Meet The ‘Genghis Khan’ Fund Manager
Mongolia? Come on. Who wants to invest in Mongolia? Gary Kucher does. He runs Mongolia Holdings, a private firm mainly focused on infrastructure. This year’s announcement of the China-led Silk Road has investors like Kucher thinking Mongolia is one of Central Asia’s best kept secrets.
These American corporate brand namers are on the same page: Caterpillar CAT -0.22%, General Electric GE -0.92%, Philip Morris, Oracle ORCL +0.61%, Microsoft MSFT +0.3%, Bloomberg, Deloitte, Ernst & Young and Visa all have a presence in Mongolia. Even Google discovered Mongolia recently, a country who’s latest recognizable name was emperor Genghis Khan. He died in 1227. But last Monday, Google put Mongolia back on the map.
Kucher’s got an idea: bring in high net worth individuals and hedge funds looking for alternative investing ideas to Mongolia. They’ll be investing in the backbone to an economy that until recently has been rivaling China in double digit growth rates.
“He saw a need for a distressed asset fund,” says his friend Peter Kohli, founder of DMS Funds in Leesport, Va. Kucher’s plan is to raise money through a private equity fund known as the Mongolia Fund, targeting infrastructure projects, either already under way or being planned. And buying up out-of-favor firms who need some good old fashioned Western capitalist know-how to keep them solvent.
Kucher thinks he is the guy to sell Mongolia to Americans looking for the next big thing. He is currently the CEO of a large Hertz franchised-equipment rental company in Ulan Bator, the capital city and home to 1.3 million. He set up the Mongolia Fund in 2012 and has been in Mongolia for the past five years. He even left Beverly Hills for it. He spent four years as chairman of mergers and acquisitions shop MB&A Capital there.
The guy’s been around. In the 1990s, he brought the Elk Creek and Turf Club Casinos to Cripple Creek, Co. They’re now defunct. He was the CEO of South African golfer Gary Player’s company Gary Player Golf and got into the big ticket equipment rental business in the early 2000s as CEO of Manex Entertainment in Hollywood.
“I traveled to Mongolia the first time, many years ago, with a frontier markets businessman friend of mine from South Korea and I immediately fell in love with it,” Kucher says. “My old friend and business partner, former U.S. Ambassador Michael Ussery, was already a huge Mongolia fan and encouraged me to take a comprehensive look at the nation’s economy. I’ve began traveling back and forth more frequently after becoming CEO of Mongolia Holdings and my expectation and desire is that there will soon be sufficient economic activity in Ulan Batar to keep me there full-time.”
What are the opportunities?
An American Chamber of Commerce survey in Mongolia, conducted in January, showed most local businessmen have a negative perception of the business environment there. On the positive side, Mongolians regard the U.S. as its Third Neighbor after China, and are open to American investment. The thinking among Mongolia’s business class is that U.S.-Mongolia commercial relationship have room for improvement.
The January survey showed the economy, unemployment, and corruption are the paramount concerns of Mongolians. Almost half of the respondents believe that the country is going in the wrong direction. Two thirds of the people are assessing the current business environment negatively and only a fifth of respondents think that the economy will improve by the second half of the year.
Yet, everyone there is bullish on the government’s support of foreign capital flows and that’s why Kucher thinks his Mongolia Fund has hit the right niche early on.
Kucher’s ‘Khan Fund’
First of all, this is not a product for the middle class investor. This is for the high net worth individual with a million dollars to burn in alternatives.
The fund is currently in its early phases, looking for a global asset manager, and gunning to raise around $250 million in capital. Most of it will go to fund infrastructure, rather than investing in stocks on the Mongolian Stock Exchange. Which exists, actually. Since 1991. Its market cap is a paltry $83 million.
“Remember, China has started their own infrastructure bank, much to the chagrin of the U.S., plus there is also the new BRICS Bank. However, instead of being private, these banks are really political in nature and I’m sure have a lot of strings attached. Untethered market based solutions are always better,” says Kohli, who will be a partner in the fund.
Here are some thoughts:
The country enacted a new investment law in 2013 that bans discrimination against foreign investors. Both foreign and domestic investors now equally protected under the law.
Last January, a securities rule allowed for custodian banks to enter the market, helping the stock market there mature. Stricter corporate governance measures are also required.
On the commodities side, Mongolia revised its Minerals Law, which reduced royalties by half to 2.5%. Australia’s Rio Tinto is partnering with China in a $5 billion project to expand mining. And within 189 countries, Mongolia is actually ranked 72nd in the Ease of Doing Business Index. That’s better than China and Kazakhstan, the other Central Asia darling.
Mongolian GDP grew by a record 17.5% in 2011. It grew 12.4% in 2012, 11.7% in 2013 and 7.8% in 2014. Despite 2014 being a sluggish year for the mining industry, Mongolia’s mining exports increased by $1.2B thanks to production of the largest untapped gold and copper mine in the world-Oyu Tolgoi, most of it being dug up by Rio Tinto.
Mongolia’s government has been taking effective measures to improve the young economy by implementing investor-friendly laws and opening up its resources to investors. Tavan Tolgoi, a 7.4 billion ton coal development, has been granted to an international consortium led by China’s Shenhua Energy. Roughly 80% of foreign direct investment inflows to Mongolia over the past five years went to the mining sector.
Kucher says there are opportunities for private equity investment in agriculture, food processing, energy, real estate and tourism to name a few.
“Mongolia, Russia and China approved a mid-term development road map for tripartite cooperation in July in Shanghai,” Kucher told FORBES in an interview. “This is a part of China’s One Belt – One Road initiative to minimize its dependence on sea-lanes for transcontinental trade. The Prairie Road program advocated by Mongolia consists of five projects with a total investment of about $50 billion. The projects include a 1000 kilometers expressway connecting China and Russia, a 1,100 kilometer electrified railway, and the extension of trans-Mongolian railways, gas and oil pipelines. The effective joining of China’s Silk Road Economic Belt, the Prairie Road, and Russia’s Trans-Eurasian Belt Development will make Mongolia the transportation and economic hub of Eurasia.”
It will be a tough sell.
Since 2013, in response to softening commodity prices and a decline in positive FDI flows, the government has maintained expansionary fiscal policies and committed to substantial infrastructure projects. During that period, the nominal exchange rate depreciated by more than 40%, driving inflation to double digits, and international currency reserves held by the central bank dropped by two-thirds.
Additionally, borrowing from abroad and access to a bilateral currency swap line with China have helped offset declines in levels of FDI inflow. The level of Mongolia’s foreign debt to GDP is high, relative to other countries. The country runs a current account deficit, despite recent improvements in the trade balance. China and Russia combined provide two thirds of all imports, and export sales are dominated by China, which accounts 90%. Approximately 50% of Mongolia’s export earnings come from copper.
Here is Kucher’s final pitch.
“Mongolia has enormous economic growth potential stemming from its varied and world-class quantities of natural resources, which have low costs of production and delivery to customers in large, nearby markets. The monetization of this national wealth is driving investment in infrastructure and value-added industries, for which the 25-year-old democracy recognizes the need for a business environment that can attract the necessary foreign direct investment,” he says.
Building out Mongolia is the basic modus operandi of the Mongolia Fund.