Institutional investors in emerging markets private equity are ignoring the credit crunch and showing their confidence by continuing to commit money according to a survey conducted by the Emerging Markets Private Equity Association (EMPEA).
The research results show that 74% of limited partners are looking to increase allocations to emerging markets private equity over the next three to five years, with emerging markets funds expected to record an average return 6.7% better than US buyout funds.
Sarah Alexander, president of EMPEA, said: “The combination of higher expected returns and a rapidly growing pool of talented private equity fund managers is continuing to drive institutional investors to emerging markets. LPs recognize that the private equity markets in developing countries are maturing, and the turmoil in the developed markets should have limited impact. Most private equity deals in emerging markets are growth capital investments that use little, if any, leverage.”
It was also revealed that China and India are set to be the main beneficiaries of LPs interest in emerging markets, with commitments to other emerging markets expected to increase rapidly within the next five years.
LPs were also shown to believe that the investment environment is improving in those countries, with one-third highlighting the improvements made in political and economic risk as one of the most important reason for increasing commitments to EM PE funds.
EMPEA estimates that emerging markets funds have raised US$25bn between January and April 2008, and US$59bn in 2007.
Alexander continues: “Our survey findings illustrate that, despite managing greater risk in their developed markets exposure, LPs continue to diversify their private equity portfolios. Recent record-breaking fundraising is further evidence that investors see long-term potential for strong returns in emerging markets.”
Asia continues to be the primary destination for LP money according to the survey, with 89% expecting to invest there within the next three to five years, the same number as in 2007. Central & Eastern Europe seems to lost some of its appeal with 75% of LPs planning to invest, versus 87% surveyed in 2007.
Latin America, Africa and Middle East are attracting greater interest from investors. Fifty-two percent of LPs surveyed expect to invest in Africa in the medium term , while 65% plan commitments to Latin America funds, and 35% project they will be investing in the Middle East by 2013.