Emerging on the horizon

While China and India have clearly been the focal point for most private equity investors seeking exposure in the emerging markets over the last year, a number of smaller, less publicised markets have also continued their march forward along the development spectrum.

Earlier this week, GPs hailing from Argentina, Croatia, India and Jordan discussed the state of private equity in their markets during a panel session held in New York, hosted by the Boston-based emerging markets “fund-of-local-funds” firm Global Horizon Fund.

Kirchner: confusing policies for foreign investors looking at Argentina.

In Argentina, local VC-cum-turnaround firm Pegasus Capital comes across few competitors, as the country continues to be perceived as highly risky by much of the private equity world, says Jerónimo Bosch, a principal at the firm. Deal flow continues to exceed available capital, although Pegasus makes a point of avoiding those sectors that attract too much attention from the government or the media. The macroeconomic and political aspects of Argentina may create confusion for international investors, who see Argentina’s GDP growing year on year paired with the Kirchner administration’s decision to halt the country’s debt payments.

Meanwhile, investment manager Igor Hrzic of Croatia’s Copernicus Capital says his firm faces a highly regulated investment environment. Although there is sufficient capital in the country to be directed into private equity, regulators are being very conservative in allowing institutional investors move into more “exotic” vehicles, such as private equity, says Hrzic. At this point, local pension funds are not yet allowed to invest in the full spectrum of even the public markets in Croatia.

Leith Masri of the Amman-based Jordan Fund says that regional funds can be a “scary thing” and that firms need local presence to invest effectively. At the same time, part of the Jordan Fund’s strategy is to go after companies that have the ability grow beyond the country’s borders and establish a regional presence.

And in India, despite the rapid growth of private equity in recent years, certain hurdles still need to be surmounted, says Gopal Jain, a managing director of Mumbai-based Gaja Capital Partners. The financial sector in general is still dominated by the government, and in the case of local pension funds, these have only recently been allowed to invest in the public markets, so it will take time before they are allowed to enter into the alternative assets domain.

As the discussion progressed, what became very clear was that each country requires a highly differentiated approach. Despite the challenges, these GPs and their respective home countries are seen as part of the next wave of development and are categorised as “attractive candidates” according to the fund selection criteria of Global Horizon Fund. However, the diligencing and hands-on requirements for investing in these countries perhaps further highlights the role that funds of funds can play in providing investors with diversification and risk management, although at a higher cost than if investors were to enter directly into partnerships with the local GPs. At the same time, it will be interesting to see how these funds of funds themselves approach the issue of identifying the best local GPs for the job in these intricate markets.