During her recent interview with Tobias, Rashmi Kwatra, founder and CIO of Sixteenth Street Capital, discusses ‘The Leapfrog Effect’ – how fast-growing emerging economies can take advantage of technological advances, bypassing traditional infrastructure building. Here’s an excerpt from the interview:
Tobias Carlisle: When you are looking at these companies, are you looking for something that can dominate geographically or dominate in the country, or do you think you’ll find some things that will potentially dominate on a global scale?
Rashmi Kwatra: Because these markets are in such earlier stages of development, there’s still quite a lot of growth within the markets themselves. So I find that the Home Depot of the Philippines, for example, they have so much growth in the Philippine market itself it would worry me if they went even to Indonesia. So it’s a combination, so not necessarily. Some of the companies we’re looking for we think that these markets provide growth for many years to come without stepping across borders.
Rashmi Kwatra: Then we have newer age companies that are building businesses afresh, and there are network effects in the e-commerce market, for example. So we have in our portfolio an e-commerce company that is dominating in several regions in Southeast Asia.
Rashmi Kwatra: Now I think Asia is also so far ahead when it comes to… we could talk about this, but leapfrogging in financial technology and mobile payments. I can open up a bank account in India, in Philippines in less than a minute. It took me forever to close my bank account in the US the other day. So I can’t do that in the US, I can’t do that in Singapore, I can in India. So some of these technologies and some of these businesses will be global.
Tobias Carlisle: I agree with you that there’s a very interesting phenomenon, and I’ve seen it in telecommunications in particular where it’s difficult to go out and run copper twisted pair to every single house. And so there are lots of parts of the world where that’s never happened, but it’s not as hard to run out mobile cell towers. And so where they haven’t ever had twisted pair coaxial cable, they’ve gone directly to fast cell phone data plans that some of the rest of the developed world doesn’t yet have.
Rashmi Kwatra: Exactly. So, some of what we’re seeing in that field especially. And this is because the infrastructure wasn’t laid out. So to the developed world’s credit, the mobile phone is less important when you have a bank branch and everybody already has access to credit.
Rashmi Kwatra: It’s very different in the developing world, which means with cell phone penetration and almost 5G network, 4G network, really great Internet across these markets which they’ve built out, what we’re seeing in terms of it definitely that interplay, how you’re connecting to a consumer using mobile is much ahead of what we’re seeing in the developed markets. So whether it’s those companies, those technologies or those ideas, that will be much more global, I think, going forward.
Tobias Carlisle: What does it do to a nation to move from being underbanked to being able to access financial services?
Rashmi Kwatra: I mean, it’s the multiplier effect. The effects are very large. I speak to two small businesses. I was just in Indonesia speaking to a small business. There’s a shop, they sell your everyday necessities, personal care, food and snacks. And their business today, because they have access to… firstly, they’re using their cell phone and services to provide their customers with more products. So you can now top up your mobile phone digitally at their store, you can buy travel tickets, you can send money to your mom using the payments network. So their businesses are growing because of technology.
Rashmi Kwatra: And now because we’re using technology to get better data on that shop’s economics and how much revenue they’re turning over, we could provide financing to them at a much more affordable rate than just a few years ago, which allows the shopkeeper then to think about expanding their business.
Rashmi Kwatra: So we’re talking about people getting credit at a much lower rate than they would historically been able to. So it’s either they didn’t have access to credit, or they were paying a loan shark or somebody in their village a much higher rate. And now we’re giving them access to credit and at a much lower rate, which allows them to scale their business, and doesn’t increase risk because we’re able to assess their business much more prudently because of the information that we’re able to get in this digital world.
Rashmi Kwatra: So I think this is a small, micro example, but the connectivity, the access to the rural villages that didn’t have an ability to scale their businesses, we’re seeing that take over, and small and medium enterprises in these markets are a much larger portion of the economy.
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