Prince Street's Halpert Goes Deep On "Digital Decolonization" - Emerging Market Views

Prince Street’s Halpert Goes Deep On “Digital Decolonization”

The term “Digital Decolonization” is one that continues to gain ground within institutional investing, primarily among those with an eye on emerging and frontier markets. One global investment manager, Prince Street Capital, is today steered by a man who has not only fully embraced digital decolonization but continues to keep his finger on the pulse of the various opportunities that continue to emerge within the frontier.

Having founded Prince Street from his NYC loft apartment (aptly named after the SoHo street), David Halpert has grown Prince Street into a thriving investment firm in a global market where bets on emerging markets remain too “risky” for some, including even the most sophisticated investors.

Through unique long-only, long-short, and absolute return strategies, Prince Street has capitalized on opportunities that are often overlooked or misunderstood. In our latest Big Interview, Halpert details his beginnings in the world of finance, how Prince Street came to be and why digital decolonization is the key theme to watch as emerging and frontier markets continue to evolve.

 

Emerging Market Views: Tell us about Prince Street. What led to the firms’ formation?

David Halpert: I started Prince Street in 2001, from my loft downtown (hence the name). Prince Street Capital Management was one of the earlier emerging market (EM) hedge funds, inspired by my experience working in the long-only investment world.

Like most entrepreneurs, I started quite small, with my mom as my only client. The big investment banks did not take my business in the first year, but I managed to get my track record audited which was crucial to this first step in my journey. Within two years of inception, Prince Street became a Goldman Sachs prime brokerage client when we secured institutional investors in 2003. We had successfully preserved capital in the dot-com crash of 2001-2002, which was a good selling point. Prince Street went on to print 10 consecutive positive years, 2001-2010, including a positive print in 2008, which I think is really what allowed us to gain market share against our peers.

In 2005, I started getting reverse inquiries from limited partners (LPs) about running a long-only product, in part because allocators were less focused on capital preservation after several strong years in EM (2003-2007). With that in mind, we launched Prince Street Opportunities in 2006, which would eventually grow to be our largest pool of capital, as it is today. Prince Street Opportunities also outperformed in 2008, thanks to a large cash weighting and some early investments in the frontier markets. We have continued to run that fund as an “absolute return” strategy since.

David Halpert, Prince Street Capital

Both Prince Street International and Prince Street Opportunities were essentially capacity-constrained, in part due to the frontier book and also because of some small-cap stock ideas that made the fund unique and differentiated. That said, we wanted to grow as a firm, and with that in mind, we launched Prince Street Institutional as a large-cap EM equity mandate in 2011.  I think some allocators were invested in Prince Street Institutional because they could not get capacity in Prince Street Opportunities.  The fact that we were running the two funds quite differently on a risk-basis created some challenges which partially explain the differences in performance.  In 2016, I was inspired to pursue the Digital Decolonization thematic after attending a meeting with the founder and board of directors of Gojek, in Indonesia. This ultimately led to my decision to amend the investment program of the long-only vehicle first launched in 2011 to follow the DigDec thematic, seeking out disruptive, innovative companies, regardless of their sector that is embracing technology to gain market share.

Many of my long-standing competitors have hung up their sneakers for other pursuits, while I have reinvested in my business and armed with the lens of Digital Decolonization, face my asset class with optimism that few of my competitors share.

During the last 10 years, I have invested personal capital into a few early-stage venture deals, starting with Gojek, around the frontier market technology scene. I started to observe a changing dynamic whereby emerging markets entrepreneurs chose to forgo personal gain and refused the sale of their companies to foreign tech titans as it was not in the best interests of their countries. The Trump administration’s decision to walk away from the Trans-Pacific Partnership Agreement (TPP) in January 2017 was a turning point in the course of tech geopolitics as emerging markets entrepreneurs could now partner with their governments to implement regulation that protected domestic digital assets and opportunities. China and Russia showed the way by fostering the emergence of local Emerging Markets Titans who offered local solutions, who benefitted from regulatory protection, and who leapfrogged foreign competitors. Over time we began writing further about this idea which became the cornerstone of a new fund we launched in May 2020 called Digital Decolonization or DigDec, the product I mentioned earlier that we amended.

