LPs to raise emerging markets commitments

Drawn by the promise of superior returns, 74 percent of limited partners expect to increase allocations to emerging markets private equity funds over the next three to five years.

The data, from the Emerging Markets Private Equity Association’s 2008 LP Survey, shows that 89 percent of LPs expect to be invested in Asia excluding Japan, or Asia ex-Japan, within three to five years. Asia ex-Japan is followed by 75 percent of LPs saying they will invest in Central and Eastern Europe, while 65 percent will invest in Latin America, 52 percent in Africa and 35 percent in the Middle East.

“Our survey findings illustrate that, despite managing greater risk in their developed markets exposure, LPs continue to diversify their private equity portfolios,” said EMPEA president Sarah Alexander in a statement. EMPEA surveyed 81 LPs in various geographies to generate the data.

PEI-ILPA Global Limited Partner Survey 2008

The primary driver for increased investment is attractive risk-adjusted returns, cited by 46 percent of LPs as the most important reason. Expected returns from 2008 emerging markets investments are, on average, 23 percent. This represents a 6.7 percent premium over expected returns from the US buyout market.

A distant second to returns as the most important reason for increased emerging markets investment was improvements in political and economic risks followed by more qualified general partners. Despite an increase in the number of qualified GPs, the number remains insufficient as evidenced by 66 percent of survey respondents citing it as an important barrier to investment.

The survey results are substantiated by EMPEA fundraising data, which estimates that emerging markets funds have raised $25 billion between January and April of this year alone. In all of 2007, $59 billion was committed to emerging markets funds.

The EMPEA study reinforces the findings of the PEI-ILPA Global Limited Partner Survey 2008. That survey also found a significant number of LPs to be planning increased emerging markets allocations over the next three years. PEI found that 61 percent planed to increase allocations to Asia ex-Japan, 44 percent to Central and Eastern Europe, 31 percent to Latin America, 18 percent to the Middle East and North Africa and 8 percent to Sub-Saharan Africa.