Study: Brazil steals China's momentum

A recent study of LP appetites found Brazil has taken China's place at the top of the podium as the place LPs regard as the most attractive destination for private equity dealmaking.

Investor interest in China is waning in favour of Brazil, according to the latest survey conducted by Coller Capital and the Emerging Markets Private Equity Association (EMPEA).

“While China and India still top LP wish-lists, investors are also shifting their gazes to the less penetrated markets of Latin America and Southeast Asia,” EMPEA president Sarah Alexander said in a statement.

While China and India still top LP wish-lists, investors are also shifting their gazes to the less penetrated markets of Latin America and Southeast Asia,

EMPEA president Sarah Alexander

The survey, using data collected from 156 global private equity investors, noted that investor sentiment regarding Brazil, in addition to the rest of Latin America, had soared significantly compared to a year ago, while appetites for Asian emerging markets beyond the boundaries of China and India have also increased significantly.

Perhaps playing a factor in China's and India’s waning appeal was the level of competition investors expected to encounter in both countries. The survey found that almost three-quarters of LPs polled expected GPs in China to experience intense competition over the next 12 months while more than two-thirds believed GPs investing in India would face fierce battles for deal flow.

“In reality, where competition is increasing in emerging market PE markets it tends to be concentrated within a handful of sectors or a particular tier of the market where deals are large enough to attract global funds. Investors recognise there are still plenty of opportunities for skilled managers to supply value-added capital and to create returns for LPs,” Coller partner Erwin Roex said in a statement.

Indeed, the survey also found that investors already exposed to those markets were undeterred by the growing competition for deals. Within Asia, China was expected to experience the greatest uptick in commitments from existing investors in the next two years, with 40 percent of LPs planning increased exposure to China, 34 percent to India, and 36 percent to other emerging Asian markets. Other markets in Asia were also flagged as interesting to investors: 36 percent of LPs surveyed saying they were planning to expand commitments in the broader region while 12 percent said they would begin to invest in it, having not done so before.

Globally, Brazil was set to gain the largest influx of new investors, with 14 percent of LPs polled saying they intended to begin investing there.

The survey's other key findings included the growing importance of environmental, social and governance (ESG) practices employed by fund managers. According to the survey, two-thirds of LPs polled said they were factoring ESG considerations into their manager selection decisions, with 22 percent of them having investment mandates directly restricted by ESG issues.

“The fact that such a large number of LPs are factoring ESG considerations into their manager selection decisions signals the link increasingly being drawn between manager focus on these issues at the portfolio company level and the ability to create value and generate stronger returns,” Alexander said.