Curing the economic hangover: investing in the "second circle" countries.

• Author: Malloch-Brown, Lord Mark

Developed countries are experiencing an economic hangover. Dismal financial conditions have cast a cloud over these countries, limiting growth prospects while structural deficiencies hinder demand. Not surprisingly, to remedy the situation, companies are looking to emerging markets for growth opportunities, with the BRIC countries (Brazil, Russia, India and China) the target of the greatest interest from global investors. Yet, compared to underdeveloped nations, asset values remain high in BRIC countries, making it hard to find good deals while other emerging markets are loosening restrictions and welcoming foreign investments. These nations, along with the BRICs, have emerged from the recession as the new frontier of investment with new opportunities, higher expectations and a deeper commitment from investors.

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Many call these economies "second circle" nations, and they include countries like Indonesia, Malaysia, Thailand, Singapore, Egypt, South Africa, Nigeria, Colombia, Chile and Mexico. The scope of the "second circle" spans Asia, Africa, Latin America and the Middle East and includes markets that can't be ignored by any global company. By 2050, Asia alone will account for over half of the world's population while the U.S. and Europe will account for less than fifteen percent. The world economy is being transformed and those who do not change with it will be left behind.

There are attractive opportunities in the second circle with deal sizes being cheaper; however, each comes with unique requirements. Most are smaller deals than many investors are used to, yet they require a high degree of due diligence and board and management involvement. Over the past twenty years, we've seen the change from a buyer's market to a seller's market with companies in emerging economies such as Hungary and China no longer desperate for foreign cash infusions.

In the new landscape, sellers have the opportunity to choose between multiple investors which have raised the stakes of the game; they are looking for a long-term partner rather than a short term influx in cash.

Partners, Not Just Investors

Even more challenging, these companies are also looking for a partner willing to contribute to local society and overall national growth, spurring a focus on creating jobs, corporate social responsibility and tax revenue. Emerging markets want lasting friends--not just footloose foreign money--and in order to capitalize on this opportunity...