Introduction

Patrick: [00:01:22] My guest today is Manny Stotz, the founder of Kingsway Capital. Manny is one of the leading investors in frontier markets, investing in equities in countries like Egypt, Bangladesh, and Pakistan. We discuss the opportunity in these markets from all angles; demographics, valuations, sectors, and beyond. It's important to note that we recorded this conversation before the COVID pandemic, and these markets have fallen 30% more without a similar rebound in prices that we've seen in the U.S. As you listen, you'll hear why this may be relevant for the companies Manny focuses on and may accentuate the opportunity in frontier markets even relative to the numbers quoted in this conversation. Listeners will know my interest in frontier markets runs deep, so I was excited to have one of the category's leading investors join me. Please enjoy my conversation with Manny Stotz.

Kingsway Capital Background

Patrick: [00:02:07] So Manny, we're going to discuss what I think is one of the most interesting thing happening in markets today, which is incredible divergence between the performance of the U.S. equity market and basically everything else around the world. The result of 2019 was great for the U.S., but it was entirely multiple expansion, basically no fundamental growth. The rest of the world is completely different. So, what I'd like you to begin by doing is describing a little bit who Kingsway is, why you started this style of investing fund. And then I want to dive into what could be an incredible global opportunity.

Manny: [00:02:40] Sure. Well, first of all, Patrick, thank you so much for having me on this. As I said to you earlier, I was quite hesitant to do anything on the record, which is not our style. We believe there is no glory in this business, but only results. And hence, we don't even have a website, but I do agree with your high-level observation that there is a very interesting moment in time where again, the U.S. market has done so incredibly well, the rest of the world has not. And there are certain individual geographies that are entirely bombed out. I have to be an investor in those geographies. So, Kingsway was conceived just over six years ago. We are an investor in what we call frontier emerging markets. So, the idea is basically, if you look at the bigger emerging markets of today, whether that's a China, an India, Brazil, and so forth.

So we've studied a lot of the wealth creation in these markets. And of course, it's been absolutely spectacular. The Chinese equity market basically didn't exist something like 20 odd years ago, and it's now shy of $10 trillion. India's market cap is $2.5 trillion or so. And of course that's just the public equity. And there are a few. If you just look at the wealth creation in emerging markets, it's been nothing short of remarkable. And so frontier markets, the idea's basically in terms of look at the level of GDP per capita, look at the level of consumption per capita. Look at the level of market caps, both in absolute dollars, but also in terms of multiple, those are countries which are basically 10 to 15 years, in my mind, behind the big and emerging markets. And to throw some names out there, so we look at Vietnam downwards. So Vietnam is one of the most developed countries we're in. Our biggest country is Bangladesh, which I'll talk a little bit about. We're in Pakistan, we're in the Middle East, we're in Sub-Saharan Africa. The way I came to this journey perhaps is interesting to some. So I'm not from any of these countries myself. I'm from Black Forest, Germany, which is a lovely but rather provincial part of the world. Grew up there. A humble middle-class background. Dad's an engineer, mom a psychologist, so they're academics, but had very little or nothing really to do with big business, let alone global finance.

I was ambitious, entrepreneurial, and slightly naive as a teenager. And the disclaimer is, I guess not much has changed. So I had two big goals in life. One was to change the world. Second was to make lots and lots of money, and realized pretty quickly its hard individually, let alone together. But I was stubborn, wanted to do both. So the first idea inside was to swap the order around. I think that was the right call. It's hard enough and almost impossible in changing the world for us. And the second insight I guess, was to get some inspiration. Who's got the most credibility on those two subjects? Which I was fortunate enough to get some lists, which exists for that. And the good news was the top spot on both lists was occupied by the same person, it was Bill Gates at the time, largely unchanged. So the good news it's not mutually exclusive. The bad news was I couldn't invent anything useful at all. So I had to settle for second or third best and came across Warren Buffet. Age, something like 16, 17 or so.

And I didn't understand anything about investing. And of course, apart from being a great investor, which he is, he's got this incredible gift of explaining complex things in a very easy to understand way, which was very helpful to me. And I still didn't understand very much apart from one insight that if you have a high return for many, many, many, many years and that's taken off a lot of time, but then you don't need to stop it very much. And that suited me well. I had no capital, lots of time. I said, "Okay, let's figure out returns. How does that work?" Led me on a journey of reading everything I get my hands on, keep that up to this day. And then I got very lucky in life. I got a full scholarship at the London School of Economics, LSE. Paid for by a Greek airline billionaire called Stelios Haji-Ioannou. So a curious case where the Greek was paying for the German. I've reminded him. We've returned that favor largely by now, but it was a really big stroke of luck. And I think luck is very important both in life and in investing and recognizing it and so forth. It's really changed my life in the most positive way. Both personally. I met my wife in London and we've got two lovely daughters, one on the way, but also professionally. Basically, I was able to follow my interest that was building around business and investing not only in theory, but reading everything but in practice by working with and for practitioners. And that's what I did every free summer and every minute in between. A bunch of internships, investment banking, and private equity, and hedge funds. And then I ended up at Goldman Sachs for my-

Patrick: [00:07:02] As one does.

Manny: [00:07:03] As one does, yes. So I signed that contract in late 2007 when arguably Goldman was on top of the world. And I didn't join the investment bank, but the internal hedge fund of Goldman Sachs, Goldman Sachs Investment Partners, which is effectively a successor group to what the proprietary equity investment business had been for something like 30 years. Well, Bob Rubin started in the '80s under the banner of risk arbitrage, became equities arbitrage, became principal strategies.

Many founders of large investment firms have come out of that group, from the folks behind Farallon, and Taconic, and the Lampard, Perry, with the whole TCI gang. More lately, Daniel Och, or Eric Mindich, or the Soroban people. So that's the training. Very fundamental, trying to figure out what is it that makes a great business from scratch, and analyzing, modeling at a lot of detail. And then having a stock picker's hat on, but being trained across the capital structure. And so I joined that team. I thought I had arrived, and nine months later we almost went bust as a firm. And in hindsight, there was a good experience for me because number one, of course, I had so much to learn, and you learn a lot more in a dislocated market. Number two, I had no money personally to lose. Was still paying back a modest amount of student debt and so forth and living off the scholarship savings. Number three, I was far too cheap to get rid of basically. And number four, if there was any ego, which there probably was having overachieved, I think landed this job at Goldman, that was dealt with very quickly. And it's a humble business. So being humble-

Patrick: [00:08:31] Quickly and often.

