North Goes East — Case Study
Case Overview and Important Items
The North Goes East Case documents a decision for the North Asset Management group to diversify the investments that it can offer its clients. One of the ideas that it had was to start a property fund in which the company’s clients could invest in real estate through a hedge fund type arrangement. One of the most promising property markets in the world was identified to be in the Central and Eastern Europe (CEE) markets. As countries in this region have been either newly introduced to the European Union or on a path to joining the EU, there has been significant economic growth driven by foreign investment.
Whereas companies in Eastern Europe were growing at a few percentage points in regards to gross domestic product (GDP) per year, many of the countries in Eastern Europe were growing substantially faster. Much of this growth was driven by foreign investment that had entered the previously untapped markets through the trade liberalization deals that were terms of the European Union. However, at the same time, there were still high levels of political instability in the CEE as well as high levels of corruption and other social issues. Therefore, for investors to accept the risks associated with the CEE they often required substantial returns on their investment. In the case of North Asset Management, this group set the bar at a twenty percent internal rate of return for their property investments.
Important Case Facts
In May of 2004, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovakia, and Slovenia had joined the EU.
At the time of the case, Romania and Bulgaria were undergoing the application process.
In order to be admitted to the EU, countries had to agree to and abide by many economic and political mandates including such important items as forming a secular democracy as well establishing a market economy.
As a result of the countries embracing capitalism, foreign investment helped fuel a game of “catch up” and these economies grew comparatively quickly on average.
Although the CEE region had tremendous growth opportunities there were still many threats such as labor migration, inflation, political instability, corruption, etc.
Successful Parent Company
Large Amount of Capital Available
Limited Experience in CEE
Limited Experience in a Property Fund
Language and Cultural Obstacles
Find an Ideal First Property Investment
Meet the 20% IRR Benchmark
Expand to Other Secondary Cities
Political Instability and Corruption
Cultural and Language Barriers
Retail Park in Romania
Logistics Platforms in Bulgaria, Hungary, and Romania
Local Market Instability
Retail Project in Hungary
Specialized Industries Close By
For the managers of the property fund, the first investment was critical as it would set the stage for all further investments. After literally considering hundreds of different opportunities and different projects, the three finalists were chosen and now the decision rest between which one showed the most promise as an initial investment. Two of the three opportunities were designed around the retail industry in which the managers had experience in.
Developing a logistics network is a complicated endeavor that requires significant knowledge of the industry. This was not necessarily in line with the management’s level of expertise and experience and they would have to rely on outside consultants for much of the development of this project. Since this is the fund’s investment project and represents an important milestone, then the logistics project should be eliminated first. This could be one of the projects that the team pursues later.
Of the two retail projects that made the top three selections, the retail park in Romania is the most attractive. This is due to the fact that the infrastructure is already well developed, there are stable and low unemployment rates, the region is rich in natural resources, and the area is currently under developed in regards to retail. All of these factors make the Romania the most attractive option to invest in first. Although the returns might not be as high as the other two options, this would put the fund on a solid foundation to develop more opportunities later. It is better to accept less risk in the first round of investments and build up some experience and a network before tackling more challenging investments that could pose various threats to the new fund.
North Goes East — Case Study