This idea has captured my imagination and re-energized my ability to undercover investment opportunities which were often distinct and undiscovered. Since embracing this new investment lens, Prince Street DigDec is now our best performing strategy on a YTD, a 1 year and a 3-year basis, and it is the fund where we are getting the most traction with potential allocators, who find the thesis compelling.

Over time, I realized that running a more concentrated and thematic portfolio would be a good compliment to Prince Street’s long-standing products and allow me to uncover next-generation investments at the early stages of their lifecycle or more traditional companies who embraced transformation through embracing technology. This thematic lens has enabled me to more clearly see trends such as digital payments, telemedicine, e-commerce, and e-education evolving across the emerging and frontier markets. The thematic approach has allowed me to be benchmark agnostics and to discover investment ideas ahead of my competitors. The thematic approach is the evolution of my approach to asset management.

How, if at all, has investor and even general interest in the emerging and frontier markets evolved since you founded the firm?

When I started Prince Street in 2001, Emerging Markets were ice cold, after having just lost everyone lots of money in the Asian Financial Crisis. At that time, Frontier markets didn’t even exist yet as a concept – MSCI launched their Frontier Equity Index in May of 2002, but most of the markets they followed (Middle East) were closed to foreign investors so aspects of the Emerging Markets asset class was all kind of theoretical. We then had a surge of interest in EM from 2003 to 2007 given a variety of factors that fell into place but since 2010 it has been quite tough going for this asset class.  I recently authored a whitepaper entitled “Emerging Markets: A Lost Decade? – The Case for Active Management”, which reflects on the last ten years of investing in this asset class.

I was inspired to pursue the Digital Decolonization thematic after attending a meeting with the founder and board of directors of Gojek, in Indonesia.

In June 2010, Emerging Markets were the darling global asset class driven by the excitement around the bottom of the pyramid consumer investment, Eat-Drink-Wash-Wear-Shop. The BRICs were at the height of their glory as a concept, about to expand their membership to include South Africa and garnering widespread investment optimism about their future investment returns. The world economy was growing 4.3%, a rate that it hasn’t seen since, and China was growing a scorching 10.6%. Market consensus suggested that if you were going to invest anywhere, it should be in emerging markets, and you should be considering frontier markets for extra investment returns. It was “obvious” that the future for the emerging markets asset class was bright.

Just as the digital economy is now permeating so many other aspects of life around the world, from entertainment to business to education to healthcare, it has become more important than ever for local people to have more of a say over what is going to show up on their phones.

Ten years later, history paints a very different picture. Over the 10 years that followed, the MSCI Emerging Markets price index in fact returned +8% (cumulative, not annualized), with the total return index doing somewhat better at +38%, somewhat ahead of interest checking but far short of the optimistic forecasts of a decade earlier. By contrast, the MSCI World total return index delivered 258% and the S&P 500 Total return an impressive 370%. The dollar gained 8% against Mario Draghi’s euro over the decade, and a new, anti-globalist surge of populism has been voted into power from Washington to London and several other capitals around the world. Unbridled optimism for the Emerging Markets class, has been replaced by pessimism as inflows into the asset class has slowed to $13 billion in 2019 compared to $93 billion at the beginning of the decade.

Many of my long-standing competitors have hung up their sneakers for other pursuits, while I have reinvested in my business and armed with the lens of Digital Decolonization, face my asset class with optimism that few of my competitors share. It is still early days, however; to date the markets have rewarded my concentrated, thematic approach and, quite frankly, I am having fun and enjoying uncovering the emerging market’s titans in healthcare, fintech, e-commerce, and infrastructure who are taking control of the opportunities in their countries offered by embracing technology. I have witnessed similar energy, passion, and vision that drove Nadiem Makarim to build Gojek, the most successful startup company in Indonesia that employs over 4 million people, and am seeing this repeated in other emerging markets. Today I search for Emerging Markets titans who fit this Digital Decolonization archetype.

As more and more developing economies invest in infrastructure and technology, “Digital Decolonization” is no longer a catchphrase or a trend. It is real. How do you define this?

