Friday Letter: Keep Talking

Picture the scene. A crowded roundtable discussion at a busy private equity conference in central London yesterday. A man in the audience asks the two panelists, both distinguished buyout partners, if they are concerned by the potential for complaint from public market investors, should a recent public-to-private trigger a spate of similar deals.  

It is one of the few issues to really trouble the industry in Europe and may even have been one of the reasons behind US Department of Justice’s investigation into club deals. One source suggests the impetus for the investigation may have stemmed from a disgruntled manager tired of seeing assets return to the public markets at a steep premium, lining the buyout managers’ pockets at the quoted market’s expense.

The issue is top of mind among those who follow private equity, and it is no surprise that the aforementioned man in the crowd chose to bring it up during a conference this week.

However, what might be surprising is that the conference in question was the Emerging Markets Private Equity Forum, co-hosted by PEO’s sister publication Private Equity International and trade association EMPEA, and that the deal referred to was Alexander Forbes, a pending privatisation led by Actis in South Africa, a market where historically, private equity has existed some way off the radar screen. Worries about private equity-sponsored PTPs in an emerging market?

On reflection, however, it isn’t all that strange. Arguably South Africa is a market that should as classified as “emerged” rather than “emerging”, and private equity firms have been increasingly active there.  And the reason PTPs are a cause of anxiety in the country is less that investors are feeling short-changed, but rather the lack of depth of the public market.

According to locals, just a few public to privates could deplete the Johannesburg exchange of some of its largest assets, leaving the index managers nowhere to invest their rands – and leaving the buyout industry wide open to critical scrutiny.

This highlights a point made by David Rubenstein, co-founder of The Carlyle Group, who gave a key note speech at the conference. In an increasingly critical and sceptical environment, he suggested, developed and emerging markets private equity managers may have similar problems with their public image.

And while the causes may be different – developed markets private equity is being seen as overly successful, whereas in the emerging economies, it is still considered flakey – Rubenstein’s proposed solution to the problem is the same: wherever private equity’s profile is rising, the industry needs to do a better job of explaining its activity.

In the case of the emerging markets private equity, more explanation is needed to demonstrate that it has become an increasingly viable part of the asset class. According to Rubenstein, emerging markets should really be referred to as “growth market”, and if the latest performance statistics from EMPEA are anything to go buy, he is right: emerging markets IRRs are rising. 

Average emerging markets returns over three years are now about the 20 percent mark compared with minus 10 percent measured in June 2003. That performance is ahead of US VCs and only slightly behind US buyouts, according to numbers from Cambridge Associates.

There is still a long way to go. Private equity’s penetration into emerging markets economies is still low compared to the US and Europe. Total fundraising is just 0.21 percent of GDP, compared to 0.85 percent in Europe and 1.22 percent in the US.

It would be heartening to think that in building their track records, emerging market private equity firms can at the same time build a case for the asset class and head off some of the public relations issues before they even arise. This is why communications with the outside world is so important.