Emerging Market Private Equity – an Institutional Investors’ Perspective

In this interview three private equity executives give their take on how institutional investors assess countries and deals within countries, and how emerging market investments fit within their portfolios. To see the interview, click the link below:

 http://www.privcap.com/programs/99-emerging-in-the-portfolio

Pernambuco: a new growth engine?

 

Northeastern Brazil is becoming a region of growing industrial activity. The state of Pernambuco and its capital Recife are examples of the Northeast’s effort to become a growth engine in the Brazilian economy. The following observations are from a recent information session on business in Brazil that took place in Boston, and from information published by the American Chamber of Commerce for Brazil.

 

Demographics & Human Capital

Per capita income in Pernambuco is growing along with the rest of the Northeast region. Yet the state’s income is significantly less than that of Brazil as a whole.

Similarly, Pernambuco’s educational outcomes, measured by Brazil’s Basic Education Development Index, have improved steadily since 2005.

 

Macroeconomics

Pernambuco’s economic growth has exceeded that of Brazil as a whole for the past two years and is forecast to do so again in 2012.

 

 

ECONOMIC GROWTH RATES
	2010	2011	2012
PERNAMBUCO	9.30%	4.50%	6.00%
BRAZIL	7.50%	2.70%	4.50%

Source: Central Bank of Brazil

 

Infrastructure

Seaports: Recife, the state capital and Suape, connecting the northeast coast to North America, Europe and Africa.

Railways: The Transnordestina connecting the seaports and industrial centers on the coast to the rural interior and other states in Northeast Brazil.

Informatics Hub: Technology Center that symbolizes modern electronic connectivity and a platform for innovation.

The Northeastern ports feature docking and logistics facilities and intermodal links to roads and railways.

Suape is home to an industrial complex with infrastructure for shipping manufactured goods throughout the country and to several export markets. Pernambuco has positioned itself as a viable route into and out of Brazil.

 

What Pernambuco buys:

• Acids and Salts
• Fuels and Petroleum Products

 

What Pernambuco sells:

• Sugarcane, beet sugar, and related products
• Fresh Grapes
• Petrochemicals
• Fuels and Lubricants

 

Conclusions:

• Pernambuco’s trade seems to revolve around primary and intermediate products to support industrial activity in the state or elsewhere.
• Exporters should consider positioning products and services to support the region’s growing industrial and infrastructure development
• Given the somewhat lower income levels in the region, consumer goods would have to appeal to the lower middle of the pyramid
• The economic profile of Pernambuco indicates that Northeast Brazil is not just growing but also attempting to integrate into the supply chain. Will it be enough to make the region a serious trade alternative to Sao Paolo, Rio de Janeiro and the the southern regions that tend to attract the most attention?

 

 

SEVEN HIGHLIGHTS FROM THE EMERGING MARKETS PRIVATE EQUITY ASSOCIATION 2011 LP SURVEY

The following observations are culled from the recently published Global Limited Partners Survey from the Emerging Markets Private Equity Association. I have also included commentary from private equity executives interviewed by Privcap, along with my own comments.

1. In 2011 fundraising by emerging market funds increased up 64% to $38.5m. One reason given by the Privcap panel is that the largest institutional investors are underallocated in emerging markets and are therefore increasing there exposure commensurate with the higher growth expectations in those markets.

2. The region that was most successful in fundraising was Latin America, especially Brazil. Brazil’s share of funds raised was up to 18% from 5% a year earlier. The executives in the Privcap interview suspect that this large increase was due to 5 or 6 big managers raising large funds. My own view is that Brazil has the size and breadth to absorb large amounts of capital, a flexible enough market to enable many types of deals—leveraged transactions are possible for example–and the dynamism of a rapidly growing developing economy leading investors to expect attractive returns.

3. Latin American funds are expected to trail only China and Southeast Asia in the size of net investment returns.

4. Sub-Saharan Africa rises from 7^th to 5^th most attractive region for investment by general partners. SSA now ranks ahead of India, Turkey, Russia and Central & Eastern Europe.

5. Limited partners perceive the biggest risks to private equity investing in Brazil to be an oversupply of funds, i.e. too much money chasing too few deals in Brazil.

