And the countries are all different. You go to South Africa and it has many aspects of a developed market. You go to Nigeria and it’s weird. Lagos looked to me like a city where aliens had come and built the city and then left, and then just sort of let it decay. People kind of wandered in from the outskirts, squatted in the city. So you had this strange juxtaposition of what was clearly modern infrastructure that had just been kind of abandoned to decay—and then total squalor. You’d go one block off a main thoroughfare and the road is dirt. You go to a nice neighborhood, all the houses are behind walls and outside the walls there’s somebody cooking on a garbage fire, right outside the walls of some big house. It’s like nothing I’ve seen anywhere else.
n+1 And yet they had a lively banking sector?
HFM: If you went there it would be clear to you that there’s no way that those banks could deploy the kinds of capital that was being pushed in.
On the other hand, there’s something very attractive from an investment standpoint of going to a place like Lagos. You’d go to an office building or a hotel and in the course of the day the power goes out six times and the generator kicks on to power the building, and that generator is powered by diesel, and you see all these fuel trucks all over the place that have to bring diesel to fuel the generator, and the generators are noisy and loud. You’re like, “Wow, there’s an obvious opportunity here. Somebody should build a reliable power plant! It would just be tremendous, a tremendous economic efficiency, because you wouldn’t need all these diesel trucks zooming around, you wouldn’t need all these generators, and by the way Nigeria has all this natural gas that’s just being flared so if you burn that in a power plant you’re using a resource that’s just being flared!”
Or you drive in the city and there’s one bridge from the mainland to Victoria Island; everyday it’s backed up for hours. It’s like, “You know what? I could build another bridge next to this bridge, I could charge a huge toll!” This is a country that needs everything. There’s so many obvious opportunities to invest and really increase efficiency. Physically invest. I’m not talking about the ability for a country to absorb capital institutionally, but like physically.
HFM: But then you realize that it’s not like they can’t figure this out. It’s not like they don’t get the fact that it’s pretty annoying that the power goes out six times a day and it’s pretty annoying to have six fuel generators humming all the time. The reason investment doesn’t happen is because it’s in some powerful person’s interest that it not happen. There’s some guy who controls the diesel trucks who makes tons of money from being a diesel distributor, and there’s a guy with all these generators who would be out of business if power plants were built, and he stands in the way. There are people there, there are corrupt government officials who know how much value can be created by a power plant, but they want to extract it for themselves. That’s why the country needs everything.
n+1: What were the difficulties, when you say there were difficulties in getting involved in the market—
HFM: It was just like mechanical difficulties. This wasn’t like going on Fidelity and saying, “Enter the six-month T-bill auction in Gabon.” There were times where to participate in an auction you’d have to get a whole like packet of documents together, signatures and everything and fax them to the central bank of the country. Sounds simple, right? Well the phone lines don’t work there half the time. So you have to fax between this hour and this hour to be eligible, but you just couldn’t even get the fax machine to pick up, or your fax transmission would be halfway through and you’d get cut off. Sometimes you have to get special approval as a foreigner to invest in these markets, and we’re navigating a big bureaucracy. So we would do all that, but once we do that, then we’d have permission to participate in the market, and it was worth it.
n+1: What would you do when there was a fax crisis?
HFM: A fax crisis wasn’t an option, because you know you couldn’t not get a fax. You’d call and try and find somebody, you know, “Could you see if the fax is working? Give me another fax number.” And it was kind of silly. But then that’s why the returns are there. How many people are going to put up with that nonsense?
When they finally improved their systems and you could email things or do things electronically or there were investments banks that would alleviate those trades for you, the opportunity disappeared.
n+1: Couldn’t you just fly there and delivery the papers?
HFM: Well you wouldn’t know, you wouldn’t know until you tried if the fax machine was going to work or not.
n+1: That’s true.
HFM: These are the kinds of trades I love. Where the success or failure is determined by whether the fax machine works, not whether the guy you just hired’s a crook.
n+1: Is this Nigeria you’re mostly talking about?
