Slowly but surely there has been a pattern of documented growing investment in Mongolia. Just this morning, China Shenhua Energy Co Ltd, the nation’s top coal producer, stated it was negotiating with the Mongolian government to purchase a coal mine in the country. Shenhua is among several miners including BHP Billiton and Peabody Energy that have expressed an interest in the Tavan Tolgoi coal mine. Free-enterprise is also truly a growing practice – it has been documented that one can start a business in Mongolia in twenty days, meeting only eight steps to do so. Truly when an increase of foreign investment is met with a promotion of autonomous opportunity and a decrease in a nation’s political risk, stability and even growth have the chance to thrive. Here, the Financial Times’ David Stevenson has published a Q&A session with Mandar Jayawant, manager of the only dedicated Mongolian frontier fund run out of Ulan Bator and Singapore, FIDP Funds, regarding the potential investment opportunity of Mongolia.

Please read on for the interview.

Below is the Q&A session with Mandar Jayawant, hosted by the FT’s David Stevenson:

Q1: Overall is Mongolia quite as promising as the Frontier bulls maintain ? On balance are the risks worth taking ?

The Mongolia country story is extremely strong. The risks are real. But there are ways to address the risks. Those with the ability to do so stand to reap extremely high rewards. But it is not the typical fly-in fly-out private equity play. Those with the ability to be patient, the positioning to establish strong local connections and the resources to put together ground presence to create operational value in businesses are best positioned to take on the necessary risks.

Q2: What are Mongolia’s strong points?

it is a China story amplified by the virtue of it being a frontier market – so far isolated from foreign investment and possessing vast minerals resources right on the border with the largest commodities demand in the world. If I were to list the strengths not necessarily in order of importance:

•Top quality vast minerals resources.

•Location on the border with China.

•A government committed to private sector development and with a realism towards the country’s possibilities. Isolated from the financial turmoil with an asset base that is real.

•Opportunities in real sectors.

•A cohort of young businesspersons eager to attract foreign investments.

Q3: What are Mongolia’s weak points ?

•A judicial system that is still evolving.

•A stock market that is moribund.

•A nascent private equity understanding.

•Difficulties making local connections.

•Infrastructure limitations.

•A weak financial sector.

•Weak corporate governance.

Q4: My perception is that political risk is still fairly low despite recent local trouble5 – would that be accurate ?

The political risk is low but not non-existent. You have to be able to manage the risk. This takes special skills and positioning.

Q5 : Any listed plays on the Western markets that allow access to Mongolia?

The major problem with Western investors at this point is that they are just too unfamiliar with the country and the story. The investment agreement with Ivanhoe and the subsequent development of the Oyu Tolgoi mine will raise the profile of the country. There is definitely interest from investors from Japan, Korea, and Malaysia. The London listed company you are referring to is Petro Matad I presume. It is an oil exploration company with strong government backing and promoted by the strongest Mongolian companies. These are the sort of opportunities that will attract the interest of Western investors. You have to be positioned to be able to participate in them. Not everyone will have access to such good deals in the private equity space.

Q6: What’s your funds approach and what are you specifically looking at to invest in ?

In Mongolia we are seeing investment opportunities in mining, mining services, energy, infrastructure, agribusiness, and financial services. The mining and mining related investments are obvious given Mongolia’s top quality deposits on the border with China. The opportunities in energy feed off the deposits of coal, export potential to China, and a high co-investment interest in clean energy from international financial institutions such as ADB, EBRD, and IFC. Infrastructure opportunities are related to transport and transshipment potential that has so far remained undeveloped and is related to the development of the large mines. The agribusiness potential originates from three sources – growing and changing domestic demand, demand from international mines, and export potential for niche high-value products. Opportunities in financial services are coming from consolidation of financial service providers and increasing demand for specialty services around the mining development.

Q7 : Any specific investment ideas or companies on your radar?

Mongolia is an extended China opportunity. The demand for Mongolia’s minerals and associated industry comes straight across the border from China. The same is the case for most of our industries of focus. We are looking at investment opportunities in mining, mining services, energy, infrastructure, agribusiness, and financial services. The mining and mining related investments are obvious given Mongolia’s top quality deposits on the border with China. In addition to investments in coal and iron ore, we are looking at secondary metals and minerals such as tin, molybdenum, and fluorspar. We have mining and associated processing investments in tin and coal. The opportunities in energy feed off the deposits of coal, export potential to China, and a high co-investment interest in clean energy from international financial institutions such as ADB, EBRD, and IFC. We are looking at a clean-burning and efficient burning coal power plant and a wind power plant. Infrastructure opportunities are related to transport and transshipment potential that has so far remained undeveloped and is related to the development of the large mines. We are looking at a stockyard and a logistics terminal. The agribusiness potential originates from three sources – growing and changing domestic demand, demand from international mines, and export potential for niche high-value products. We are developing a vertically integrated milk production and packaging plant and a fruit and berry processing plant.

Opportunities in financial services are coming from consolidation of financial service providers and increasing demand for specialty services around the mining development. We are looking at a credit institution and a leasing company.

Q8: Isn’t there a real problem with an inside track with all these true frontier markets – outside investors will never get a look in because of the local structure of the financial markets?

The insider track ”problem” is in fact an insider track ”opportunity” for us in Mongolia and also in Cambodia and Laos. I alluded to that in my original e-mail. Because we have a long-standing local presence in Mongolia (I have lived and worked in Mongolia for four years and a half) and are recognized by the strongest local partners as having a long-term position, we are able to access the most exciting investment opportunities. It is our firm view that the PE play in these frontier markets is very different from the traditional high-leverage PE play in established markets. It is about establishing relationships, creating value, and negotiating exits that owners are comfortable with. The fly-in – fly-out financial engineering route to high immediate term returns is doomed for disaster in these markets and Mongolia is no exception. Our investment philosophy is the same also in Cambodia and Laos.