Manny: [00:08:32] .... early enough then is I think a good thing. Now, I enjoyed my time at Goldman. I learned a ton, was a generalist. Spent time in all sorts of industries studying anything that's listed in Germanic Europe, so chemicals and autos and suppliers and industrial companies, cement plants. And spent a lot of time then also on healthcare, on TMT and branded consumer goods. And I guess if I had any insights at that time, it was the appreciation of quality. Quality in terms of business quality, where I think it's a very important idea that I want to flash out a little bit, but basically the more time I spent with lower quality businesses or industries, the more I appreciated the benefits of quality. And secondly, I appreciated the fact that you want to see inefficient markets pretty early on. Europe, arguably is more inefficient than the U.S., and so we had some interesting situations there, but there was an early appreciation as well. And of course I got somewhat disenchanted with some of the flaws of the Goldman way of investing. Again, only good things to say in terms of the people who were smart and terrific and supportive, but basically I would argue there's somewhat of a lack of coherent investment philosophy. There's no north star that is, what do we really believe in? So it's putting a bunch of some of the smartest people on the business and give them all the tools and let them make money.

Patrick: [00:09:46] Very decentralized.

Manny: [00:09:47] I call it the acrobat model, running your winners, cutting your losers. And I guess I also appreciate the fact that there's no extra medal or prize anywhere in the world for making money in a more complicated way. There's no style points. They were doing a lot of complicated things. They allegedly invented capital structure arbitrage with Fischer Black in the '80s. And they were very proud of the fact that it's something complicated and it worked. And I said to myself, "There's no style points. It shouldn't be more complicated than it is and there's elegance and simplicity."

So basically the two big ideas. And there were issues with, I guess, things like time horizon and alignment and so forth, which I don't need to go into. But the two big ideas I've had, I guess, that instead of being an acrobat, I want to be rather a very long-term owner of the very, very best businesses, let them compound for me and get out of the way. And secondly, to do that in inefficient markets. And so basically having studied this idea of quality in different sectors, and maybe it's time to define this, what I mean by quality, which in a lot of people say, "Oh, this is a great business. This is a good business," but what do you actually mean by that? So I think it's very important to have a consistent and concise definition for that. By far, that's not the only one, and I haven't come up with it. Let me give you mine. For me, the very best businesses in the abstract are businesses that have the ability to sustain a high return on invested capital without debt. And for reasons we can understand. And they can sustain that with a moat that comes from largely intangible rather than physical assets because physical assets are easier to replicate than intangible assets. So I could, I don't know, explain the Coca-Cola company in that framework where you have basically high margins and low capital intensity. Why? You've got high margins while you're turning caffeine, water, and sugar, free commodities which cost very little, into Coke. And that's 65% gross, 35% operating margins. And your CapEx to sales is only 4%. Why? Of course, you need a soft drinks plant, but if you look at it, you're really only selling what's chemically nothing but caffeinated sugar-water. And it turns out you don't need a lot of capital to create that. And of course, what you're really selling is the trust. The idea that this is the best sugar in the world. When you grew up with the one you love, it makes you happy and so forth. And turns out selling trust or selling ideas is not very capital intensive.

The Intangibles

Patrick: [00:11:56] Can we talk very specifically about what you look for on the intangible side? Obviously brand is incredibly important, but there's lots of what goes into a brand. So talk to me about the deep specifics of what you think the best company builders are good at in terms of creating and reinvesting in brand, and maybe some things that you look to avoid.

Manny: [00:12:15] So basically you've got this high margin of 20 commodities in the brands, and you've got low capital intensity of selling trust. You marry those two, you get a higher return on invested capital, which will protect the buyer moat from intangibles, but brand arguably is the most important. In Coke's case, Coke's the second most spoken word in human language. It's okay. Coke, taxi, apparently. It's hard to measure, but I'm not talking English.

And of course, what you're really selling is the trust. The idea that this is the best sugar in the world. When you grew up with the one you love, it makes you happy and so forth. And turns out selling trust or selling ideas is not very capital intensive.

So if you think about that for a second, it's an incredible moat. If someone gave me $10 billion to compete with Coke, it's not about me setting up a scale, bigger, more cost-effective soft drinks plant. I can literally order the kit. That's not that expensive and so forth, but it's about me convincing seven and a half billion people on the planet that Manny's Coke is now better, which is, I would say impossible. And the other insight about brands or tangibles, the largest arsenal is scrappage value. So if you gave me 10 billion to compete with Coke and I don't succeed, I won't be able to give-

Patrick: [00:13:04] Can't sell it off.

Manny: [00:13:05] 60 cents on the dollar. I'm sorry. It's all down the drain. So Virgin Cola is literally worthless. And so because there's no scrappage value, the barriers to compete with great brands or intangible businesses is so high. The CEO of Colgate told me once, he was, "2X is the relative market share for the next biggest competitor. It's yours to screw up basically. It's almost game over." So what makes a great brand and a great category? By the way, there's other intangible assets, which are important.

Of course, in consumer company's case, it's distribution, market share, shelf space, consumer trust. In Coke's case, specifically, it's also the IP, then of course the recipe and so forth. But great brands is the most important because it is, of course, inside the minds of your consumers. So I think having, of course, a very strong brand recall. Ideally, people buy these products out of loyalty, habit, dare I say addiction. And of course, we're all creatures of habit, and that's true for seven half billion of us. You stick something into your mouth, onto your body, it's a private place, you want to have a brand. It's human nature. It's not a Western idea at all. And if anything, the consumers in my country's a lot more brand loyal than you and I. I look at a Coke and say, "Oh, this, this costly chemical drink. A lot of sugar," and whatnot. The consumer in Bangladesh will say, "Oh, this is the same drink the president of the United States drinks. I've arrived in the consumer society," and so forth. And the alternative is hazardous one-branded. So it's a very strong, I think human trait to be using brands and trusting brands, but there's a couple of important insights what makes a good brand, what makes a good category. So one is the frequency of use. How often do you brush your teeth? Two, maximum three times a day. And that's a pretty good category. And so coffee, I don't know, two, three or four times a day, some people more. Coke has famously no taste memories, so again you can drink a lot of Coke without getting too tired of it.

And then there's some categories which have less frequency of use, but are quite powerful when you experience them or consume them, like alcoholic beverages are in that category, which is more once or twice a week, once or twice a month. But when you do it, it's a social lubricant, and these are of course pretty good businesses. So I would say in order to create a brand, you need, of course, time. You need a consumer product that has a clear function, which I think any consumer product needs to have the function for, and coffee is pretty clear. You want to, of course, become more awake and present. Functional alcoholic beverages, they again descend together typically with others into a slightly different state of mind. And you need, of course, very clever advertising. And ideally, that's basically sticking in people's brains. And then you want to keep doing that. Basically, the flywheel of these businesses is when you reinvest a portion of your top line into advertising, promotion, or other intangible assets like distribution.

