Institutional investors spooked by the recent credit crunch are looking for a safer way to play the credit markets. Since 2001, Montréal-based Cordiant has been offering institutions access to emerging-market corporate debt as a new source of assets with returns in excess of LIBOR.
In May, the firm raised US$200 million for its third emerging market loan fund, Cordiant ELF III. It expects to raise a further US$200 million before the end of the year.
Cordiant’s previous offerings, IFPT ’01 and IFPT ’04, have returned anywhere from 5% to 9% since inception. Such steady returns are based on different risk parameters than traditional private equity funds. The firm mitigates sovereign risk by partnering with international financial institutions and commercial banks to make loans to a diverse group of companies in over 40 emerging countries, including Turkey, Serbia and Brazil. It is this diversification across regions and sectors, as well as the aforementioned partnerships, that enable Cordiant to navigate the risks inherent in these markets.
Cordiant CEO David Creighton“Our team of analysts, drawn from around the globe, has fostered relationships with these institutions and they function as our eyes and ears in all these different countries,” says David Creighton, Cordiant’s CEO.
Cordiant’s debt funds are similar to private equity funds, in that they raise capital and then draw down the money as needed for investments over a period of five years. Capital repayments are made to investors. However, the Cordiant funds do not employ leverage and generate generally lower, if steadier, returns, in the neighborhood of LIBOR plus 3%.
“The liability of pension funds is primarily related to inflation and the correlation between inflation and LIBOR is fairly high,” explains Creighton. “What attracts pension funds to Cordiant are the absolute returns generated by our funds. More important still is the non-correlating nature of our investments. With the credit markets in North America running into trouble in the last few months, our portfolio has remained resilient.”
From Soybeans To Coke
Creighton points to the firm’s investments in an Argentine soybean exporter and a Ukrainian glass bottler as prime examples of its investment philosophy. “When the Soviet Union disintegrated, the enlightened management of the glass bottler shunned the old Soviet ways and instead invested in improving its machinery. The result was that Coca-Cola came in and contracted with the company to be its bottler. Short of a complete sovereign meltdown, people are going to continue to drink Coke. The bottler continues to do well and the fact that it is located in Ukraine means that the project is paying a substantial yield.”
Similarly, the moratorium on all foreign currency payments during the Argentine crisis did not affect loans generated by IFIs and highlights the efficacy of the firm’s partnership strategy. IFIs, which serve as Cordiant’s primary source of deal flow, derive advantages from their status as multilateral development banks. Principal among these is the preferred creditor status, which ensures that member governments grant preferential access to foreign currency in the event of a foreign exchange crisis. “The soybean exporter,” explained Creighton, “was a good business in a difficult country. The project, however, continued performing and never skipped a payment.”
Charting New Territories
Cordiant is constantly looking at new countries and monitoring those countries in which it is already invested. “We were in a lot of the BRIC and Eastern European countries five years ago,” said Creighton. “Gradually we’ve moved into places like Serbia, Azerbaijan and Panama, where we think the outlook is improving. In Asia, we’ve begun looking at deals in Pakistan and Indonesia. These are countries that have always been on our radar and as they’ve begun to improve, we’re considering the opportunities.” Conversely, countries like Hungary and the Baltic states have graduated from emerging status.
The experience of the Cordiant team is essential to identifying the right deals in the right countries and is a definite “value-added” benefit for institutional investors who are interested in emerging market exposure but who lack the know-how to enter these markets confidently. Business in many of these countries is done differently and governments do not always facilitate the business environment. Creighton offers China as a prime example. “China is an interesting story and everyone is falling over themselves to be a part of it, but the truth of the matter is that it’s a difficult environment to operate in, particularly at a time when the government is actively trying to slow down the economy.”