- Limited Partner (LP) appetite for emerging markets private equity (EM PE) at highest levels to date
- Brazil overtakes China as the most attractive market for GP dealmaking in the next 12 months
- 2011-vintage EM PE funds will outperform developed market funds of the same vintage
- For EM PE, environmental, social and governance (ESG) issues are important in GP selection
Washington, D.C. – Emerging markets will capture an even greater share of investor allocations to private equity, as LPs aggressively seek exposure to high growth markets, according to the latest EMPEA/Coller Capital Emerging Markets Private Equity Survey:
- EM PE LPs expect the proportion of their PE allocations directed at emerging markets to increase from 11-15% today to 16-20% in two years’ time.
- Nearly three-quarters (73%) of LPs expect that 2011-vintage EM PE funds will outperform developed market funds of the same vintage.
- More than half of LPs (54%) expect annual net returns from EM PE of 16% or more (compared with one-third of LPs who expect similar returns from their global PE portfolio).
- LPs have the highest return expectations for Emerging Asia PE funds, with three-quarters (78%) expecting them to deliver annual net returns of 16% or more.
- Brazil has leapfrogged China as the most attractive market for GP dealmaking in the next 12 months. The nascent Asian PE markets are now perceived to be as attractive as China.
- Two-thirds of LPs claim that environmental, social and governance (ESG) considerations materially impact their GP selection process for EM PE funds.
“Institutional investors facing escalating liabilities within the next 5-10 years find the growth opportunities in emerging markets very compelling,” said Sarah Alexander, President and CEO of 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.”
Brazil is now seen as the most attractive market for GP dealmaking in the near term—pushing China into second place. Brazil will also gain the largest influx of new investors (14% of LPs plan to begin investing there). The nascent Asian PE markets are now perceived to be as attractive as China, and will see increased investment from both current and new investors (with 36% of LPs expanding commitments and 12% beginning to invest).
Although China is seen as the most competitive market for GPs seeking deals in the next 12 months, investors are not deterred. In fact, China will see the greatest expansion in commitments from current investors in the next 2 years, with 40% of LPs planning to increase their exposure.
Erwin Roex, Partner, Coller Capital said, “In reality, where competition is increasing in EM 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 recognize there are still plenty of opportunities for skilled managers to supply value-added capital and to create returns for LPs.”
While LPs are comparatively bullish on EM PE returns, the 2011 Survey revealed that investors’ return expectations for an individual PE market vary depending on whether they have exposure to that market. LPs without exposure to Emerging Asia are even more optimistic than those with exposure, while those without exposure to CEE, Russia and Sub-Saharan Africa are more pessimistic—especially in the case of Russia.
The 2011 Survey revealed that ESG considerations materially impact the GP selection process for two-thirds of EM PE investors (with 22% 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,” noted Ms. Alexander.
