IFC: Private Equity Still Viable in Emerging Markets

NEW YORK (Reuters) – Emerging markets will likely remain a viable alternative for private-equity investors seeking returns during the deepening global financial crisis, according to an official with the International Finance Corporation.

Emerging market economies are expected to still expand in 2009, said David Wilton, manager for private equity and investment funds at the IFC, the World Bank’s private sector arm. As a result the private-equity investment model in emerging markets, based mainly on revenue growth and margin expansion, “remains intact,” he said.

“The growth is going to be lower, but it is still going to be there, and enterprises are going to be largely compensated, so you still have a very viable business model” in emerging markets, Wilton told Reuters in a recent interview.

Emerging markets will be the alternative for many private-equity investors who had focused on the now-defunct leveraged buyout sector, he added. The LBO market collapsed in September, when banks became unable to keep funding such deals, and analysts see no quick comeback.

Fund raising for new private-equity projects in emerging markets is also frozen, and should remain so for at least the first half of the year, according to Wilton.

While profitability has also been hit, private-equity funds backed by the IFC posted average returns of 16 percent in 2008, below the 22 percent average seen in July, Wilton said.

“Risk aversion has gone up enormously, partially because nobody has seen this before. Everyone is trying to figure out what is happening and what to do,” he said.

But eventually, Wilton argues, risk aversion will diminish and liquidity problems will be sorted out. And, if emerging markets are not decoupled from developed markets, they are still in better shape to weather the crisis, he said, mentioning opportunities in countries such as India and Vietnam, as well as the African continent as a whole.

“I think some people thought the correlation (between emerging and developed markets) was much closer to zero than it really is. And now they think it’s much closer to one than it really is. But it is somewhere in the middle,” he said.

The IFC has about $1 billion invested in about 100 emerging-market funds, more than 80 percent of which are private equity. The institution supports the private sector with funds and expert consulting, in order to foster growth in developing economies.

By Walter Brandimarte
(Editing by Leslie Adler)