So basically let's say you spend 10 percentage points of your revenue into intangibles. And let's say we've got a situation in Tanzania where we've got a brewer that has something like 85% market share. And the competitor's got 15%, so let's say this company spends, for using round numbers, 10 percentage points of their revenue into reinvesting, into brand distribution, other intangible assets. Now, that's eight and a half points of that entire market. That's more than half of the other guy's top line. So for them to ever match you dollar for dollar, it's virtually impossible unless they want to be gross margin negative. And even if they did, you could raise from 10 to 12% and make a little less money, but still be wildly profitable. And you can buy the pot, which is why there's this equilibrium. Once you're 2-3X to the next competitor, it's almost game over if you're well invested. And I think that's an important insight. There's a lot of talk about the end of brands and so forth, and these branded consumer goods companies in the Western world. I have my own view on that. It's not a day-to-day worry for me given Bangladesh, we are very far away from that, but it's definitely true in my mind that these high-quality businesses have, I think very strong advantages for long-term investors. And I always point to three of them. Number one, I would argue there's a superior long-term return to be had as an owner of a higher quality business, even if you pay a little more.

Let me lay it out to you mathematically. If you've got a business that has say a 100 of capital and 20% return on capital and can sustain that as per my definition. So next year you got 120. Now, if you then can sustain the 20% return on capital and you can reinvest the 120 at 20%, you've got 144 the year after. So whatever the market pays for this today or tomorrow, or whether it's public or private, it shouldn't matter either. It must be true that in 10 years from now, you've got a much bigger pile of money as an owner of that business and as an owner of a business that can generate and sustain 10% a year even if you pay a little more for that. So that's the first point. The second point is not as obvious perhaps, but just as important is the lower probability of loss, the lower risk of impairment of capital. That's basically due to the fact that again, these businesses sell products that people buy out of loyalty habit. Dare I say, addiction. The wallet shrinks, the stomach doesn't. It's very defensive in terms of volumes. Even if there's a recession or some contraction in the economic growth or consumption, these are gently impacted typically. And they've got pricing power, they can pass on cost inflation. They've got no debt, so they can't go bust. So the combination of lower risk of permanent loss and superior long-term return is the magic trick. And then the third one is what I touched on a bit earlier is to find if you believe one and two on earth what's the best business 10 years from now? And the answer is, I don't know that, but I have a high degree of conviction in data that suggests that the best businesses, if well-invested, if the management team looks after their brands, and redeploys excess profits into growing the moat of the business and growing the business, the best businesses tend to stay the best businesses or even get better. And that's due to this flywheel I mentioned earlier.

Country-Specific Factors

Patrick: [00:18:29] Another really important circle in your interesting Venn diagram is the tailwind that results from the countries in which you're invested, specifically the demographics, the age, profile of the countries, their economic trajectory. I think again, of Bill Gates and the Hans Rosling factfulness idea of countries emerging from poverty or very low per capita income or GDP. And the opportunity that creates in these consumer businesses. So I'd love to go there now, and then we'll come back to things like even more nuanced distribution and why that matters, and trading, and position building. But let's first talk about this really important tailwind.

Manny: [00:19:04] And maybe I'll weave then into my personal journey. And so I sit at Goldman Sachs at this very high powered investment team and really get pregnant with two big ideas. Instead of being an acrobat, to be a long-term owner of the very, very best businesses. And again, the branded consumer goods industry, which is by far not the only industry that has great quality franchises, but of course there's an unusual, rich amount of them. They also have delivered mid-teens forever. They're global best-branded consumer companies. Mid-teens forever isn't bad. Of course, there's no shame in getting rich slowly at all. The most important thing is to get and stay rich. And these businesses have been, of course, wildly successful at that. But I guess I was a young man in a hurry looking for 20s, and I found 20s in emerging market consumer, whether that's India, or Brazil, or Indonesia. You could have had 20+ IRRs for 30+byears basically. The challenge with that then was in the rearview mirror, of course, these were already been compounding for a very, very long time. They've become very large absolute dollar market caps and were high valuations on big profitability numbers. So while that is not over, I think it's hard to see another 10, let alone a 100 or 200X from there, which is what happened in the last 20, 30 years. So that led me to look at frontier markets. And again, I mentioned the countries earlier. So of course, it's no surprise to look at things like demographics and economic growth, but let me put some high-level numbers on that.

So basically the countries that I'm focused on are home to roughly 3 billion people. We know, which is bigger than India and China combined today. So it's a really large part of the global population, roughly 40%. So if you look at the world, if I look at the world, where I look at the world today is there's 1.3 billion people in the developed world, so-called, North America, Western Europe, Australia, or Japan. There's another, I call it 3 billion people or so in the BRIC emerging markets. And I don't necessarily like that definition, but let's just use that as a helpful categorization. So most of them, of course, in India and China. And then there's another 3 billion people, which are my people. And we're going to go from 7.5 to 9.5 billion over my investing career. And all the extra 2 billion would come from my markets; 1 extra billion from Africa alone. So the demographics are pretty staggering and scary actually. So the average number of kids per mother in Nigeria is like 6. That's the average. And the average age of this population is around the 19 or 20 mark. So it's like this permit. So they are by far the fastest-growing populations. Then they are the fastest-growing economies.

And we're going to go from 7.5 to 9.5 billion over my investing career. And all the extra 2 billion would come from my markets; 1 extra billion from Africa alone. So the demographics are pretty staggering and scary actually.

Bangladesh is growing a real GDP of 8%. It's the fastest-growing economy in all of Asia, probably the biggest beneficiary of the U.S.-China trade spat, given they have a strong advantage in labor cost. It's roughly a quarter of Chinese and half of Vietnamese wages. They have already taken share in the last few years, but that's accelerating now, given of course, tariffs on China. And so the next point is a part from demographics and GDP per capita growth is the question, how does GDP per capita growth translate into the growth in branded consumer goods consumption? And that's a non-linear relationship. Some people call it the S-curve. Nestle has this framework, calls it the hot zone. Basically, the idea is that at a dollar a day, you're not a customer yet. And for two reasons. One, the dollar amount is so small, but secondly, the savings rates are quite high because of irregularity of income. It's not like a dollar, a dollar, a dollar a day. It's nothing for, I don't know, two weeks and suddenly $14 because of some random one-off construction or extra job or whatever temp work it might be. So with the small dollar amounts and up to 50% savings rates of that. And then what happens? You go from one to two to three over time, dollars per day. You typically then go hand in hand with some more regular income. So you've got higher dollar amounts on-

Patrick: [00:22:33] Lower variance.

Manny: [00:22:34] Exactly. And lower savings rates, so it frees up discretionary spend. Now, you basically have got a clear hierarchy of needs. First, anything to eat or drink to wash yourself with, unbranded. You're in the informal sector. Then you buy a mobile phone, and then you buy brands. And that happens really between $3-5 a day, depending on the category. Some of the sin categories start earlier, but then tail off also earlier.

Patrick: [00:22:54] Is that tobacco and alcohol just as a general rule thumb?

