EMERGING MARKETS SPECIAL: PREDICTIONS

“The private equity industry in emerging markets is maturing. Capital flows are high but many GPs struggle to attract talent, with expertise at a premium. LPs new to emerging markets, including hedge funds, lack the requisite skills for the extensive and vital due diligence and may encounter difficulties further down the track. Markets are cyclical and a key question is how the industry will cope when the downturn comes, especially if set against the expectation of the continued short-term returns of recent years. Growth in emerging economies brings great opportunity but this must be tempered by caution. Investors should remember that private equity is a medium- to long-term business.”

Richard Laing, chief executive, CDC Group

“Five years ago virtually no one predicted the explosive growth that has transformed emerging markets private equity. And five years hence we are likely to be equally astonished about the industry compared to its profile today. If the numbers on fundraising, investments and exits continue at anywhere near their current pace, we will no longer label this a nascent asset class. The same factors that have been the traditional drivers of industry growth in mature markets are becoming more evident in many developing countries, leading many investors to be more comfortable with emerging markets risks – corporate governance practices, accounting and auditing standards, contract enforcement, and skilled professional managers.”

Roger Leeds, chairman of the board of directors, Emerging Markets Private Equity Association

“As more capital flows into emerging markets we will see more intense competition for quality deals, pushing up valuations. However, this problem will be far less in the small to mid-cap area as the ratio of VC firms and capital versus the pool of deals in that segment is much more favourable than at the larger end of the spectrum. High commodity prices and improved macro-economic performance means that many emerging markets are creating excess liquidity that is being fed into sovereign wealth funds. This will lead to an increase in private equity investments in emerging markets. Many of the sovereign wealth funds are also looking to overseas private equity as a way of accessing key sectors, industries or resources. Regulators and governments in emerging markets are working hard to improve the functioning of local stock markets and liberalise foreign ownership laws. This extra liquidity should make it far easier for private equity investors to exit.”

Sev Vettivetpillai, chief executive, Aureos Advisers

“While capital markets have globalised at a rapid pace, private equity is still in the early stages of this process. Assuming global economic growth continues, we believe globalisation will be the defining theme of the private equity industry in the next five years. It is easy to forget that in the 1970s, the largest buyout funds in the US were in the $30 million range. We would expect that by 2012, private equity markets in China and India will be a mainstream asset class, and institutional private equity markets will be developing in places such as Indonesia, Vietnam, the Middle East and Africa. Asia will continue to lead the way. The rise of a consumer middle class and the building out of a services economy in China and India is a long term process that will transform both countries over the next generation. With public equity markets trading at frothy valuations, private equity is a better bet for long term investors who are looking for exposure to fast growing sectors of these two economies.”

Doug Coulter, vice president and head of private equity Asia Pacific, LGT Capital Partners

“One of the biggest recent developments is that the emerging markets have finally been embraced by mainstream institutional investors. We've finally arrived at the point where institutions and plan sponsors realise that ten years from now they might have to answer the uncomfortable question of why they didn't invest in the large developing countries, given their explosive growth, rather than continue to give the comfortable explanation that the risks in emerging markets are too high. The track records of good managers point to the unavoidable conclusion that the perceived risk of emerging market private equity investing is much higher than the actual risk.”