The first session at PEI’s Emerging Markets Forum, held today in London, singled out the conflict between head office and local representatives when making decisions for portfolio companies in emerging markets as a major challenge for firms.
Panellists also stressed how critical it was for firms to have local knowledge in their investment regions.
Investment is fundamentally still a game of picking the winners
Stephen Evans, Silver Lake
Stephen Evans, a director at Silver Lake, said that “investment is fundamentally still a game of picking the winners” and to do this you must have “local knowledge fused with global knowledge”.
Fellow panellist James Seymour, a managing partner at Pontefract Global Strategies, said a huge challenge was identifying “Who is in charge? Head office or the local team?”
Seymour said that it was not always clear which offered the best experience. While locals often provide better connections and extensive knowledge about the area, this could sometimes create pressure on them from local contacts, which could be a disadvantage.
Similarly, head office-based decision-making had its advantages, offering a “more distant, objective approach”. Experienced head office-based executives wouldn’t necessarily have cultural or local experience to carry out deals in the most effective way, he added.
One danger Seymour highlighted for Western firms operating in emerging markets was the increase in Western-educated professionals from emerging markets who then return to their native countries to do business. Seymour said foreigners were competing with people who have Western training, yet have the advantage of local knowledge too.
The panel noted other challenges such as the lack of legal protections and regulation. Relationships in the region could help address these too. Trade bodies also had a role to play in educating governments and businesses about the merits of private equity investment.
However, the panel said the best way to avoid political risk was to avoid politically-influenced companies. Despite this, the panel argued that political turmoil – for example in the MENA region as a result of the Arab Spring – could yield opportunities.