Friday Letter: Enlightened self-interest

Emerging market-based GPs have a great opportunity to win friends and influence the powerful - or face the kind of backlash that has rocked their peers in Europe and the US.  

Lord Mark Malloch-Brown, the UK minister for Asia, Africa and the United Nations, yesterday called on the private equity industry in emerging markets to work more closely with governments to eradicate poverty.

Speaking to a packed audience at the third annual emerging markets forum in London, Malloch-Brown said enlightened governments with support from developed nations could, alongside profit-seeking investors, create a “rising tide” to lift millions out of poverty.

He told delegates, co-hosted by PEO’s sister publication and the Emerging Markets Private Equity Association, that China’s free market initiatives had enjoyed a greater absolute success in this regard than all the aid programmes put together.

Malloch-Brown warned however that such wealth creation could increase inequality if the newly enriched left the poor behind. He also said fast growing economies could lead to environmental catastrophe. The message to private equity managers in emerging markets was that they should take advantage of the opportunity, but they should also embrace “public policy to deal with consequences of growth”.

His comments were met with wry smiles around the room. As one manager in the audience put it afterwards: “I get nervous – and my LPs will too – if my fund is there to fight poverty rather than grow companies.” Investors and managers polled at the event conceded in an ideal world social responsibility was a “nice to have” but returns had to be the focus.

In fact only a single investor voiced unequivocal support.

But managers in emerging markets may miss a trick to win friends in powerful places if they are seen to be placing wealth creation too nakedly ahead of broader social concerns. Irrespective of whether the minister’s wish for a social mission to private equity can only ever be a secondary goal, it nonetheless can appear to be near the top of the industry’s agenda as far as policy makers are concerned.

If GP groups in emerging markets can begin to evidence how their investment activities have helped transform local economies – at the micro- let alone macro-level – then policy makers both near and far can be shown how the impact of the asset class reaches far beyond those putative fat cats so loved by the mainstream media. And now that many emerging funds are beginning to exit their investments, there are a growing number of very real success stories to point to.

The private equity industry has an unparalleled opportunity in emerging markets to persuade regulators and politicians it is a force for good. Eliminating poverty should be the mantra; wealth creation the goal.