Manny: [00:22:57] Don't shoot the messenger, but that's clearly the human psyche I guess, has a tendency to start with these categories very early. Makeup starts a little bit later, but then has longer runway. But there's definitely tobacco, alcohol, biscuits, snacks, confectionery, and other food beverage categories that are starting earlier, and then cosmetics, and consumer healthcare, and things like that can start a bit later. So basically you've got demographic driver, you got the GDP per capita driver. You've got the bottom of the S-curve. So putting this all together, you've got this very strong structural tailwind. The other way to describe it, I guess, is what's the greatest force in the universe. I would argue, apart from compound interest, perhaps it's the willingness and desire for every single human being to have a better life for themselves, their kids, and their family. This is what built, after all, the United States as well. And you shouldn't bet against that, even if the government's not helpful, which it typically isn't. There's 3 billion people waking up every morning with that idea. And so that's just this powerful force and wave that these businesses are benefiting from. And so the other good thing, of course, is that the problems that branded consumer goods companies have in the developed world, where they have, whether it's Walmart as a customer, which squeezes you both our margins and working capital terms, or now Amazon, similar, I guess. And of course, can do private label and stuff like that. That doesn't exist in these markets. There's not even supermarkets yet. So the formal retail penetration will be something like 5%, which means you've got not only higher margins, but you've got also lower capital intensity because you've got either lower or sometimes even negative working capital for branded consumer goods companies. And bigger moats because you can't just show up and plug into Walmart. You have to literally build distribution to a million points of sale, mom and pop shops. They pay you cash. They have no buying power against you. So secondly, we're of course not at all affected by this better for you, the venture-funded, whatever, almond milk competition. That's not the case.

Patrick: [00:24:44] No almond milk competition.

Manny: [00:24:46] No. And lastly, of course, these markets are cheap and these stocks are cheap. And I think that's, of course, an opportunity. These are the most inefficient equity markets in the world I would argue. And of course, the runway is very long. And I would argue that these businesses that we invest in, they're still a little bit more expensive, let's say than the average market multiple or something like that, or whatever the telecom I traded or something. But I don't think that people appreciate having the local investors we compete against, which are not that many. They will always know more about their home country, but I think I would argue know slightly less about the long-term compounding trajectory of these, and the strength of these moats, of these high quality, branded consumer businesses. And I would stress that we're not wedded to this idea. It's not about consumption, consumption, consumption, about quality, quality, quality. We just want to own the best, not the rest, both in terms of businesses and people who run those. And we find opportunities increasingly in healthcare, in education, and perhaps most excitingly in internet-enabled businesses.

Building a Book in Frontier Markets

Patrick: [00:25:42] So we're going to segue for a minute to talk about the capital and market and investing flows and how that's affected everything. Because I think what's so stark about this opportunity is I first started getting interested maybe two, three years ago. And a lot of the same things could have been said, and yet it's been a lousy outcome ever since. And almost all of that is what I would call a de-rating. Meaning the multiples of the stocks have gone down considerably in many cases, even while the businesses are growing extremely nicely. So I'd love you to talk through the dynamics around how capital is flowing, how investors are getting washed out and redeemed upon. Like the behind the scenes away from the businesses, more the market side of things.

Manny: [00:26:23] No, that's been been a tough period for these markets and for us investors, although I think it's a huge opportunity. And basically what happened was this is a relatively nascent asset class. Although we're talking about 40% of global population, and 15% global GDP, both fastest-growing again, you're only talking about 50 basis points of global equity market cap. And again, I would bet that those will be much bigger numbers. What has happened basically is that frontiers markets started really to be on investor's radar just before I guess the global financial crisis in the mid, late 2000s. And of course, we had this large crash, which was Western induced financial crisis. That of course also led to a drawdown in these markets. But these markets have never recovered from that, and they have never received a single dollar of QE money, quite the opposite. They've actually-

Patrick: [00:27:16] Tighter conditions, right?

Manny: [00:27:17] Yeah, exactly. So let me try to explain that a little bit. So basically after the global financial crisis in which was a similar drawdown to what happened in the S&P and now I'm talking about the MSCI Frontier Index, which is not a great index at all. And we don't pay much attention to it other than it's a measure of popularity for the asset classes. I think that's fair to say. And so we're now still roughly 50% below the pre-crisis highs of 2007, '08. And just hovering above '09 lows. 2009. This is 11 years ago. So we're 50% lower than we were 12 years ago and just above '09 lows. So it's 800 on the S&P. So the divergence has been spectacular. When we started the firm just over six years ago, it was already pretty wide discrepancy there. And the first 18 months were actually pretty smooth. There were modest inflows into these markets. I guess people realized that there's already big diversions ongoing. The markets were up something like 20% in the first 18 months of us doing this. We were up twice that. It was relatively calm.

And then really starting in late 2014, the cracks started to appear. And this bear market started in earnest where people worried about China hot lending, number one. Number two, the commodity prices collapsed in frontier and emerging markets. In aggregate, it might be seen as a commodity play, which might or might not be true, but we're doing this very different. Our companies turn commodities into brands, we're effectively short commodities in long stomachs. They use fuel for distribution. And you can see it in the earnings numbers. The earnings numbers weren't at all impacted by, and if anything, lower commodity prices led to an expansion in margins, so top line was slightly soft because of low inflation, but that's okay. And so that was the second problem. The third problem is then these many emerging market currencies became very weak or devalued and the dollar has been super strong. And I think the dollar is actually one of the most important macro variables in this. We're stock pickers, not macro or country pickers, but we have to worry about single country risk, and currency is the biggest piece of that.

And then the other big issue, I guess, has been how QE has worked. Basically, it has sucked a lot of liquidity out of rest of the world back into the dollar. That has been definitely a big driver. But the real biggest problem for me or for these markets has been the structure of markets and how other market participants were setting up affairs, which was basically with daily liquidity funds. So the vast majority of frontier market or Africa funds and so forth, will be used as daily liquidity. And those were the biggest. They raised a bunch of money in the aftermath of the financial crisis. So Templeton allegedly had $13 billion in frontier markets, which is now down to something like a couple of hundred. So it's been literally not 50 or 70, but 80-90% decline in terms of flows. And it's pretty much across the board so that there's been an ocean of forced selling basically, pretty aggressively at discounts, at any price. And it's been a vicious cycle because let's say you've got a daily liquidity fund and you report everything to Bloomberg or Reuters. People can ascertain, we did this and we know the broker's doing this. You look at how much was the AUM last month versus this month, how much is explained by returns, how much is explained by the-

Patrick: [00:30:15] Becomes self-fulfilling.

