Institutional investors believe emerging markets will continue to present attractive investment opportunities in the coming year and plan to maintain or expand their exposure to it over
Institutional investors believe emerging markets will continue to present attractive investment opportunities in the coming year and plan to maintain or expand their exposure to it over the medium term, according to a survey by EMPEA/Coller Capital.
Over three quarters (78 per cent) of LPs invested in emerging markets private equity plan to commit to additional emerging markets private equity managers and geographies over the next five years – half of them (49 per cent) within the next two years.
A further 62 per cent of LPs invested in emerging markets private equity plan to maintain or increase their new commitments in 2009. The 38 per cent who expect to reduce their new commitments cite cash constraints and over-allocation to private equity as the key reasons.
‘Investors recognize that emerging economies are the only ones still growing, and they also know that, since private equity deals in emerging markets don’t rely on debt, the collapse of the global leveraged finance markets won’t impede deal flow,’ says Sarah Alexander, president of EMPEA. ‘Emerging market private equity funds may benefit from very ripe conditions going forward: asset valuations are finally becoming more reasonable, and there is also a strong appetite for private equity capital because companies have fewer financing options.’
Erwin Roex, partner at Coller Capital, says: ‘In the face of a global economic downturn, there has been no sign of private equity investors in emerging markets running for the hills. This increased investor confidence stems not only from the prospect of stronger growth in emerging economies, but also from the increasing maturity of the sector. The majority of investors committed to recent emerging markets private equity funds expect them to outperform developed market funds of equivalent vintages. Moreover, they expect this out-performance to continue for new commitments they will make over the next few years.’
Over three-quarters (77 per cent) of LPs expect net annual returns of 16 per cent plus from their emerging markets private equity funds over the next three to five years, versus 43 per cent of LPs who expect the same from their whole private equity portfolios.
New investors will continue to enter emerging markets in 2009, but at a slower rate. The majority of LPs believe the risks of emerging markets private equity have increased over the last year, especially in Russia, Central and Eastern Europe, and Africa. However, four out of five existing investors who think risk has increased nonetheless expect to expand their exposure to emerging markets private equity within the next five years.
‘In these circumstances, existing emerging market investors probably have a real advantage,’ Alexander says. ‘Those LPs who are already familiar with emerging markets private equity can recognize the managers who will invest profitably over the long term. For investors without this familiarity, the perceived risks may be less acceptable.’
LPs ranked Brazil as the second most attractive destination for investment in the next 12 months – behind China, and just ahead of India.
‘Of the BRIC countries, China and India remain strongly attractive to private equity investors,’ says Roex. ‘But Brazil is the big winner in terms of changed appetite. Some 17 per cent of LPs plan to increase their private equity exposure to the country over the next couple of years, and a further 11 per cent expect to begin investing there. However, confidence in Russia as an investment destination has declined markedly.’
