LPs cool on emerging markets

EMPEA’s annual LP survey shows South-East Asia has usurped Latin America as the most attractive emerging market for investment.

Slowing or negative economic growth poses the greatest concern for LPs investing in emerging markets private equity, followed by currency volatility and concerns over the historical performance of funds.

The findings come from the Emerging Markets Private Equity Association’s 12th annual Global Limited Partners Survey, which questioned 107 LPs on investing in emerging markets private equity.

The number who anticipate upping commitments to emerging markets private equity funds in the next two years has declined steadily since 2012. In the latest survey, 40 percent said they expected to increase their commitments in dollar value, down from 46 percent last year and close to half the 75 percent in 2012.

Meanwhile, 22 percent expect to decrease their commitments, up from 16 percent in 2015 and 8 percent in 2012. Among those planning to decrease their exposure, 57 percent said returns have not met their expectations.

In a ranking of the relative attractiveness of various emerging markets, South-East Asia climbed one spot to be ranked most attractive, followed by India (fourth in 2015), and sub-Saharan Africa, which took third place for the third year running. Latin America excluding Brazil dropped from the top spot to fourth, while Turkey and Russia/CIS remained the two least attractive markets.

Political risk was the most significant deterrent for LPs investing in Russia/CIS, MENA, sub-Saharan Africa, Turkey and Brazil, while currency risk was the biggest deterrent for investors in India and South-East Asia.

LPs surveyed singled out healthcare and consumer goods as the most attractive sectors for emerging markets funds to invest in, followed by technology and telecommunications. The least attractive sectors were basic materials and oil and gas.

Growth capital remains the most popular investment strategy, with 54 percent of respondents intending to expand their investment into the strategy in the next two years. This was followed by private credit and private infrastructure and real assets.

Investors considered operational improvement and multiple expansion to be more important in emerging markets than in their developed counterparts, with 75 percent estimating that operational improvement would be a very important value driver for 2015-vintage funds. Leverage was considered less important as a value driver, with 11 percent considering it very important in emerging markets, compared with 60 percent in developed markets.

The most important factor for investors selecting a fund manager was the length of the working relationship among senior members of the GP team, with 79 percent of respondents deeming this very important. This was followed by operational expertise in target sectors with 74 percent and perceived strength of the GP’s past performance with 68 percent.