Manny: [00:30:16] Yea, and then even what do you own? And then the bids trap from here to there. And you need to sell, you need to hit some of the bids. You have to get another bad interview print next month, and more redemptions, and the same thing happens again. That's been going on aggressively, especially in '15 and '16. '17 was a bit of a respite, and the markets came back nicely. We thought that was the end. We felt pretty good at ourselves having loaded the boat in '15 and '16 with more stock at pretty attractive prices. And then Trump starts the trade war. Everything was down again. 20+ percent again. And earnings are up every year. In some cases accelerating like Bangladesh's case. Trump is I guess, bad news for emerging markets as a whole with China and stuff, but Bangladesh is accelerating. I can tell you that much. And so the situation, multiples have halved or even more than halved in some cases. 70% de-rating across the board, probably closer to 50%. We started out, these businesses were half of Indian valuations. India, it's the market we studied the most in terms of the big emerging markets given it has the most similar profile in terms of the conditions on the ground and so forth. The big difference is that the Indian equity market I would argue is much more efficient. You've got more analysts covering, State Bank of India then covering JP Morgan on equity. And as a result, I guess, especially large caps in India have pretty highly valued, especially the highest-quality businesses, including consumer businesses that we own. So they're trading between 40 and 60 times earnings. We started out, we were in the low 20s, basically P/E, and now we're half of that basically like low teens. And so we think that's very attractive on absolute basis, but I would agree with your observation that even on a relative basis, it's even more attractive than I had other options in life. And the reason I'm very excited about 2020 is because where can you find really high-quality businesses that are secularly growing, that have very high returns on capital, very strong moats? And where can you find those at attractive valuations, for reasons that you understand and are comfortable with?

Patrick: [00:32:07] Can you talk a bit about the difficulty of building a book in these markets? So we in the U.S. take for granted the lack of frictions around even building very large positions. Say in my business as an asset manager, it's almost trivial. I think that's probably less true in some of these markets. So I'd love to hear a bit about that side of the business, actually building substantial positions in these stocks.

Manny: [00:32:30] Those markets trade very differently than, let's say the U.S. equity market. So you can put an order in and go to lunch and expect to get filled. So first, we need to solve a problem of trading, settling, and custody. So that's already not trivial. So when I was a Goldman getting pregnant with this idea, I tried to buy myself some shares, P/E, in some of these markets. And it turns out Goldman can't do it. And that's a good tell because most money center banks won't be able to do that given these markets are so small and irrelevant, frankly for Western money center banks. And so the vast majority of capital world, it doesn't even get the physical access. We need to get that plumbing right. Then once you got that, the next problem is how do you find the shares? There's of course the daily liquidity, but it's really the wrong metric because 10% of what any of these stocks trade will be what you would call liquidity, where it's basically ADTV, but 90% is in the block market. So these are basically almost like OTC blocks of stock that you need to find, both in the buying side and you need to find block buyers on the selling side. And for that, you got have the real capability that we've built. So it's a challenge, but also an opportunity. It can be a source of edge. And I would argue we've built a sourcing edge and that's a lasting competitive advantage for us as a firm. And we think a lot about what is our own competitive advantage and how do we grow that? And it's the same vein. Our competitive advantage is intangible assets, like our relationships on both sides of the balance sheet.

So when I was a Goldman getting pregnant with this idea, I tried to buy myself some shares, P/E, in some of these markets. And it turns out Goldman can't do it. And that's a good tell because most money center banks won't be able to do that given these markets are so small and irrelevant, frankly for Western money center banks. And so the vast majority of capital world, it doesn't even get the physical access. We need to get that plumbing right.

We've got terrific LPs, we've got terrific portfolio companies. We want to be their go-to shareholder for any of the things strategic. Of course, we're long-term, which can't be said for most people in these markets. We have a lot of domain expertise and so forth, and we're sometimes actively helping our companies to execute and grow value. And then we have a sourcing edge. So basically, as I said, 90% in the block market. So what you have to do, you have to of course travel to these countries. So I go once to the moon every year, equivalent distance traveled, and there's a handful of us. And then you meet with those portfolio companies, their competitors, their suppliers. You do mystery shopping and things like that and maybe meet the advertisers. And then you also meet with 5 or 10 biggest holders of some of these shares. And those are either government-related pension funds. These are local asset managers or banks, insurance companies, or individuals, or families. So Bangladesh has a group called ICB, which has Investment Corporation of Bangladesh. They own half the market, and they got these shares for free. And every June 30th, they need to raise capital to fund their commitments. And they don't care whether they sell to telco, to a cement company, the bank, or the biscuit company. So it's a matter of them having that relationship. And we are one of the biggest investors in Bangladesh. We own, I think something like 1.5%, even up to 2% of the entire stock market there.

By the way, these markets are tiny. I'll go into that if you want. But I think it's fascinating just to look at the absolute dollar market cap of these countries. Bangladesh will be $35 billion. All of it.

Patrick: [00:35:16] Tesla gained that much market cap this morning.

Manny: [00:35:28] Exactly. So India in the year 2000 was $80 billion today. Today it's 2.5 trillion, and it hasn't gone up 30X because there's been some issues, but it's been a good performing market. But the businesses that we're talking about, they're the best-branded consumer businesses, whether that's Godrej, or Britannia, or Dabur, or Marico, and these companies, so ITC and even Nestle. So they have been 50 to 100 baggers, or in some instance, 200 baggers over that period. So in Bangladesh today it's 35 billion. That's similar to Nigeria, Egypt. Pakistan will be slightly bigger, not more than 40, 50 each. Kenya is 20, Tanzania is 5 billion. All of it. So it's literally staggering. Because these markets are small and of course, illiquid, but I would point out that their liquidity is just different. So it's all blocks. So we have to find owners of stock that are willing to entertain the idea of working with you.

And the conversation is typically, "We are large investors in your country. We'd love to do more. We think your country holds a lot of prospects, but we struggle with liquidity." And if we phrase it that way then, "Oh, here is a cup of tea. Here's a biscuit. Let's talk about it. Well, how can we help?" That's worked for us. And just hustling. I went to Kampala, Uganda. I bought 8% of BAT Uganda at like 5 times earnings. And I was the only guy that walked into the office of that guy and asked politely whether there's a transaction to be done. And they are no fools. And he sold this for basically a 20% dividend yield to me. Not because he doesn't think it's going to be a good return, but he is building a real estate project over there that has 18 months paybacks and so forth. Because the cost of capital is so high in these countries, our capital is so dear that we'll find bargains from local sellers that are meeting our cost of capital, because they can do even more interesting things. We will never do real estate in Kampala. So you find things like that.

Patrick: [00:37:05] I think it's so interesting. I love contrast in markets, and you talked to investors here in the U.S. and the edges that they are trying to source through insane modeling and information gathering. Literally, you're talking about showing up. Just like go there, and walk into someone's office. That's the edge.

Manny: [00:37:21] I would say it's a fair point. I think it's very important to know what your edge is. The most important advice I got when I started Kingsway was from ... I hope he doesn't mind me saying this. Our biggest day one investor was Howard Marks, the founder of Oaktree Capital, who of course has been terrific and effectively become a philosopher. So he told me, "Manny, if you want to win any game, whether it's sports or investing, you have to be a good athlete. And you're a great athlete here, but there's so many others. And the difference between first and the second-best, and the third-best is very, very small."

