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Private equity well-positioned to exploit turmoil in emerging world

In a macro environment that looks increasingly bleak, emerging-markets investors from around the world gathered in Washington in May to talk about how private equity is uniquely positioned to navigate the turbulence.

Emerging markets have been hit hard by declines in commodities prices and the slowdown in China, which serves as one of the main export destinations for many emerging economies. Many such markets are rife with political turmoil, frozen capital markets and fledgling middle classes on shaky financial foundations.

Yet the mood at the Ritz Carlton in the leafy northwest of the capital was optimistic, if a little subdued. There was a sense of resignation to the macro waves battering every economy from Asia to South America, but also a sense that on a micro level, on a local level, private-market investors can seek out the nuance, the tiny shades of opportunity others can’t see.

“The macro needs to be looked at, but we don’t need to be owned by it. Such is the nature of private equity,” Arif Naqvi, group chief executive of Abraaj Group, said in an opening keynote speech.

Certain factors help drive optimism for emerging economies, sources said at the IFC Empea Global Private Equity Conference: rising middle classes, positive demographics, urbanization. These factors survive no matter what tremors shake the wider world.

There was even some optimism from perhaps the bleakest corner of the emerging world: Brazil. While investment professionals spoke of the massive challenges facing the Brazilian economy, they also spoke of opportunities.

“Even with the right measures being taken, we still expect a slow recovery to sustainable growth,” said Piero Minardi, São Paulo-based managing director at Warburg Pincus. Minardi cited pockets of growth for PE to exploit, including healthcare and education.

Jaime Cardoso, partner at Bozano Investimentos, said that in Brazil valuations have come down even for quality companies, presenting a great opportunity for PE equity firms with money to place.

“The potential number of opportunities in which to allocate capital … has increased,” Cardoso said. “We are seeing assets in general are cheaper.”

China, meanwhile, remains a great uncertainty. It’s one of the engines of worldwide economic growth, and any slip in its trajectory ripples across the globe, sources said.

While emerging markets GPs are comfortable operating amid uncertainty, LPs who invest in these types of funds have some unique requests for terms.

Some emerging markets LPs believe GPs who don’t resolve key person issues should be punished. The LPs are asking for provisions in limited-partner agreements that would treat unresolved key-person issues as “for cause” events that could lead to “for cause” removal of GPs. In this scenario, the GPs could lose carried interest. Check out our coverage in this issue.

The event’s overriding tone was clear: It’s an uncertain world, but the people in the room were best positioned to handle the uncertainty. By taking risks and staying open to unlimited possibilities, emerging-markets GPs will be integral to driving the engine of inevitable global growth.