The share of emerging markets in private equity deals has increased from 5 per cent to 30 per cent over the last decade, rivalling the proportion of deals in the USA and Europe, and it is expected to increase, according to a study which indicates that private equity's centre of gravity is shifting toward emerging markets which are witnessing accelerating returns.
The study by IESE Business School and The Boston Consulting Group says returns from emerging markets have more than tripled since the 1990s to more than 17 per cent today, and the most attractive markets are India, Brazil, Turkey and Malaysia.
The study, which is based on an analysis of the largest data set of its kind, has found that emerging markets' share of deals has increased steadily from 5 per cent in 1998 to 30 per cent in 2009, in contrast to the USA and Europe which accounted for 34 per cent and 38 per cent of the deals, respectively. Over the same period, emerging markets' share of deal volumes more than quadrupled to 21 per cent.
Moreover, there are strong signs that investors plan to step up their involvement in these markets. Approximately one-fifth of global PE funds, equivalent to about $231 billion or seven times the 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 towards emerging markets. During the 1990s, returns averaged just 5.3 per cent but since 2000 they have more than tripled to 17.3 per cent. Other factors that are pushing and pulling investors towards these markets include the widening gap between emerging and developed market GDP growth rates, and a more attractive socio-economic environment in emerging markets.
“The economic scale of a market is obviously critical for private equity but socio-economic factors such as the market's degree of openness, legal protection for investors, and the liquidity of its local stock exchange are equally important if investors are to realise the market's full potential,” said Professor Heinrich Liechtenstein of IESE Business School, one of the leaders of the study.
The winners in private equity in emerging markets create value through operational improvements, rather than leverage, and have a strong local presence. 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 overriding conclusion of the study is that emerging markets have come of age for private equity investors,” said Heino Meerkatt, a senior partner and MD at BCG, and one of the leaders of the study.
Source: My Digital FC