Mongolia beckons BNP Paribas Security Services
BNP Paribas Securities Services anticipates a burst of new business in Mongolia as asset managers attempt to tap into its commodities growth story.
Lawrence Au (pictured), head of Asia Pacific at BNP Paribas Securities Services (BNPP SS), says Mongolia is an “exciting frontier market” with an economy forecast to grow by 8% this year.
“Mongolia is booming because of its mining industry,” he says, adding that for the first time, coal exports from Mongolia have surpassed those from Australia, traditionally considered the main source of coal for Asia.
Until now, most asset managers trying to get exposure to the Mongolian growth story had two options. One was to make private equity investments in Mongolian companies, hoping they would make an initial public offering.
The alternative was to buy in to Mongolian companies listed on stock exchanges elsewhere in Asia. These two options are about to become less attractive, Au says, because there is a long list of companies on the verge of entering Mongolia’s relatively underdeveloped stock exchange.
By the end of 2010, just 474 joint stock companies had listed on the exchange reaching a stock trading value of MNT262.5bn (€147m). Yet the Mongolian Stock Exchange (MSE) was the best performing equity market globally in 2010, with the benchmark MSE Top 20 Index gaining 138%, according to Asian investment bank Eurasia Capital.
Eurasia believes Mongolia is set to become the world’s fastest growing economy in 2012, anticipating 20% GDP growth this year. When the MSE’s floodgates open and more firms list on it, having direct access to the exchange will become essential.
Au believes BNPP SS has revolutionised asset managers’ relationship with the Mongolian market, having recently implemented a unique mandate for Hong Kong-based Harvest Global Investments.
Harvest launched the Asian Frontier Equity Fund, an emerging market fund investing in Mongolia, at the end of 2011. BNPP SS is the first custodian to have enabled an asset manager to gain direct access to the Mongolian market, Au says.
Hurdles
Au faced many challenges in securing direct exposure to Mongolian markets for Harvest. With the MSE still in its “infancy stage” (despite having been in operation since 1991), Au’s team had to overcome its lack of swift messaging and the fact “there is no concept of custody law. The law does not recognise the role of a custodian acting as a trust for the client”.
As a result, no banks in the region offer custody services, so Au had to find brokers that “act in good faith” instead.
The MSE also has no delivery v. payment system, making it difficult to ensure a broker delivers cash to the depositary. Au got around this by devising a system allowing BNPP SS to monitor payment deliveries itself.
Another hurdle involved persistent lobbying Mongolia’s Financial Regulatory Commission to permit BNPP SS to open a direct account as a depositary on the stock exchange in the name of the fund.
“The regulators have now recognised foreign interest in the country and are quite open to listen... and accept in principal a trust concept,” Au explains.
Au believes the regulators and Mongolian government are keen to find new ideas and improve capital markets.
In 2009, the Business Council of Mongolia established a working group to advocate for the “sound development of Mongolia’s embryonic capital markets”, including stock markets, debt and mortgage markets, private equity, venture capital and insurance. BNPP SS has since been invited to become a member of the working group.
The board of the MSE has noted the need for change, saying there is an “absolute necessity” to create a favourable legal framework for capital markets, improve the market infrastructure and introduce a competitive trading platform to upgrade MSE and the clearing, settlement depositary system in line with international standards.
Eventually, as global custodians develop their relationship with Mongolian regulators, more asset managers should be able to access the market directly. Au believes it will continue to provide valuable opportunities as “the prospects of these companies are very promising and they have low private equity ratios.”
Harvest may therefore represent the tip of the iceberg in terms of clients seeking securities services in Mongolia.
Au adds that within a few hours of BNPP SS announcing its mandate with Harvest, inquiries about the deal started flowing in from other asset managers.
