Georges Sudarskis, the man who set up the private equity arm of the Abu Dhabi Investment Authority in 1998, recently spoke at PEI’s Emerging Markets Forum in London. If he were to do it all again, he suggested, he would increase its exposure to emerging markets private equity. “This is where the world of investment is going,” he argued.
He isn’t alone in this belief.
This is where the world of investment is going
Last year, Private Equity International researchers interviewed 53 institutional investors from around the world. We found that the majority planned to reduce their developed market private equity allocations in favour of greater exposure to emerging markets. For example, LPs’ mean percentage allocation to Asia was 17.9 percent in 2010, but was expected to rise to 21.8 percent in 2012. Allocations to Latin America, the second-most popular emerging market with LPs, were projected to rise to 3.2 percent in 2012, up from 2.2 percent in 2010. Developed markets, meanwhile, were expected to lose 4.2 percentage points to make up 70.2 percent of investors’ allocations next year.
So why are emerging markets attracting ever more attention from private equity firms and investors? It’s not exactly rocket science: they are expected in the coming years to deliver greater GPD growth and enjoy more significant demographic shifts than developed markets. Many also have changing regulatory and corporate governance landscapes, not to mention increased capital markets development. This has made them progressively more attractive places for private equity to take root.
The quest for better opportunities – the kind that will allow fund managers to deliver top-quartile returns – has led many international private equity firms to plant flags in new territories, be they the ‘BRICs’ (Brazil, Russia, India, China), ‘MISTs’ (Mexico, Indonesia, South Korea, Turkey) or elsewhere. And of course a growing number of domestic firms and service providers have also surfaced in these regions as their private equity markets develop.
As such it’s perhaps unsurprising to learn that between 2005 and 2009, emerging markets deals – as a percentage of total private equity deals globally – more than doubled to 30 percent, according to mergermarket and Thomson Reuters, as cited in a Boston Consulting Group report. As you’ll learn in the following pages, that trend is likely to continue – despite the various risks and challenges emerging markets continue to present.