6. Political risk is a concern in most regions and is most prevalent among limited partners investing in Russia, Sub-Saharan Africa, and Middle East/North Africa.

7. In Africa, LPs largest concerns are political risk, limited number of general partners—not enough competing funds–the exact opposite of Brazil’s issue, and insufficient scale among investment opportunities.

It is interesting to note that Sub-Saharan Africa is become a more attractive investment destination even while facing significant challenges related to political risk, investment size, and number of PE players in the market. These issues are generally well known by investors and policymakers. Regional integration and strengthening of institutions, will attract capital from those regions that are oversupplied, and improve the worldwide private equity industry.

Emerging Market Stock Indexes and Exchange Rate Changes in Q1

Advansa International follows exchange rates and stock market indexes for several emerging and frontier markets. Exchange rates and stock indexes are recorded on the last trading day of the week. The tables below show changes from the last trading day of the last full week of the quarter for several key markets in Africa, Latin America, and the Caribbean.

 

STOCK MARKET INDEX TRACKER – 1ST QUARTER 2012 AFRICA
COUNTRY	YTD MARCH PCT CHANGE
GHANA-Local Currency	9.43%
GHANA-US$	1.67%
KENYA-Local Currency	6.10%
KENYA-US$	8.57%
NIGERIA-Local Currency	1.02%
NIGERIA-US$	3.94%
SOUTH AFRICA-Local Currency	5.46%
SOUTH AFRICA-US$	10.66%
WEST AFR. BOURSE-Local Currency	12.46%
WEST AFR. BOURSE-US$	10.04%
MSCI AFRICA-Local Currency	5.18%
MSCI AFRICA-US$	10.57%
MSCI EMERGING MARKETS-Local Currency	-30.2%
MSCI EMERGING MARKETS-US$	13.65%
Sources:  Stock exchangewebsites, Financial Times, Advansa International data

1ST QUARTER 2012 EXCHANGE RATE TRACKER AFRICA
COUNTRY	1ST QTR PCT CHG	YTD SEPT PCT CHANGE
CFA AREA*	-7.26%	-0.67%
GHANA	-5.47%	-15.41%
KENYA	-12.27%	-13.76%
NIGERIA	0.17%	0.24%
SOUTH AFRICA	-3.40%	-15.97%
TANZANIA	0.60%	-3.74%
UGANDA	-2.93%	1.68%
Sources:  Financial Times, Advansa International data

*Includes Benin , Burkina Faso , Cameroon, Central African Republic, Chad, Congo (Brazzaville), Cote D’ivoire, Equatorial Guinea, Gabon, Guinea Bissau. Mali, Niger, , Senegal , and Togo.

STOCK MARKET INDEX TRACKER – 1ST QUARTER 2012 LATIN AMERICA/CARIBBEAN
COUNTRY	YTD MARCH PCT CHANGE
ARGENTINA MERVAL-Local Currency	6.33%
ARGENTINA MERVAL-US$	4.62%
BRAZIL BOVESPA-Local Currency	13.67%
BRAZIL BOVESPA-US$	15.91%
COLUMBIA IGBC-Local Currency	18.73%
COLUMBIA IGBC-US$	26.65%
JAMAICA MAIN INDEX-Local Currency	-4.12%
JAMAICA MAIN INDEX-US$	-4.93%
MEXICO-Local Currency	6.59%
MEXICO-US$	15.53%
MSCI LATIN AMERICA-Local Currency	8.22%
MSCI LATIN AMERICA-US$	14.03%
MSCI EMERGING MARKETS-Local Currency	9.92%
MSCI EMERGING MARKETS-US$	13.65%
Sources:  Stock exchangewebsites, Financial Times, Advansa International data

1ST QUARTER 2012 EXCHANGE RATE CHANGE LATIN AMERICA/CARIBBEAN
COUNTRY	1ST QTR PCT CHG	YTD SEPT PCT CHANGE
CFA AREA*	-7.26%	-0.67%
GHANA	-5.47%	-15.41%
KENYA	-12.27%	-13.76%
NIGERIA	0.17%	0.24%
SOUTH AFRICA	-3.40%	-15.97%
TANZANIA	0.60%	-3.74%
UGANDA	-2.93%	1.68%
Sources:  Financial Times, Advansa International data