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Country Profile Looking for the growth markets of the future Sarah e. Alexander, President and CEO of the Emerging Markets Private Equity Association (EMPEA) Emerging markets private equity has become and will remain core to investor portfolios. Investors recognize the simple truth that faster-growing emerging markets hold greater return potential than developed markets. Improvements in fiscal and monetary policies, rapid economic growth, growing middle classes accustomed to rising standards of living, and the emergence of sophisticated local private equity fund managers have all contributed to emerging markets’ ascendance within the PE landscape. From only 4% of total global PE fundraising in 2004, emerging markets’ share tripled to almost 12% in 2010. EMPEA’s annual LP surveys indicate that emerging markets’ share of allocations will keep growing, with 2011 survey respondents predicting a rise from 11-15% today to 16-20% by 2013. Fundraising for emerging markets-dedicated funds is likely to exceed US$40bn this year, a 75% increase over 2010, compared to a 15% projected rise year-on-year in the US. But not all emerging economies have benefited equally from the growing appetite for private equity in these markets. PE investment is increasingly concentrated in China, India and Brazil. In 2010, 75% of the private equity capital invested in emerging economies went to these three countries, up from 50% in the years from 2007-2009. China’s share in particular is swelling; China-dedicated funds represented 45% of all capital raised for emerging marketsfocused funds through mid-2011. Year after year, our annual survey of LPs points to investors’ desire for greater exposure to high-growth markets as the number one reason behind emerging markets’ rising share within allocations. While China, Brazil and India consistently sit atop our survey’s list of most attractive markets for near term GP investment, LPs also express growing interest in diversifying into Latin America beyond Brazil, Southeast Asia and Sub-Saharan Africa. Beyond the macroeconomic fundamentals, there is a subtle combination of both demand- and supply-side factors that work in concert to draw LP capital to certain markets Why, then, do such a small number of markets command so much of the capital? The reality is that no single country can claim the winning formula for building a PE market, and no single factor – growth rate, population size, past returns, number of managers, regulatory environment – determines LP decision-making. If growth rates were all that mattered, Qatar, Ghana and Mongolia would be the top three destinations for LP PE capital in 2011. If population size were the answer, then Indonesia, which boasts the world’s fourth largest population, would have drawn investor attention long before 2011. Pakistan, Nigeria, and Russia in sixth, eighth and ninth place in the population rankings respectively, would also be priorities. Instead, beyond the macroeconomic fundamentals, there is a subtle combination of both demand- and supply-side factors that work in concert to draw LP capital to certain markets. Enabling factors include the domestic regulatory architecture and legal system, the degree of participation from domestic sources of institutional capital as well as the existence of an active and organized domestic practitioner community. EMPEA works at all of these levels in our efforts to help develop the PE industry across all emerging and developing economies, without a bias toward destination. We do this at the local market level, for example, by engaging on regulatory issues – in both developed and emerging markets – in favor of policies that support the industry’s growth or at least do no material harm, and by supporting the local organization of the industry. We also produce analysis for the global investor and private equity community that goes beyond the headlines – not only putting China, India and Brazil into the global context, but also highlighting the dozens of other economies where private equity can play a uniquely valuable role in financing economic development while providing superior returns to investors that discover those opportunities. n Autumn 2011 BVCA Briefing 13
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