Lerner: Emerging markets boom will ‘be with us for quite some time’

A new wave of alternative investment in the developing world is fundamentally different than past expansions, Harvard professor Josh Lerner told attendees at the 2008 Emerging Markets Private Equity Forum in New York, co-hosted by Private Equity International and EMPEA.

The recent explosion in emerging markets fundraising and investment signals “a profound shift” in the private equity landscape, according to Josh Lerner, a Harvard Business School professor and prominent private equity scholar.

While cautioning both LPs and managers to appreciate the historical volatility of developing markets, Lerner argued that the current downturn in the American and Western European economies, combined with increasing regulatory pressure on private equity throughout the developed world, will continue to make emerging markets an attractive destination for private capital.

Lerner 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.

Josh Lerner

High levels of private equity activity in emerging markets is “not something that’s going to go away”, said Lerner, who in January released a report on private equity’s impact on jobs before the World Economic Forum in Davos.

Fundraising for emerging markets has increased by $26 billion (€16.44 billion) between 2006 and 2007, and many limited partners are upping their allocation to the developing world in response to the anticipated downslide in many OECD economies.

Pointing out that private equity has come under increasing regulatory scrutiny lately, Lerner observed that emerging markets could be accidental beneficiaries, especially as more and more developing nations liberalise rules on foreign investment.

Lerner’s sentiments were echoed by Emerging Markets Private Equity Association president Sarah Alexander, who was even more upbeat on the prospects of alternative investment in the developing world.

“Never has the industry looked so promising,” said Alexander.

Alexander pointed out that emerging market investments should be relatively immune from the American credit crisis, as most private buyouts in the developing world utilise considerably less leverage than those in the US or Europe.

Although most speakers at the conference agreed that the recent boom in emerging markets private equity activity would persist, there was some disagreement over to what extent a US slip into recession would affect developing markets as a whole.

“Decoupling is a myth,” said Joseph Ferrigno, partner in the Asia Mezzanine Finance Group, during a roundtable discussion on emerging market trends. Ferrigno warned the industry against exaggerating emerging market immunity to a US downturn, as many countries remain heavily reliant on Western consumers.