Emerging markets are taking over the world. Private equity firms and limited partners, of course, are more than aware of this, as evidenced by the turnout at the Emerging Market Private Equity Forum in London in early November – co-hosted by PEI and EMPEA – at which more than 300 GPs and LPs from around the globe convened.
Investors are looking to developing economies for the outsized returns long since vanished from the mature markets of Europe and the US and during the recent crisis, emerging markets have shown themselves – to a greater or lesser extent – to be havens of growth.
One of the major concerns raised by limited partners from advanced economies eying these markets is whether they are attracting too much capital too quickly. With growth rates so imbalanced between emerging markets and the advanced economies, it is no surprise that Brazil, India and China are on the radar screens of just about every institutional investor around the globe. The question of these markets overheating is, therefore, often raised.
TPG co-founder David Bonderman was one of those to recently broach the subject. The volatility in these markets, he told delegates at a conference in Hong Kong in November, would be good for those who could take advantage, but “bad news overall for what that means for people’s chances of success.” TPG, incidentally, is one of a clutch of global private equity franchises – including the likes of The Blackstone Group, Carlyle Group and Kohlberg Kravis Roberts – currently raising or planning to raise a Renminbi-denominated fund to invest in China, a country in which TPG recorded a great success in the form of a 16.5x return from its 2004 investment in Shenzhen Development Bank.
Putting the fears raised by Bonderman and others aside, there is a key data point that puts a discussion of this “gold rush” to the emerging markets firmly into perspective: by 2014, the total GDP of the emerging economies will have surpassed that of the so-called advanced economies.
In a speech to delegates at November’s London conference, Peter Cornelius, head of global research with private equity investment giant AlpInvest Partners, exploded the notion that the emerging markets would be unable to handle the current inbound capital flows.
Too hot? probably not
Is there too much capital flowing into the emerging markets? “The short answer,” Cornelius said, “is probably no.” The net level of private capital flowing into emerging markets is forecast to be around $800 billion during 2010 and remain at a similar level for 2011, he said. This equates to around 4 percent of emerging markets’ GDP, which is more or less the average since the mid-1990s. Obviously a hefty caveat applies to this analysis, noted Cornelius: each market differs.
Characteristics across these markets vary from those undergoing explosive growth to those currently stuck in reverse.
As explored in the following pages, India, China and Latin America are all undergoing private equity booms, with each market at a different stage of development and taking a notably different shape.
The Indian market, for example, is starting to sprout a new generation of GPs, with either a sector or geographic specialism to differentiate themselves from what is estimated to be anything up to 500 GPs active in the country.
The Chinese market, in the meantime, is having to wean itself off a diet of pre-IPO style investments and focus on the basic private equity tenet of value creation.
Latin America, meanwhile – with Brazil at its heart – has become 2010’s destination of choice for private equity capital. The two largest emerging markets funds raised in 2010 – by Southern Cross and Advent International – are focused on the region. A number of GPs planted their first flag in the region this year too. Apax Partners, Silver Lake Sumeru, Actis and First Reserve were among the firms to have made debut investments in Brazil during 2010.
Outside of these three focal markets, the remaining BRIC – Russia – has had less to celebrate. Of the capital raised for all emerging markets as of the first nine months of this year, less than one percent of it was destined for the country.
Outside of the BRICs, where fewer LPs dare to tread, there lies considerable opportunity. Africa and the Middle East both benefit from vast, young populations. Sub-Saharan Africa is benefiting from the emergence of a new middle class consumer with disposable income – as well as being rich in natural resources. The Middle East and North Africa (MENA), meanwhile, boast a relatively affluent population and significant first mover advantage to those with the wherewithal to grow pan-regional businesses.
Central and Eastern Europe, meanwhile, stands apart from the other emerging markets, as some of its most promising nations, such as Poland and the Czech Republic, prove themselves to be more akin economically to their EU neighbours than their peers in the bloc such as Latvia.
There is still room for private equity to do much more in these markets. In the first three quarters of 2010, emerging markets accounted for circa 10 percent of global private equity investment. This will only increase over time. The difficulty then, is not in the heat of the economies themselves, but in the capacity of their private equity markets to act effectively.