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Emerging markets to gain greater share of PE commitments

Institutional investors increasingly believe that emerging markets are attractive for private equity investment, both on a standalone basis and relative to more developed markets, according to the latest EMPEA/Coller Capital emerging markets private equity survey.

Over half (57 per cent) of limited partners who currently invest in emerging markets private equity plan to accelerate their new commitments over the next two years.

Emerging markets’ share of LPs’ private equity investment will continue to grow, with total commitments to emerging markets private equity funds expected to rise from six to ten per cent today to 11 to 15 per cent in two years’ time.

Over three-quarters (77 per cent) of LPs expect annual net returns greater than 16 per cent from their emerging markets private equity portfolio, compared with 29 per cent of LPs who expect similar returns from their global private equity portfolio.

Nearly three-quarters (70 per cent) of LPs are either satisfied or very satisfied with the performance of their emerging markets private equity portfolio relative to that of their listed emerging markets equities.

In addition, 61 per cent of LPs view the alignment of their emerging markets private equity managers as just as strong as that of their developed market GPs, and an additional 23 per cent of LPs see a greater alignment with their emerging markets GPs.
“Investors are clearly drawn to markets with strong underlying growth rates, which trumps leverage in driving returns,” says Sarah Alexander, president and chief executive of EMPEA. “LPs now see a mature group of fund managers with the skills and experience to capture the private equity opportunities fuelled by growth and to minimise investor risk.”
Erwin Roex, partner, Coller Capital, adds: “Investors are still increasing the proportion of their private equity commitments targeted at emerging markets. Why? Quite simply, because LPs expect emerging market funds to outperform developed market ones. And they regard emerging market GPs as at least as well aligned with their interests as developed market GPs.”
Only 11 per cent of investors intend to slow their new commitments to emerging markets private equity, compared with 38 per cent one year ago. Those who do cite cash constraints as the primary obstacle to maintaining commitments, followed by an over-allocation to private equity.
Beyond China, Brazil and India, which continue to dominate the rankings in terms of investment attractiveness, emerging Asian markets (Vietnam, Indonesia and Thailand) are poised to see the greatest expansion in commitments from current investors.

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