So more importantly than that, you have to choose a game that stacked in your favor. Seek inefficient markets basically. For them, it was junk bonds in the '70s and '80s when Moody's came out and said, there is no price, not even one cent on the dollar should ever pay for a non-investment grade security, which we know is a whole lot of rubbish. In the same vein, you can look at frontier markets. There are people out there I'm sure are saying, there's no price, not even one-time earnings and 90% dividend yield. They should pay for Pakistani stock, which I would argue will be a whole lot of rubbish. So basically our edge is, I would say what I said earlier. So I would say we have a slightly more sophisticated investment philosophy and process. Although that would be a commodity in the U.S., but it's not a commodity there. We have a longer time horizon. We've got a sourcing edge, we got information advantage, and there's no database for transcripts. There's no quality sell-side research at all. So it's very old school. You get the annual reports from the stock exchange, from the companies, sometimes dust them off from certain archives. You then build a model.

Now, having then all the data, which was hard to get, and we've filled the library of transcripts and so forth, which is proprietary. Once you have the data to make a judgment call that these are good businesses. I wish that was my USP, but if anyone has solid financial fundamental investing training can do that. But then buying the shares is difficult rather than being able to hold, or even to add on weakness. And it's taxing. These countries don't look pretty scary to some people. Another source of competitive advantage is my German passport. I always joke that it's pretty neutral. We've got the most visa-free countries in the world and you show up there. If I was American, blonde, female, I would have a much more difficult time. Three-quarters of these countries are Muslim countries. You need to be able to have, I don't know, grow a beard, sacrifice your liver once in a while with these tycoons. And Pakistan is a good example, but not even Indians get a visa because they don't get along. Americans watch Homeland, so they have no interest in going to Pakistan. And none of my Jewish friends would ever set a foot in the place either. So who's going to do it? Some of the best investors I've ever met were either, or a combination of American, Jewish, Indian. They're shutting out a lot of smart people. So no one goes basically. It's definitely easier to have a large and sustainable edge in my markets, but it's the sacrifices. You have to travel a lot.

Importance of Distribution

Patrick: [00:39:56] So I think you've obviously focused tremendously with your capital on businesses everyone understands. We've talked about biscuit companies and tobacco companies and consumer beverage companies. Going back to this idea of intangibles. Beyond brand, what else is important? So you mentioned distribution. I'd love to hear your thoughts there. What does that mean? If you say a company in one of these markets has built a great distribution network and strategy, what specifically does that mean to you in terms of quality?

Manny: [00:40:22] So first you asked for how many number of outlets you reach, right? Let's say Bangladesh, that's probably 1.5 million max outlets in the entire country. That's already a lot. And so how much do they reach? So the percentage of coverage. Whether they do this directly or indirectly via wholesalers. How does this rank against the competition, and how much is there still to do in terms of getting coverage higher? And then how does the working capital work basically? Do they give credit? Do they get paid cash? As I said earlier, the vast majority of our companies are paid cash by their customers. And of course, they've got 30, 60, or 90 days on their own payables. So that can lead to negative working capital. And of course, how much distribution margin they're giving away. And there's a trade-off there between margins and working capital. And how much turnover there is in the sales force, how many salespeople they have. So there's a lot of quantitative, I would say, metrics that you can look at. And on the qualitative side, it's just that they realize the distribution is not a nice to have, but it's actually a source of moat.

Because of this idea, let's say, again, sticking with biscuits and Bangladesh, you've got these million mom and pop stores. So Mondelez is not in Bangladesh, and for a couple of reasons. There's import duties, but even beyond that, their products are not made for their price points. So it's a chicken and egg problem for them. If they came to Bangladesh, they would need to first build the distribution, but they don't have the brand yet. And they don't have the manufacturing yet. If they're manufacturing the brand first and don't have distribution yet. So you got to have both at the same time, which is chicken and egg. If you have it already, it's a huge advantage. And you can push more products over time for distribution. In a biscuit company's case, first, just most basic biscuits, then it's peanut butter biscuits, it's Oreo-type sandwich cookies. It's candy. One day it will be chocolate. And then the savory does instant noodle. So you can branch out into adjacent categories and push them for the same distribution. And of course, that's going to be a very long runway for growth.

Portfolio Construction

Patrick: [00:42:10] How concentrated are you willing to get in these markets? So you've mentioned a lot of the countries and the categories. I guess I wouldn't be able to give an intelligent guess on the number of stocks in the portfolio or position limits or anything like that.

Manny: [00:42:23] We're quite concentrated. I'm sure there's more concentrated funds than us, but we definitely can look in the mirror and say we're living true to the idea of punch card investing basically. So our biggest position is around a quarter of the fund. A second position is 20 odd percent. So the top three are basically over 60%. So we own, call that 10 or 12 stocks depending we've got some foothold positions in some names for reasons I can't go into, but basically I call it a dozen stocks.

And this is informed by the idea of quality again. If you believe what I said earlier about the benefits of quality being so important, then it must be true that the outcome for the long-term in the very first best business is going to be way superior than the investment outcome of the fifth-best. And then you couple that idea with the fact that our single biggest sources of risk is country risk. I would argue within-country risk effects. Then why on earth would I buy, I don't know, the fifth-best business in Nigeria if I can have the first best? So they're both in Nigeria, so if Nigeria flows up, which happened, you have a drawdown in both, but you've got a bigger drawdown in the lesser one. Eventually, it recovers or it does well, you make less. So basically the idea is to buy the best, not the rest. First best. Maybe the difference is close to first and the second-best in each country. And then do it in a whole lot of countries, so you diversify the single country risk without diversifying or diluting the quality of your portfolio.

Patrick: [00:43:41] What do you think the natural extension is from here away from just consumer staples? I guess I would call it consumer brands. I love the idea maybe that we talked about the first time we met in Connecticut about this construction of the indexes. If you look at MSCI Emerging Markets, or even the Frontier Markets Index, I think the EM one has Alibaba and Tencent are some crazy percentage of that index. They're not going to benefit to the same degree of this factfulness idea of the emergence from $1 to $3 to $5. It's not the same profile. So index exposure may not really capture the idea here. Can you talk about that a little bit and then where we go from consumer in these markets?

Manny: [00:44:2] Well, I fully agree. I don't know what's going on at MSCI, but they clearly have very different ideas of what makes a frontier market. Like Kuwait, for instance, would I think one of the biggest index weights in the frontier market-

Patrick: [00:44:30] It's like 30%. I think Kuwait is like 30%.

Manny: [00:44:32] Something like that. And Kuwait is a country which has of course oil wealth, and as a result, GDP per capita, higher than, I don't know, the United States. And so that's not really what we're after. Bangladesh is a real frontier market where people live on $2 or $3 a day, and there's half the U.S. population. So 170 million people. The country's the size of New York State, super dense, and people literally going from $2 or $3 to $4 or $5 a day. And then Kuwait is very, very different. So we need a lot of stomachs. We need large populations. So below 40 million people, it's generally not that interesting to us. So typically our countries have probably between 40 to 200 million people. Large consumer categories, which have good characteristics, dominant market leaders. And on the Alibaba and Tencent point, there haven't been yet very large internet-enabled businesses been either built or gone public, but we think that's going to happen basically. Of course, China internet is always going to be a very different animal and unique in its own right given the sheer size of the market, the pace of adoption, the fact that it's firewalled and rigged for the locals, and so forth.

