Are emerging markets getting overheated?
I really don’t think so. There are still a lot of opportunities there – and a very wide range of them. If you just look at the IPO activity that’s taking place, you’ll see that there is about $250 billion of new issues annually in emerging markets. Of course, not all of these companies are qualified to receive private equity investments, and there are some you wouldn’t want to invest in. But that gives you an indication of the opportunity that’s out there.
Does private equity remain a good way to tap them?
Definitely; it provides an opportunity for the growth of capital markets generally. You’ve got to do the private equity deals first before you go to the capital markets. So it’s still very important – and growing. Private equity can also help to provide access to certain markets in the cases where there is either no stock market, or it is not open to foreign investors. Finally, private equity investment allows you to tailor the investment to a specific situation and to educate companies.
Is investor appetite still strong to invest in these regions?
Yes. In fact, Templeton Emerging Market Group now invests in total $3.5 billion in frontier markets, of which over a third is Africa. That gives you an indication of the tremendous interest that’s out there. And we’re only one of the many managers present in these countries. I was recently in New York, for example, and witnessed a lot of interest from potential clients.
Do some of them have misgivings?
There always are misgivings. Investors are asking themselves these questions: Is China growing? What’s going to happen in Brazil? What about the rule of law in Russia? All these concerns are bubbling to the surface. But at the end of the day, when they look at the numbers, it’s still obvious that emerging markets are growing very fast. So despite their questions and fears they know they have to get involved.
Do regional or global fund still retain an edge over more local ones, even for more sophisticated investors?
We believe they do: the advantage of private equity funds dedicated to global and regional arenas is that the choices are much greater, so the chances of finding good investments is higher. In addition, diversification protects against disastrous losses.
Where are the most attractive markets – and where is the new frontier?
The frontier markets arena is the place where we are finding the most exciting opportunities. And that includes countries like Nigeria, Vietnam, Pakistan, and Bangladesh. It even includes places like Zimbabwe, which a lot of people think is a basket case but where in fact there are opportunities. There are companies making very good profits there. We also think much of Africa is fast becoming a private equity market with attractive investment opportunities in countries such as Kenya, Ghana and South Africa.
Are emerging markets reserved to a certain class of investors, which demonstrate a heightened appetite for risk?
There’s no question that there is a long way to go in terms of investors realising that first of all, they should be globally diversified; and secondly, they should get into emerging markets. The most sophisticated investors, to begin with, generally have between 3 to 8 percent in emerging markets, even though the market capitalisation of emerging markets is 35 percent of the world. This means that, for the most part, investors are severely underweight in emerging markets. And that’s despite the fact that assets under management continue to grow.
How do you convince investors that the risks are worth it in these frontier markets?
The proof is in the pudding, so to speak. If you look at returns in emerging markets, you will see that they’ve been far superior to that of any particular developed markets. Of course, from year to year, there will be underperformance and in the last 12 years, emerging markets have underperformed for two of those years. But in the end, over the long term, they generally outperform developed countries.
Founded in 1987, Templeton Emerging Market Group is a global asset manager with $48 billion invested in emerging markets. It is exposed to private equity through its Strategic Emerging Markets Funds, managed by a team of six investment executives and looking for growth investments in developing economies. Having fully exited its Fund II last January on a 2.1x return, the firm is now raising the fourth opus of the series with a $300 million target.