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Guest Article: North Korea: The Ultimate Final Frontier Market

Geoffrey See
Managing Director - Choson Exchange
13 February 2013

News Analysis

Editor’s note: The term “frontier market” is bandied about quite a good deal in the investment world and this publication, like others, gets its fair share of views about countries seen as promising for those willing to take on the requisite risk. But very few mention North Korea, a jurisdiction that has been run by a hard-line communist regime since the early 1950s and which is infamous for its mix of personalty-cult leadership, repression and lack of contact with the outside world. The jurisdiction was back in the headlines this week over reports of a further nuclear test, which has provoked international condemnation. In the light of such things, is there an investment case that can or should be made for this place?

Geoffrey See, who is the managing director of Choson Exchange, his eponymous non-profit organisation focused on business, economics and legal education for young professionals and policymakers in North Korea, gives his views about the country. See has advised hedge funds and private equity firms about North Korea; he has also worked at Bain & Co. His views here are not necessarily endorsed by this publication, but it is delighted to share the insights about what might one day be a country more familiar to investors than it currently is. (Choson Exchange has offices in Beijing, Singapore and Boston.)

This question must seem utterly contrarian with the recent North Korean nuclear test, coming on the heels of a rocket test, and the likely chorus of think tank voices that will follow calling for increased sanctions. Given the obsessive secrecy that shrouds North Korea and its tendency to be in the news for the wrong reasons, it is unsurprising that most western investors overlook the country. However, niche interest in North Korea is rising among some American, European and Southeast Asian investors, not to mention increasing investments from mainstream Chinese investors. Hedge funds trade defaulted North Korean debt instruments while other investors take stakes in various commodity, property and retail opportunities.

I recently spoke at a conference a hedge fund organised for their investors. The fund had some exposure to North Korea. For investors looking to the long-term and interested in yield, it is easy to see why this niche interest exists. After all, a friend who provides working capital loans in Pyongyang charges interest greater than 50 per cent on an annualised basis to the more reputable borrowers in the country – an indication both of opportunity (scarce capital) and risks (potential for default).

But is North Korea invest-able for more mainstream investors?

The answer to this question is unfortunately a non-resolute perhaps…North Korea is slowly opening its market to foreign investors. But foreign businesses in North Korea still struggle with weak governance, arbitrary rules and an opaque operating environment. 

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