And this is informed by the idea of quality again. If you believe what I said earlier about the benefits of quality being so important, then it must be true that the outcome for the long-term in the very first best business is going to be way superior than the investment outcome of the fifth-best. And then you couple that idea with the fact that our single biggest sources of risk is country risk. I would argue within-country risk effects. Then why on earth would I buy, I don't know, the fifth-best business in Nigeria if I can have the first best?

There are some countries like that in my world. Although the best example of that probably would be Iran, which is sanctioned, but that's exactly like China firewalled and so forth. And the internet activity there is out of control. But of course, we can't invest there unless you have a new president or new policy to that extent. But there's definitely other internet-related businesses that are being built, whether it's in payments, whether it's in online classifieds, especially both horizontal and some verticals like property or other areas, which I think are going to be very fertile hunting grounds for long-term investors like us. And the leap of faith there, it's actually not different in my mind, because again, I said earlier, the best businesses for me are not ... We're not a consumer staple investor. We like quality, for reasons I explained. And whether you have high margins and low capital density and a high return on capital that's sustained by a brand or distribution or network effects, we can make that leap of faith pretty easily. And I would argue some of the world's best businesses today, and especially in the United States are digitally enabled businesses. It just turns out that it's much easier to move bits than to move atoms. Marginal cost of production is zero for software. You got distribution through mobile phones, and those have arrived in our markets with a vengeance. Even before the smartphone came along, we had pretty high mobile penetration, which happened pretty rapidly. And now the smartphone penetration has caught up. Pakistan went from zero smartphones to 60 million in the last couple of years we've been doing this only. So it's been pretty astronomical. And so we're looking increasingly for the best digitally-enabled businesses there. I don't think you'll see a Tencent or Alibaba coming out of our markets, but you'll definitely see some interesting local champions, anything you find in the odd quirky market that will produce some pretty big businesses.

Patrick: [00:47:14] We've mentioned Bangladesh a few times. How about a few other countries that you find, especially interesting and maybe what is so interesting about them specific to that country?

Manny: [00:47:19] As I said, so we're stock pickers, not country pickers. Ideally, a frontier market doesn't stay a frontier market but develops. And so we spend a lot of time thinking about and reading all the literature on the question, what is it that makes a country succeed and fail and what happen if they do? And there's tons of literature on this starting from Guns, Germs, and Steel by Jared Diamond, or Niall Ferguson's The West and the Rest. And best probably is Daron Acemoglu's book about why nations fail. But I think the common threat in all of those is that it's not about geography, it's not about religion or ethnicity. It's about effective institutions. The quality of institutions, especially property rights and the courts that protect those. The way to understand it, I guess it's pretty obvious. If you an entrepreneur, an investor, or a salaryman, if you can't be sure to keep the fruits of your investment, entrepreneurship, or work, whether it's arbitrary dictatorship on one hand or communism, on the other hand, it's not a good model basically and it hasn't worked. You don't need democracy, which is a controversial thing to say, but look at Singapore, look at China.

You can have a lot of development and wealth creation without democracy, as long as you've got property rights and courts to protect those. What we are benefiting from in our universe is the fact that most of those countries are former British colonies. So they're part of the Commonwealth. The British left the imprint of English law, English court system and legal system, protected property rights. So that's true for basically Bangladesh, Pakistan. That's true for big parts of the Middle East. That's true for much of Africa. That's a good situation and a good setup. Now, of course, are there problems? There are lots of problems, especially headlines, politics and riots and terrorist attacks, and so forth. But we find generally the gap between perception and reality being bad headlines and good bottom lines. That's I think an interesting theme. Again, stocks are cheap because the headlines are bad, but you're not buying the headlines, you're buying the bottom line. Some of our LPs are some of the biggest branded consumer goods families who have been, of course, in this business for not only decades but generations. And they've seen everything happen to them from. They have owned these businesses through World War II, they've owned them through nationalizations in XYZ emerging market, and currencies, and so forth. An interesting insight, one of the families who was in the beer business, had the most profitable market in the world was Papua New Guinea. I didn't see that coming. I thought it was surprising to me. Papua New Guinea. What do you know about Papua New Guinea? Cannibalism?

Here I laid out for you. You've got a big enough population, not even that big, but it's a young population, hot climate, which is good for beer, but here it comes as one brewer, 60 odd percent margins or so. Now, I'm from Germany, we drink 120 liters for every man, woman, and child, present company included. There's 82 million of us. We're pretty rich and it's a safe place to do business, but no one makes money in beer. There's 500,000 brewers. Every village has one. So the point is it's not the largest market, but it's the least competitive. It's the larger market that has the best profit pools. Even though the headlines are bad, the bottom lines can be very good.

Now, it's probably different for companies or industries where either God or government sets the price. God being commodity related to companies or government being anything highly regulated, but for branded consumer goods companies, that's definitely a pattern. A long way of saying is basically that there's a framework that we have developed to understand what makes a country succeed and fail. And the key question for me is what is the business model of the country? I wouldn't argue that you absolutely need one, but it is helpful if you do. And Bangladesh turns out to have really a strong business model, which I think has got a sustainable competitive advantage and will be a development miracle in the making. And what's the business model. Well, I said it earlier, it's basically the most competitive low-cost labor force on the planet. Again, quarter of Chinese and half of Vietnamese wages. As a result of that, you have, it's manufacturing and export-focused. You've got a current account surplus from exports financing your fiscal deficits. So you basically don't need to borrow, especially in dollars, which would be the Achilles heel for any of these countries to pile up U.S. Dollar debt that they can print. And then the currency will be under pressure. So that's not the case in Bangladesh. Then secondly, it's a very democratic source of wealth creation. So literally millions and millions and millions of factory workers going from $1, $2 or $3 to $4 a day that's trickling down to consumption. It's very inclusive growth.

And that's different to let's say Nigeria, which has a business model arguably that it will be described as 3.5 million barrels of oil a day. And that's not such a good business model in my mind, because A, it's cyclical both in price, of course, but also in volume because all the oil is in the south where there is insurgency going on. And there's literally a dozen, 12 rather than 12 million people who make all that money, and they spend it in London, not in Lagos. It manifests itself in crazy ways. There's more private planes in Nigeria than there's commercial planes. So there's huge inequality. And so basically we either want to be invested in structurally strong countries like Bangladesh, where we can be really big. So we've got just under a third of our fund in Bangladesh in two of the best companies there. And that's almost like a buy and hold for as long as I can see. Or you have these more cyclical countries, which have less good of a business model. If I have to contrast, so Bangladesh for me, in the moment, the macro is better than India, though I'm very bullish on India, and we don't invest there largely because of valuation reasons and so forth, but I think the macro is better there.