HFM: No, that’s some other countries we had this issue with, smaller countries.
n+1: What other places did you go that were interesting?
HFM: You name the country in sub-Saharan African, we either did some small trades there or looked into doing some small trade there. We were pretty promiscuous. By the time the bull market came around, we only had some small investment in Nigeria and Ghana.
n+1: How was Ghana?
HFM: That particular investment did not work out so well. As an economy overall it’s hard to say. It was less corrupt than Nigeria, more democratic than a lot of places we operated, but it was still Africa, right? The economy was still a little bit chaotic, statistics were poorly kept, transparency was poor and the economy’s subject to a lot of volatility. There was a thing at the end of last year where there was a devaluation of the currency. There was an election and the campaign spending went out of control, the incumbent tried to buy victory for his party’s candidate. He was unable to. So I mean, it’s Africa.
n+1: Of all the places you’ve dealt with, Africa was just the least developed, is that the main thing?
HFM: It’s the most chaotic. People talk about corruption, but like really effective corruption requires something like organization. Like Argentina. It’s organized, it’s very organized corruption. Even a lot of Russia, to a certain extent. Very organized corruption. Africa is certainly corrupt. But it’s more that it was chaotic. The infrastructure is poor, volatility is high. Whereas in Argentina you can predict that you will be screwed. You just know it. In Africa, anything can happen.
Like one day you’re trying to transfer funds out of out of the country and suddenly they say, “Oh, sorry there are no dollars available.” And you know if somebody said that to you in Argentina, it would be like, “Because I want you to buy the permission or whatever.” In Africa they are just, “No, there are no dollars today,” and the next day they’ll call you up, “Oh yeah there are dollars now.” There are things that happen there that in other places I would chalk up to an attempt to shake me down. There, it was often just chaos and disorganization.
n+1: You were the only ones willing to sit on the fax?
HFM: No, in Angola we had to get literally a presidential decree.
n+1: [Laughs.] How did you get that?
HFM: It took us lobbying for like two years.
n+1: You would, how would you—
HFM: When they would come to the UN or World Bank meetings, you’d meet with them, we met the ambassador, we were like, “Look, we want to invest in your country, but we want to get started with something simple so we want to be able to buy T-bills. Don’t worry, we’re not hot money, we’ll keep the money in for a long time.” Which we did. They let us in, they gave us a very small capacity, but we were involved in their T-bill market for like two years.
n+1: And that’s considered a considered a long time?
HFM: Yeah, that’s a pretty long time.
n+1: And they love you? They love you in Angola?
HFM: I don’t think they remember us anymore. It was a long time ago. Actually the ambassador that we—was it the ambassador or the finance minister?—one time we went to the ambassador or the finance minister and then the finance minister at that time was later arrested.
n+1: Why wouldn’t they let you in?
HFM: That’s the thing, it was just chaos. They’re just like “What’s the upside?” They’re just kind of suspicious. And like, “What’s a hedge fund? And if something goes wrong I’m going to get in trouble.”
n+1: Uh huh.
HFM: “Yeah, it could be good for the country to have foreign capital involved but there’s nothing in it for me, so why should I exert myself?”
n+1: Couldn’t you have bribed them?
HFM: It’s illegal!
HFM: It’s illegal under U.S. law for a U.S. citizen to pay bribes to a foreign officials.
n+1: [Scoffing chuckle.] Even if you’re over there?
HFM: Wherever you are. The government is very strict about that and we are very strict about that.
n+1: Are there places that aren’t?
n+1: Does that put you at a disadvantage?
HFM: Theoretically. But if my business were based on paying bribes I wouldn’t want to be in it.
n+1: Did you sense that they were expecting bribes—
n+1: They’d be like, “You should contribute to my charity fund,” or how?
HFM: It’s kind of like, “Well what’s in it for me?” “Do you mean, ‘What’s in it for your country?’” “No, what’s in it for me?”
n+1: How do you ignore that?
HFM: You say, “It’s a very good thing for your country if this investment goes forward.”