It’s a good time to invest in emerging markets, according to Carlyle Group co-founder and co-executive chairman David Rubenstein.
Speaking at the IFC’s 21st Annual Global Private Equity Conference in Washington, DC on 15 May, Rubenstein said “the bloom is off the rose” for emerging markets. Returns have not exceeded those of funds in developed economies, making investors question why they would take on the higher risks associated with them, in turn causing capital to pull away.
That is the “best time to invest in emerging markets,” Rubenstein said.
It has been difficult to raise an emerging markets fund in the last three or four years, but the worst is probably behind these markets in terms of commodity price declines, concerns about corruption, accounting issues, finding good deals and financing challenges, according to Rubenstein.
Only 17 percent of all private equity capital raised is invested in emerging markets. Considering that 55 percent of the world’s GDP is in these markets, it is only a matter of time before more capital will flow into them, he noted.
Rubenstein is putting his money where his mouth is – both on a personal level and through Carlyle.
The firm is reportedly raising capital for its second Africa fund, according to Private Equity International sister publication Buyouts. In addition, some of Rubenstein’s personal money is flowing into emerging markets through his family office, Declaration Capital.
Family offices have a greater appetite for emerging markets, Rubenstein explained. For one, they are not bound by fiduciary obligations, as public pension systems are. Additionally, most family offices were started by entrepreneurs who have larger risk appetites.
Rubenstein told delegates that private equity has continued to perform well, outperforming the public markets indices by between 300 and 600 basis points over the last 30 years.
While the last financial crisis drove several hedge funds out of business, private equity firms by-and-large held on to their investments, bought back debt at a discount, invested more equity and consequently came away with “pretty good” returns, he said.
“As a recession hedge, private equity is expected to do reasonably well.”
However, he said investors have lowered their return expectations from 20 percent to 15 or 16 percent. Private equity firms are adding talent to their skill base, and those return expectations are “not unrealistic” to achieve.