Factfile
• Capital: Ulan Bator
• Mongolia GDP: $6.2bn
• Population: 2.7 million
• Mongolia is a net exporter, with minimal import of electricity and no import of natural gas. CO2 emissions are 11.28 (measured as metric tonnes of CO2 equivalent)
Source: EBRD, World Bank
Lawrence Au (pictured), head of Asia Pacific at BNP Paribas Securities Services (BNPP SS), says Mongolia is an “exciting frontier market” with an economy forecast to grow by 8% this year.
“Mongolia is booming because of its mining industry,” he says, adding that for the first time, coal exports from Mongolia have surpassed those from Australia, traditionally considered the main source of coal for Asia.
Until now, most asset managers trying to get exposure to the Mongolian growth story had two options. One was to make private equity investments in Mongolian companies, hoping they would make an initial public offering.
The alternative was to buy in to Mongolian companies listed on stock exchanges elsewhere in Asia. These two options are about to become less attractive, Au says, because there is a long list of companies on the verge of entering Mongolia’s relatively underdeveloped stock exchange.
By the end of 2010, just 474 joint stock companies had listed on the exchange reaching a stock trading value of MNT262.5bn (€147m). Yet the Mongolian Stock Exchange (MSE) was the best performing equity market globally in 2010, with the benchmark MSE Top 20 Index gaining 138%, according to Asian investment bank Eurasia Capital.
Eurasia believes Mongolia is set to become the world’s fastest growing economy in 2012, anticipating 20% GDP growth this year. When the MSE’s floodgates open and more firms list on it, having direct access to the exchange will become essential.
Au believes BNPP SS has revolutionised asset managers’ relationship with the Mongolian market, having recently implemented a unique mandate for Hong Kong-based Harvest Global Investments.
Harvest launched the Asian Frontier Equity Fund, an emerging market fund investing in Mongolia, at the end of 2011. BNPP SS is the first custodian to have enabled an asset manager to gain direct access to the Mongolian market, Au says.
Hurdles
Au faced many challenges in securing direct exposure to Mongolian markets for Harvest. With the MSE still in its “infancy stage” (despite having been in operation since 1991), Au’s team had to overcome its lack of swift messaging and the fact “there is no concept of custody law. The law does not recognise the role of a custodian acting as a trust for the client”.
As a result, no banks in the region offer custody services, so Au had to find brokers that “act in good faith” instead.
The MSE also has no delivery v. payment system, making it difficult to ensure a broker delivers cash to the depositary. Au got around this by devising a system allowing BNPP SS to monitor payment deliveries itself.
Another hurdle involved persistent lobbying Mongolia’s Financial Regulatory Commission to permit BNPP SS to open a direct account as a depositary on the stock exchange in the name of the fund.
“The regulators have now recognised foreign interest in the country and are quite open to listen... and accept in principal a trust concept,” Au explains.
Au believes the regulators and Mongolian government are keen to find new ideas and improve capital markets.
In 2009, the Business Council of Mongolia established a working group to advocate for the “sound development of Mongolia’s embryonic capital markets”, including stock markets, debt and mortgage markets, private equity, venture capital and insurance. BNPP SS has since been invited to become a member of the working group.
The board of the MSE has noted the need for change, saying there is an “absolute necessity” to create a favourable legal framework for capital markets, improve the market infrastructure and introduce a competitive trading platform to upgrade MSE and the clearing, settlement depositary system in line with international standards.
Eventually, as global custodians develop their relationship with Mongolian regulators, more asset managers should be able to access the market directly. Au believes it will continue to provide valuable opportunities as “the prospects of these companies are very promising and they have low private equity ratios.”
Harvest may therefore represent the tip of the iceberg in terms of clients seeking securities services in Mongolia.
Au adds that within a few hours of BNPP SS announcing its mandate with Harvest, inquiries about the deal started flowing in from other asset managers.
Factfile
• Capital: Ulan Bator
• Mongolia GDP: $6.2bn
• Population: 2.7 million
• Mongolia is a net exporter, with minimal import of electricity and no import of natural gas. CO2 emissions are 11.28 (measured as metric tonnes of CO2 equivalent)
Source: EBRD, World Bank
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