Hirsch: ‘Mega-fund phobia’ partly driving emerging markets

Emerging markets private equity funds can be valuable in the portfolio, but some limited partners are attracted to this opportunity for the wrong reasons, Hamilton Lane CIO Erik Hirsch told delegates at the 2008 Emerging Markets Private Equity Forum in New York.

“Mega-fund phobia” and a mistaken belief that the emerging markets are not correlated to developed-market private equity returns are among the reasons limited partners are currently gravitating toward emerging markets private equity, according to Hamilton Lane chief investment officer Erik Hirsch.

Hirsch made the comments today during a keynote address at the 2008 Emerging Markets Private Equity Forum, a New York conference co-hosted by Private Equity International and the Emerging Markets Private Equity Association (EMPEA).

Erik Hirsch

Some LPs are inclined to avoid mega-funds in seeking exposure to emerging markets, Hirsh said. However, he presented data which showed key mega-funds already having a 30 percent allocation to “rest of world” geographies.

The newfound aversion to mega-funds, Hirsh said, was in part an emotionally driven presumption among some LPs that mega-fund GPs are too “rich and lazy” to aggressively pursue strong returns.

Hirsch argued that many large, global private equity firms are “actively and aggressively building out local teams”. Additionally, these firms can offer local general partners significantly higher compensation than can indigenous private equity firms.

“LPs need to drill into global funds and understand their real exposure,” said Hirsch.

Private equity asset manager and advisory firm Hamilton Lane has invested less than 5 percent of its portfolio in emerging markets. “Historically, the risks have outweighed the potential returns,” Hirsch said, arguing that data continues to show the US and Western Europe largely outperforming the emerging markets both over the short and long term.

In an opinion echoed by many speakers at the Emerging Markets Private Equity Forum, Hirsch said that many LPs incorrectly perceive the emerging markets as uncorrelated to developed markets. “The notion of global decoupling at this stage is premature,” he said.

Although most speakers agreed that emerging markets are not decoupled from the developed world, some believe that the correlation is weakening, and that many of the emerging markets will be able to thrive despite a slow economy in the West. Many Asian companies have become increasingly driven by domestic demand as opposed to exports, decreasing correlation to the US markets, said Pote Videt, managing director at private equity firm Lombard Investments, during a panel discussion on exits in emerging markets.