Key discussion points from this year’s Emerging Markets Private Equity Forum, as hosted by PEI and the Emerging Markets Private Equity Association in November 2010.

Location: The Royal Horseguards, London

#1 There is probably no bubble
Delegates were reassured to learn that evidence – both anecdotal and empirical – suggests no bubble in emerging markets private equity. Three-quarters of the audience knew this to be true from their own experience

Peter Cornelius

and said as much in an electronic poll ahead of the Forum’s Big Debate on the same subject. Peter Cornelius, global head of research at AlpInvest Partners, made the point categorically in a sledge-hammer of charts in the Forum’s Data Snapshot, a keynote session packed with macro- and microeconomic intelligence. Cornelius showed that private equity investment in emerging markets was still only 10 percent of global investment and an even smaller percentage of GDP of those emerging economies and nowhere near the levels of investment reached in the peak of the last bubble. There will be cause again to worry, but now is not that time.

#2 Prepare for the next crash
Hosein Khajeh-Hosseiny, managing director, head of global private equity investments at Northgate Capital, drew on his management consultancy background to deliver an industry checklist. It gave delegates all they needed to mitigate the worst effects of the next inevitable downturn in the business cycle. Stay true to private equity’s mission and the industry will be alright: 1) Commitment to rigorous insights, to smart and well aligned resources, to top quality opportunities; 2) Early recognition of a changed environment, early redundancy of low quality resources; 3) Well-informed and timely decisions as opposed to endless debates; 4) Emphasis on multiple value creation levers; and 5) Comfort with being different from the herd. And if you’re in any doubt heed Warren Buffett’s advice to Salomon Brothers in 1987: “If you lose money for us, we will be forgiving; if you lose reputation for us, we will be ruthless.”

#3  Be flexible if you want to raise money – think about your investors’ needs
Two seasoned investors stormed the audience in the LP Clinic – a live Q&A devoted to the audience’s questions. There was much to take back to the office and the Monday morning partner meeting. Not least if you are in the market right now fundraising, then make sure you stay nimble and don’t be afraid of bespoke structures – cutting your coat to suit the investors’ cloth, so to speak. And key to that is understanding who your investor is. Do not turn up with a cleantech fund, if the LP is buying mid-market buyout.

#4 Poachers beware
While it may seem like the logical way for global brands to establish offices in emerging markets, poaching local private equity teams – or even individuals – is not that easy. There has to be more on offer than just dollars, as

Joe Bae

delegates heard from Joe Bae, KKR’s Asia head, in his on-stage interview with Private Equity International editor Toby Mitchenall. Bae should know, having built up a team of 75 executives across six regional offices. In another panel, private equity recruiter Cagla Bekbolet, from Egon Zehnder International, explained that private equity professionals only tend to be poached if they are already unsettled and even then they are just as likely to set up their own fund as join an established brand.

#5 Horses for courses
Different deals work in different markets. As outlined on day one by Bob Stefanowski, 3i Group’s managing partner and chairman, the firm has a realistic view on what works

Bob Stefanowski

where. Infrastructure deals are tough to execute, for example in China, while buyouts will not work well in India or China (but are doable in Turkey). Debt management, meanwhile, is viable in India, but not China or Turkey. 3i is not currently active in Latin America, but as revealed by Stefanowski in his keynote, the group is currently running the rule over the region.

#6 Put away your spreadsheet
To successfully invest in emerging markets, you are better off having a degree in liberal arts than financial modelling, said Rahul Desai, managing director of Religare Global Asset Management. Speaking as part of a panel giving the LP’s perspective on day two, he explained that in many emerging markets a knowledge and understanding of the history and culture – and how business should be conducted – is a vitally important skill for a GP to have.

#7 Local money is good
When you are raising an emerging market private equity fund, nothing says “you can trust in our management” like a first close replete with local limited partners. The emergence of domestic LPs in various markets was viewed unequivocally as a positive development by many GPs and LPs over the course of the event. When asked via an electronic poll whether they thought these new LPs may crowd out the international investors, delegates responded with a resounding “no”. Only 1 percent replied yes. Indeed, international LPs often see the local money as an affirmation of the GPs local credentials. BUT problems can arise when emerging LPs start to influence the investment process, as has happened in Brazil. These instances are, however, in the minority.

#8 The cost of regulation is manageable
The opening panel of the forum dealt with the increasingly pertinent and timely issue of the swathe of proposed regulation facing investors in emerging markets, from Dodd-Frank to the AIFM Directive. Jeffrey Leonard of Global Environment Fund made the point that regulation is coming and, yes, there will be a cost involved in complying, but not to blow it out of proportion. That is to say, there are other areas of running the firm that will cost more and need as much if not more attention.

#9 The Samba boys
Antonio Bonchristiano, co-chief executive officer and co-chairman of GP Investments, painted an articulate and compelling picture of the prospects for Brazilian private equity. And he didn’t even mention the Olympics or the World Cup. The largest market in Latin America is enjoying ongoing macro and political stability and the private equity landscape continues to improve: well developed capital markets opening up new exit routes; attractive entry valuations; increasing opportunities for consolidation in growing consumer sector and improved legal and regulatory framework. And they’ve got the World Cup in 2014 and the Olympics and 2016.

#10 Skin in the game
It matters. Even more so when times are tough. LPs like to – need to – see commitment from the GP to the fund being raised. And it needs to be significant: “It must have a meaningful impact upon the GP,” according to Richard Laing, chief executive of CDC. First-time fund managers in emerging markets – even those which may not have significant disposable capital available – still need to make a commitment, which could be by way of distribution of the management fee over time. For all the ILPA guidelines and recommendation, there is no better way of aligning interest than having a vested financial interest in the outcome of the investments you are proposing to make.