Dreaming with BRICs

For one of my first projects at HBD Venture Capital, I completed a study of trends in the private equity and venture capital markets for the BRIC countries. BRIC stands for Brazil, Russia, India and China. A research report by Goldman Sachs in 2003 argues that the BRIC nations will overcome the G6 nations in GDP by the year 2050. The paper outlines the growth projections underlying its thesis and argues that China and India will become the dominant global suppliers of manufactured goods and services and Brazil and Russia will be the dominant suppliers of raw materials.

Although I agree that the economies of the BRIC nations will be a force to reckon with, there are a lot of factors that need to be overcome in order for the projections to hold. For instance, the World Bank issues a ranking of “Doing Business” for all the countries in the world. Singapore, New Zealand and the U.S. are ranked in the top 3, while the Democratic Republic of Congo is ranked last of 178 countries. Brazil, Russia, India and China are ranked 122, 106, 120 and 83, respectively. The ranking is done on a number of indicators, such as:

• Indicator: ranking of Brazil, Russia, India, China
• Starting a business: 122, 50, 111, 135
• Dealing with licenses: 107, 177, 134, 175
• Protecting investors: 64, 83, 33, 83
• Enforcing contracts: 106, 19, 177, 20

In other words, the World Bank study supports the argument that there are a lot of improvements that need to be made before the economies of the BRIC nations can sustain long-term growth.

A summary of trends in the private equity and venture capital markets for the BRIC countries:

Brazil

• Second wave of growth after the 1998-2002 financial crisis, spurred by improvements in legislation and policies to reduce legal and credit risk to promote long-term investment, and not attract the volatile and speculative capital inflows of the 1990s which led to the crisis
  
• One of the 10 most entrepreneurial countries according to the Monitor Group

Russia

• Strong government influence on supporting innovation sectors (i.e. state-supported funds such as $1.2bn Russian Venture Company created in 2007 and focus on technoparks, technology transfer centers and special economic zones)
• Technology sectors still in early stages (IT sector relatively new and older scientists/academia not familiar with commercialization of technology)

India

• Crowded PE/VC market (over 300 funds in India with another 60+ being raised)
• Wider sector coverage (most VC deals in 2007 were in IT/BPO sector, however a lot more deals in engineering services, medical devices and energy in 2008)

China

• Uncertain legal environment due to changing property and operating laws (exit opportunities in stock market and overseas markets unclear and state still a large stakeholder)
  
• Most VC deals in 2008 were in internet and media sectors.