Emerging markets expected to give better returns, more than half of private equity investors believe

Written by Ray Clancy

Monday, 19 April 2010 08:57

More than half of private equity investors plan to put more money in emerging markets, expecting higher returns from deals in these economies than ones in sluggish western markets, according to a new survey published today. (Mon April 19)

Some 57% of investors expect to increase allocations to markets including China, India and Brazil over the next two years, says the survey from private equity firm Coller Capital and the Emerging Markets Private Equity Association (EMPEA).

‘Investors are clearly drawn to markets with strong underlying growth, which trumps leverage in driving returns,’ said EMPEA president and chief executive Sarah Alexander.

Just last week Advent International said it had raised $1.65 billion for deals in Latin America, and Carlyle CYL.UL said it had raised $2.55 billion for Asian investments, bucking tough fundraising conditions to beat previous fund sizes.

Many investors see emerging market investments outperforming European and US markets. Over three quarters expect emerging market net returns to exceed 16% over a three to five year period, compared with 29% seeing similar returns from their global portfolio, the survey also found.

‘In a number of these markets, particularly China, India and Brazil, the environment has changed. There’s more stability, there’s better governance, there are more factors allowing for those returns to be generated,’ said Coller partner Erwin Roex.

A fifth of investors expect emerging markets net returns to exceed 25%, a figure in keeping with returns from European and US buyout firms during the buyout boom.

‘Over the long term, markets which are growing at 7, 8, and 9% are going to provide a more exciting environment for outperformance,’ said Richard Laing, chief executive of emerging markets investor CDC Group.

As Western economies edge back into growth, China last week posted stronger than expected annual growth of 11.9% in the first quarter. India, meanwhile, is expected to grow 8.5% in the current fiscal year.

While perceptions of better returns are pushing investors into emerging markets, they also now realise that debt laden deals in Western markets carried higher risks than previously assumed, Roex said.