A growing interest in Cambodia’s financial sector has led to some recent high-profile mergers and acquisitions. The Post’s Kali Kotoski sat down with John McGinley, managing partner for Mekong Strategic Partners, to discuss the investment opportunities in the sector.

Where do you see the greatest potential for mergers and acquisitions (M&As)?

We’re seeing a lot in the financial sector with potential offshore deals, but that doesn’t mean in the future it will be limited to that. There are other very attractive Cambodian companies. Although it may have started with the finance industry and microfinance institutions because they are very good companies, there are other industries that will be of acquisition quality down the road.

Why has the financial sector been the first mover in M&As?

It might stem from the fact that the mergers and acquisitions that you see are driven by institutions that have already embedded strong corporate governance and strong management systems, making them easy to look at as potential assets. That doesn’t mean that organic Cambodian assets are not as equally attractive, but for the first mover, the finance industry is just easier to verify.

How has private equity performed in Cambodia?

Private equity is a fairly new practice in Cambodia. It hasn’t been a roaring success for foreign investors and that is because most of the large Cambodian businesses and family companies are willing to take on debt. Debt tends to be more appealing for these companies in the long term rather than selling out equity.

For the private equity that has come into the country, is there a lack of exit options?

Exiting is obviously a challenge for many of the private equity firms and I can’t think of an example of a private equity firm that has developed a strong track record for exiting. If you look at some of the private equity firms and their business thesis, you would see that a lot of them hoped that they would list on the Cambodian stock exchange for an exit option. But that is clearly a challenge with the stock exchange not taking off. So it is fair to ask some questions about how feasible that strategy is now.

Where do you see further growth in the banking sector?

There is certainly room for growth, but I think the current challenge for the banking sector is that there are two tiers. The international banks generally have specific credit appetites and strategy, and those strategies don’t tend to support the Cambodian economy as a whole. They tend to support the top end of the pyramid and I think that is fine because they have a role to play. But if you look at the local banking sector the opportunity and challenge is to have a more broad-based approach to credit risk so they can bank small- to medium-size enterprises (SMEs) and start to work down the economic pyramid. Really what you have going on in Cambodia is that these international banks come in and try to cater to the top, and the local banks try to compete with them, but there is a whole missing middle.

How do financial institutions tap into that missing middle?

From what we have observed, it is easy for microfinance institutions to organically move up as they grow and continue to support their customer base and adopt an SME approach. And it seems that is an easier challenge to master rather than Cambodian banks that wanted to tap into the top tier and now want to move down into having SME capacity. But for the smart banks, they will look into how they can deepen their distribution into the SME sector, which would be a net benefit to the economy as a whole. But the missing middle is not just a Cambodia problem because you see that in a lot of developing countries.

This interview has been edited for length and clarity.