Study: Emerging markets shine despite risks

The percentage of LPs planning to increase their emerging market allocation rose from 32% to 41% during the past year. 

Limited partner sentiment toward emerging markets has improved during the past 12 months, with some LPs paying particular attention to first-time funds in the segment, according to the Emerging Markets Private Equity Association’s 2014 LP survey results webcast Tuesday.

“I love first and second-time funds,” said Ralph Jaeger, a managing director at Siguler Guff said during the webcast. “If you are not looking at first- and second-time funds for various reasons you are not going to be able to access performance.”

Scott Voss, a managing director at fund of funds manager HarbourVest Partners agreed.

“We definitely look at first-time funds in emerging markets. We like to be able to invest in people with proven track records or subsets of teams that might have spun out from a leading private equity fund.”

Roughly 41 percent of LPs plan to increase the percentage of their total private equity allocation targeted at emerging markets over the next two years, up from 32 percent a year ago, the EMPEA survey found. Some 78 percent of respondents consider their recent emerging market investments to have “met or exceeded expectations for the asset class” while only 22 percent of respondents said their emerging market investments have underperformed, the study found.

Still, political risk and the limited number of established fund managers are two of the most commonly cited deterrents cited by LPs who are wary of investing in various emerging markets, according to an EMPEA survey. About 43 percent of  the 106 LPs surveyed this year cited historical performance as a factor steering them away from emerging markets like Central and Eastern Europe, with 44 percent choosing the same factor for India. Similarly high percentages of LPs cited the limited number of established fund managers in Southeast Asia, the Middle East and North Africa and Sub-Saharan Africa.

In China, Turkey or Brazil, however, less than 25 percent cited historical performance or the limited number of established fund managers as deterring factors.

“Turkey is presenting very attractive investment opportunities,” said Jaeger. “China has a lot of local capital that is going to local general partners and local funds.”

Other factors cited by LPs include high entry valuations in China, weak exit environments in India and CEE, challenging regulatory or tax issues in India and Russia and political risks in Russia, Turkey, MENA and Sub-Saharan Africa.