GPs warn of ‘rough ride’ in emerging markets

Political risk and inflation were among challenges highlighted by Abraaj's Arif Naqvi, Actis' Jonathan Bond and Global Environment Fund's Jeffrey Leonard while speaking at an industry conference.

Emerging market private equity is entering a turbulent transitional period in which inflation, regulatory changes and political instability will present risks for investors, according to panellists at the the International Finance Corp's emerging markets conference in Washington DC Tuesday.

“What we’re really seeing is the world going back to how it was in about 1830 when China and India counted between them for more than 50 percent of global GDP,” Actis partner Jonathan Bond said at the conference, which was also sponsored by the Emerging Markets Private Equity Association. “Getting back there is going to be a rough ride for everybody.”

Bond added that emerging market-focused portfolios with between 7 to 10 investments needed to be “much bigger…to allow for all the different risks”.

President and chief executive officer of the Global Environmental Fund, Jeffrey Leonard, highlighted the possibility of inflation and longer-term volatility in emerging markets compared to the boom and bust cycle of the late 1990s.

“The BRICs, the main drivers of the redistribution of world wealth over recent years, are really looking long in the tooth in terms of the economic cycle, so we see inflation up considerably in a lot of those markets,” he said.

Even as you see these doom and gloom forecasts, or these inflated markets or valuations that seem really high in certain markets, there are great investments.

Jeffrey Leonard

Leonard also said substantial changes in regulatory issues have fundamentally changed the way certain industries operate.

“The energy industry gets its tariffs paid,” he said. “It’s not only political instability in my mind…we’re in an era of somewhat regulatory instability as well”.

Founder and chief executive officer of Arif Naqvi warned investors about the inherent risk of political upheaval in all emerging markets.

“Do not assume that the issues that happen in Middle East are restricted to the Middle East,” he said. “Across the emerging markets there are commonalities and these commonalities have manifested themselves in North Africa today.”

Amid all the ominous predictions, both Leonard and Naqvi conceded that despite the challenges ahead, there was no shortage of investment opportunities in emerging markets.

“Even as you see these doom and gloom forecasts, or these inflated markets or valuations that seem really high in certain markets, there are great investments to do in each of our domain areas,” Leonard said.

“I see that the investment cycle and the opportunity for investments is as great as it ever was,” said Naqvi.