Why private equity in emerging markets ?

Why emerging markets ?

Quoting Dickens we might say that this is the worst of all times, but we also might say that this is the best of all times.

Indeed, this is a time when the United States are going through their worst financial crisis since the 1930s and when every day brings its load of bad news and bank failures on both sides of the Atlantic, regardless of the public authorities attempts to calm down the markets with massive liquidity injections, banks nationalizations and massive bailout plans.

Trouble is now spreading from Wall Street to Main Street, and both Europe and Japan seem to be following the United States into a recession that may last several quarters.

Is there a bright spot in this dark picture ? What is the rationale behind that potential bright spot ?

The answer is yes. The bright spot is emerging markets. The rationale is the decoupling process between developed and emerging economies. In fact as GDP growth is expected to hover around zero in developed economies, the emerging economies of Russia, India, China, Brazil, Saudi Arabia, South Africa, and the likes, continue to expand at sustained growth rates.

The reason behind this decoupling is that these economies have gained sufficient momentum in the last ten years to rely now increasingly on a thriving domestic demand fueled by rising incomes, changing consumption habits and huge investment needs in energy, infrastructure, healthcare and education.

We believe alongside many economists and analysts that this is a structural transformation and that we are only at the beginning of what will appear 30 years later as one of the most radical economic transformations that mankind had known for the last 500 years.

Why private equity ?

More than 80% of the world companies are privately held companies ranging from individual micro businesses to family controled groups. But these companies, especially those located in emerging markets, sometimes lack the proper access to capital that they need, as banks prefer to lend to well established companies which are often state-controlled or publicly listed companies. Hence, private equity funds may bridge the gap and bring not only much needed capital but also management expertise and "guanxi" (the chinese word for network) to allow these private businesses to grow and to succeed.

While stock markets in emerging economies are increasingly integrated with developed markets and are often impacted by the movements of the US market, which remains by far the leading stock market in the world, private equity investments are completely decorrelated from erratic stock movements as they are fundamentals based macro and micro bets on the long term growth potential of the underlying emerging countries and enterprises.

In addition, private equity in emerging markets is not based on leveraging easy money and "raiding" on healthy enterprises with a short term horizon as is usually done by LBO funds. On the contrary, private equity in emerging markets is much more related to providing growth capital to promising businesses based on thorough expertise and field work. Indeed, investing in a ukrainian based agro-food business or in a chinese biotech company takes time and patience.

If you have a long term investment horizon and if you are looking to make a healthy return on your investment alongside contributing to the development of local communities by creating new jobs and opportunities, then emerging markets private equity is the right solution !

My intention with this blog is to provide relevant and up-to-date information and to perform pertinent analysis about private equity in emerging markets in order to help both General and Limited Partners. Most of the information is provided free of charge but some special country / sector / industry reports may be charged for.

Further, I can be contacted for client-specific work such as industry and market research, target identification and valuation, PE fund due dilligence, and investment strategy advisory based on the client's needs.