Brazil becomes favourite market for emerging private equity

Brazil has overtaken China as the favourite market for emerging private equity deals over the next year, due to a stronger political and regulatory environment and lower valuations, according to a new survey.

Private equity investors want to increase their exposure to emerging markets as a whole, to 16 to 20% in the next two years from 11 to 15% currently. This is primarily due to the high economic growth in these markets, according to the Emerging Markets Private Equity Association and Coller Capital survey of 156 private equity investors globally.

‘Brazil has leapfrogged China as the most attractive market for private equity fund manager deal making in the next 12 months and the rest of Latin America is also now viewed as significantly more attractive than it was a year ago,’ EMPEA/Coller Capital said.

Over three quarters of investors surveyed expect annual net returns of at least 16% in emerging Asia, and nearly two thirds expect to see this in Latin America. While 14% of emerging market private equity investors expect to begin investing in Brazil in the next two years.

‘The assessment of political risk in Brazil is almost zero, in China its 24%,’ said Sarah Alexander, chief executive officer of EMPEA. ‘Regulatory and tax issues are seen as relatively easier in Brazil, and Brazil compared to India and China is not expensive.’
Political risk is a major deterrent to fund managers new to investing in Russian private equity, with 63% of respondents citing this as an issue, the highest for any region in the survey.

‘It's tied with how Russia is perceived in the outside world. Investors that are already in the Russian market have a quite different perception from those that are not in,’ explained Erwin Roex, partner at Coller Capital.

Extensive news coverage of issues such as the legal spat between BP and Russian state controlled Rosneft over joint venture TNK-BP are stifling new investment, but existing private equity investors are making strong returns, Roex added.

Investors in the survey were also deterred by political risk from investing in the Middle East and North Africa, but the survey was conducted in January and February, at the height of political tension in the region.

‘Anything related to the Middle East would not be reflective of sentiment today,’ Alexander said.