PE investors sees better opportunities in emerging markets

By siliconindia   |   Wednesday, 10 November 2010, 12:44 IST
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Barcelona: Private equity investors' center of gravity is shifting toward emerging markets as returns in these markets accelerate and could soon account for the lion's share of deals, reveals a new study from IESE Business School and The Boston Consulting Group (BCG). However, the most attractive markets are not necessarily the ones that have captured the headlines in the past, and the key success factors for investors differ significantly from those that have worked in developed countries. The study is based on an analysis of the International Finance Corporation's (IFC) data set on emerging-market private-equity funds. The data reveals that emerging markets' share of deals has increased steadily from 5 percent in 1998 to 30 percent in 2009, when the U.S. and Europe accounted for 34 percent and 38 percent of deals, respectively. Over the same period, emerging markets' share of deal volumes more than quadrupled to 21 percent. Approximately one-fifth of global dry powder, equivalent to about $231 billion or seven times annual deal volume (based on a five-year average), is earmarked for these markets, spanning all investment stages. Increasingly high returns have been a key driver behind this shift toward emerging markets. Returns from emerging markets have more than tripled since the 1990s to more than 17 percent today. Widening gap between emerging-and developed-market GDP growth rates, and more attractive socioeconomic environments in emerging markets are the other factors attracting investors. "The economic scale of a market is obviously critical for private equity but socioeconomic factors such as the market's degree of openness, legal protection for investors, and the liquidity of its local stock exchange is equally important if investors are to realize the market's full potential," says Professor Heinrich Liechtenstein of IESE Business School. The study suggests that the 'Western' investors will have to rethink their business models to succeed, including accepting minority rather than majority stakes in businesses, and generating value via operational improvements rather than leverage. Local private-equity firms in emerging markets could be tomorrow's giants. On average, the returns of domestic and international funds with local offices are more than five times higher than international funds without local offices. The study used a novel framework to assess the relative attractiveness of markets, taking into account both GDP and a country's socioeconomic environment, based on IESE's Global Venture Capital and Private Equity Country Attractiveness Index. According to the study, the most attractive markets combine economic scale and favorable socioeconomic conditions, such as Brazil, India, Turkey, and Malaysia.