pyongyang in 2002 and returned enthused about the parallels he could see with pre-open era China and Vietnam. CLSA’s strategist Andy Rothman went on to publish comprehensive reports as recently as 2006, but interest appears to have waned since then.

Partly this is because of the nuclear issue. Six-party talks continue aimed at ending North Korea’s nuclear programme, but in April senior negotiators said no major progress was expected before the autumn. Additionally, South Korea’s new president, Lee Myung-bak, was elected on a conservative agenda including a tougher negotiating style with Pyongyang. His hand was strengthened when members of his party were elected to a majority of National Assembly seats in April. North Korea has issued statements through its state media stridently criticising the new president; generally, a more peaceful and progressive relationship between North and South Korea is seen as a prerequisite to North Korea opening up to the rest of the world.                                                                                                       

Set against that are the prospects of a new market of 24 million people, with a desperate need to modernise, substantial natural resources, and prosperous trading neighbours. The idea of an open China looked absurd once. The early movers into that market are laughing now – all the way to the bank.