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.
- 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.
- 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.
- Latin American funds are expected to trail only China and Southeast Asia in the size of net investment returns.
- Sub-Saharan Africa rises from 7th to 5th most attractive region for investment by general partners. SSA now ranks ahead of India, Turkey, Russia and Central & Eastern Europe.
- 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.
- 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.
- 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.