It could be like Korea, which has been a massive development miracle. One of the less talked about ones, but the Korean development model was very special. And I think Pakistan is following more the path of Indonesia. A very large Muslim country, a bit of chaos going on, but too big to fail. It's a nuclear power, which for us, at least it's a good thing given that failure is no option, basically there. Egypt is in that category. Egypt has a more diversified economy. It's got tourism, it's got the Suez Canal, it's at a hundred million people, but these countries are more cyclical. So basically there you want to invest, of course, either after devaluation, which we've done in Egypt's case, or if you see one coming, then, of course, you sell out entirely, or you reduce exposure to a point that you're confident heading that. I can talk a bit more about this idea of country business model, but the problem with that is they don't teach that in business school. You have to do it yourself. You have to read everything you can get.

Future Opportunities

Patrick: [00:53:17] From talking to you a couple of times, it's clear you're one of the constant learning type people, endlessly curious about these markets and markets in general. What topic areas are you most excited to learn about right now? So a lot of what we've discussed, you know extremely well. What are some things that you think might affect your investment outcomes over the next 20 years? You're sprinting up the learning curve on now.

Manny: [00:53:39] So definitely we're trying to learn at least one new business model in a year. I definitely want to spend a lot more time with digital businesses. I've only followed peripherally what's been going on in the U.S. with software and things. And I understand consumer internet businesses, I would argue well because I'm a consumer and user of those. But what's happened in SaaS, for instance, has been pretty crazy. And perhaps not quite as relevant for us, but there are software companies in our markets, although you could argue that it's going to become a more global game. At the same time, let's see what happens with China-U.S. bifurcation. Most of our countries arguably will end up somewhat in the Chinese orbit. They're the biggest One Belt One Road countries, and that might come with strings attached, and I would speculate one of them could be that they're going to use less U.S. software, but more their own or Chinese software. And so I want to learn a bit more about that. What makes these businesses great, and how you think about those. FinTech, especially as well.

Patrick: [00:54:30] Sure. Payments I'm sure-

Manny: [00:54:31] Exactly. Payments is I think the holy grail in these markets, and we've seen what's happened in China. I think the payment volume in China is like 200% of GDP every year. So that's a staggering number. And then it came out of nowhere. And the reason it's bigger than GDP is that their transactional economy of course, is bigger than the producing economy because the velocity of that. And so I want to learn that as we invested in a small way in one payment company in Egypt that's just gone public, but there's loads of others there. And FinTech, I think is a bit complicated because everyone's getting involved. The banks are getting involved, the telecoms are getting involved, the regulators are getting involved, the Chinese are getting involved, and Facebook's getting involved potentially-

Patrick: [00:55:106] The big theme here certainly is figuring out for every company how to get into the payment flow, and make that part of your revenue model. So it's a fascinating space. Again, highlighting one of the most interesting setups, investing in business setups in the world right now that literally, nobody talks about because despite its enormous size of population and businesses, because of how well the U.S. has done. And so I really appreciate the outline, the overview, certainly in the camp that thinks this is somewhere to look for those that can't become Kingsway investors, which is virtually everybody out there. And we've talked about the flaws of say an MSCI Emerging Markets Frontier Index. What would you recommend they do? Is it just a learning exercise? Are there places that they can go as a next step if they're interested in this opportunity?

Manny: [00:55:50] First of all, thank you for the kind words. First of all, you can't do this with a huge amount of capital. And of course, we've been blessed with having LPs and especially family offices and individuals, as well as a handful of endowments and foundations, but mostly the smaller ones, given the sheer constraints on capacity there, that it's quite limited. We have, call it $1 billion under management. So that works in over a dozen or so countries in stocks. And we've been pretty aggressive and playing offense in this part of the cycle. We of course have to give existing investors preference. We don't want to manage a lot more money than we do today. I would definitely stay away from the indices because that's full of-

Patrick: [00:56:31] Strange construction.

Manny: [00:56:32] Companies with questionable corporate governance, or low-quality business models, and getting weird MSCI. We have countries in there that have very different things going on. I would say we need all the help we can get in the sense that, again, where it feels to me like we're the last man standing, which is one of the reasons I come on to this podcast because someone wanted to ... If you close your eyes and say, "Where can I see 20+ IRRs for 30 plus years?" Which is 10X in 10 years, 100X in 20 years. And inshallah, a 1000X in 30. It sounds absolutely crazy, but that's what happened. Any young aspiring investor out there who is not afraid of these countries and wants to-

Patrick: [00:57:09] Build wealth.

Manny: [00:57:10] Yeah, exactly. I think this is a good time to launch a fund. We're happy to be helpful. Again, selfishly, because again we're the only ones left and we need more. We need at some point foreign money to come back to these markets, that would be good. And I think it will be very good outcome. The size of the prize is very large, I think. And that was also the key reason why I went down this road. I had other options in life. Far-flung and totally quite the opposite where actually I need to just get going. And so I think you can either of course set the fund and invest in these markets directly yourself, or you can even, in some markets you can access them with prime brokers or something like that. So happy to again be helpful and point people in the right direction, how you can settle and trade stocks in Bangladesh. And of course, for those who are far too big for this can own this through ... I guess whether it's global consumer goods companies. Nestle is in all these markets. So all people like that. All the global internet companies, frankly. Google and Facebook are hovering money out of my markets. Of course, those are people's portfolios. It's an exciting time. And I know we'll have amazing 2020s, and happy to answer any questions or be helpful if people want to learn more about it.

Patrick: [00:58:13] So my closing question for everybody is to ask for the kindest thing that anyone's ever done for you.

Manny: [00:58:18] I would probably highlight three if I'm allowed more than one.

Patrick: [00:58:22] Sure.

Manny: [00:58:23] So I'm a young parent and two little daughters, one on the way, and combining with the travel and all that. And I take parenting very seriously. It's been taxing. So I would argue the first one is my parents that have put me on this earth and then looked after me during times when I was probably not always nice to them. I think that's clearly a big sacrifice. Only, I think parents understand. And secondly, my wife, I guess who said yes when I asked her to marry me. And she's now doing the heavy lift on our kids. And that's again something that I think needs to be mentioned. And then lastly again, I would point to, if I think back on my life, there's been many positive influences and mentors and help. But the fact that I got the scholarship has been, I think pretty life-changing. And I'm sure I would have been fine in Germany, but I would've never have had the opportunities professionally or personally that I have now. So my wife now have given a dozen scholarships to the LSE and starting on a small way to give back ourselves. And Kingsway, the name of the firm's actually after the streets that LSE is on. So I own it up to scholarship, donor, and to the school at large. And so I'm starting in very small ways too. I haven't forgotten about the goal.

Patrick: [00:59:31] Well, wonderful. A great place to end. Great bookend to the conversation. Thank you for your time.

Manny: [00:59:35] Pleasure. Thanks so much.

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