I define Digital Decolonization as a process, or a historical phenomenon, much like the “analog” decolonization of the 20th century (you may remember Kwame Nkrumah and Sekou Toure?). It will take decades to happen, in my opinion, and along the way, there will be plenty of frustration and disappointment. But it seems obvious to me that the future of the world economy isn’t going to revolve completely around six zip codes in California and Washington State, and that 8 billion people aren’t going to accept having this much wealth and power concentrated in so few hands. Just as the digital economy is now permeating so many other aspects of life around the world, from entertainment to business to education to healthcare, it has become more important than ever for local people to have more of a say over what is going to show up on their phones. Who will decide what food you can have delivered to your apartment in Accra or Asuncion? Who will decide if your kids learn about Christmas, Ramadan, or Deepavali? Who curates the news feeds on election night? Do you want your daughter to watch Dora The Explorer in English or in Twi?

Honestly, stock market capitalism and colonialism go way, way back. The Dutch East India company was actually the first company to get listed on a stock exchange (Amsterdam, during the Tulips, no less!), and stocks and bond markets were trying to price risk for colonial ventures as early as Virginia. Who built the railroads linking the Ashanti Gold Mines to the harbor? Who financed them? These major macro trends repeat themselves throughout the course of history with a slightly different twist however the theme remains the same, namely the demand for self-determination and control over one’s destiny. As recently as 2015 Google management were proudly boasting about the “Next Billion Users”, and Uber came to Cairo to launch their global bus service. But just like Lord Lugard and old Ashanti Gold Corporation managers found Africa challenging 100 years ago, I think Amazon and Alibaba are going to find it similarly challenging in the 21st century and will need the services of a local guide. Just ask Tiktok.

I define Digital Decolonization as a process, or a historical phenomenon, much like the “analog” decolonization of the 20th century.

Financially, we define DigDec as a framework to analyze stocks. There are companies on the right side of history – Gojek, Reliance, Fawry, Safaricom, to name a few – and then there are other companies who are on the wrong side of the trade. There is a long list of companies that are still trying to figure this out, like Anglo American, Naspers, Tencent, Alibaba, Amazon, Facebook, and so forth. Are we viewing the local people as stakeholders in our business or as a factor of production? Do we have our board meetings in Lagos or in London?

My current read on this is that the Reliance Jio transaction is very meaningful for the future. The great tech oligarchs – US, Chinese, or Japanese – are starting to realize that they can’t expect Asians, Africans, and Latin Americans – Google’s famous Next Billion – to just sign up as customers for the entire suite of digital products that they sell back home in Atherton, California, without some significant local input. The local input is getting very sophisticated, very quickly, and beginning to understand what ESOP means. So either we are going to see a lot more Jio-Facebook deals in the next few years, or we are going to see a lot more TikToks.

The implication for investors is kind of obvious at this point. Reliance stock price has doubled since the Facebook deal (back in April) and Mercadolibre has outperformed Amazon this year.

Financially, I think the principal of DigDec can be applied quite broadly. Take gold mining, for example. Do you really want the South African guys calling the shots on where to put the next tailings dam at Obuasi? Wouldn’t you rather have smart Ghanaian geologists and engineers making these decisions?

What countries do you view as the most prepared to tackle “decolonization”? India? China? If so, why?

Korea and Taiwan really started the decolonization movement, followed by China, Russia, India, and Israel all in the late 20th century. All these countries have produced multibillion-dollar companies that either listed or were sold strategically to big multinationals. Since then, we have seen multibillion-dollar companies get listed from Argentina, Brazil, Kenya, South Africa, and Singapore, with up and coming candidates from Indonesia, Egypt, Bangladesh, Vietnam, Colombia, Nigeria, and elsewhere. Give me 100 million consumers, a good CEO, CTO, COO, and CFO, and a billion dollars and I will find DigDec in Kinshasa.

Interestingly, there have been several unicorns sold out of the Middle East (Souq, Careem) but very few IPOs. I think it will take some time before we see capital markets activity in much of the frontier. Other markets, such as Turkey, Mexico, Thailand, and the Philippines are remarkably behind in building these companies, but I honestly see this as more of an opportunity for the future than as a sign of problems with my analysis. Entrepreneurs in these countries are going to increasingly hear the call for self-determination and have a playbook of what’s needed to become a DigDec EM titan. From my perspective, it’s only a matter of time before they emerge to harvest the opportunities.