“Financial inter-mediation seeking to match international investor risk appetite with domestic funding needs in Frontier Markets”

Frontera Capital focuses on financial inter-mediation seeking to match international investor risk appetite with domestic funding needs in frontier markets, in terms of the principal components of the value chain – originating, structuring and distributing frontier market risk transactions.

  • Frontera Capital is a boutique investment firm which focuses on fixed income and money market investment opportunities in frontier markets:
    • Frontier markets are early stage emerging markets and are mostly characterised by rapid, but volatile GDP growth with significant and increasing funding needs.
    • Some corporates in frontier markets are able to tap international capital markets, but only in hard currency.This exposes local borrowers to FX mismatches, as they borrow in hard currency and their assets are local currency.This is the gap Frontera looks for solving
  • Frontera Capital provides long-term local currency funding in local currency and FX hedging products to both lenders and borrowers
  • Frontera Capital contributes to create a secondary markets of loans from financial institutions in emerging markets.

  • Frontier Markets
    A frontier market is an economic term coined by the International Finance Corporation in 1992 commonly used to describe a subset of emerging markets with much less developed economies and capital markets.

    Frontier markets are ‘investable’, but have lower bond and equity market capitalization and liquidity and turnover than established emerging markets.

    Frontier markets are typically pursued by investors seeking high, long term returns and low correlations with other markets.

    The implication of a country being labeled as frontier is that, over time, the market will become more liquid and exhibit similar risk and return characteristics as the larger, more liquid developed emerging markets.

    Frontier markets are more organized as an asset class in listed equities than in fixed income markets given the former’s classification on qualifying criteria for inclusion in ‘investable’ indices, notably the MSCI suite of frontier markets.

    The inclusion discretion of a market as ‘frontier’ is thus typically greater for dedicated fixed income vs. dedicated listed equity international investors. Below is a map of dedicated index qualifying equity markets, showing examples of developed, emerging and frontier equity markets.

    Frontera Capital Investment Frontier Market

    Source: MSCI

    New Opportunities
    Frontier markets are mostly characterized by rapid GDP growth and, as a result, rising funding needs. By matching investment demand with supply, Frontera Capital is able to bridge this funding gap and, in so doing, help to deepen local currency sovereign debt markets; provide local corporates access to the international capital markets and facilitate financing of infrastructure projects.

    On the demand side, a quest for both diversification (to reduce portfolio beta) and yield (to enhance portfolio alpha) will likely see more investors allocating capital ‘down the risk curve’ into sovereign local currency funding as well as corporate financing opportunities and more direct infrastructure funding that have hitherto not been generally available given that these frontier market sectors are relatively undeveloped.

    On the supply side, two types of corporates will likely be seeking funding solutions:

    • In fast growing frontier economies, local funding sources are limited. As local economies diversify, INDIGENOUS companies will increasingly need to look to offshore investors as a viable funding source for their incremental capital raising requirements.
    • Equally, the prospect of rising per capita incomes in economically diversifying frontier markets will also attract ever more INTERNATIONAL companies, many of whom will seek to match their Treasury funding on a market-matched basis, seeking to raise their incremental capital from outside a parent balance sheet from both local and offshore investors.

    Core Competence
    Based on his career experience in frontier markets and academic expertise in Finance and Economics, Frontera Capital’s Managing Principal is seeking to optimize the initial senior staff complement to incorporate the following four core competencies:

    1. Geographic Knowledge of Frontier Markets
      Senior team members have either lived, worked or visited extensively in frontier markets, especially sub-Sahara Africa and Latin America including on-going field research trips to these countries since 2005.
    2. An Extensive and High Profile Network of Contacts
      This ensures ready and efficient access to key decision makers in frontier markets in the government, corporate, banking and Development Finance Institutions (DFI) sectors.
    3. Product Knowledge of Global Investment Banking
      Origination, Structuring (incl. legal work) and Distribution of assets from frontier markets to global investors; Trading a frontier market FX, fixed income and credit derivative client and proprietary book; Fund Managing frontier market multi-asset portfolios including FX, fixed income and equities.
    4. Market Intelligence and International Investor Access
      Either through the team’s own network or via best-in-class distribution agents to ensure that assets are targeted to investors with a proven and repeatable risk appetite for frontier market exposure.