Speaking at the SuperReturn annual private equity conference this week, private equity experts said buyout firms may be ignoring risks such as internal politics and environmental conditions in the scramble to get the words ‘China’ and ‘Brazil’ on the front of their fundraising documents.
“There is not a single investor in the world not focused on trying to figure out what to do in Brazil and China,” said Bob Brown, managing director at Advent International. “If you believe that scarcity of capital leads to higher returns, then one might want to consider that there is not a scarcity of capital in these emerging markets.”
U.S. and European buyout firms have raised large funds dedicated to Asia, attracted by growth predictions which blast past sluggish U.S. and Western Europe figures.
From 2005 to year-to-date 2011, $197 billion was raised to invest in Asia, dwarfing other regions such as Latin America which attracted $33 billion, the Middle East and North Africa which attracted $18 billion, eastern Europe with $14 billion and sub-Saharan Africa which attracted just $5 billion, figures from London research firm Preqin show.
“It used to be BRICs, then the BICS, and now it is maybe just Brazil and China,” Advent’s Brown said.
While Asia is “the huge opportunity” with a massive population and fast-growing consumer spending, investors have to be aware of “the internal fracture lines, internal politics, economics and the environmental conditions of that region”, said Lord Mark Malloch-Brown, chairman of global affairs at business advisory firm FTI Consulting.
“There is a lot of unfinished business between countries which are now growing very rapidly,” he said. “It is compounded by a lot of internal difficulties with rising inequality in lots of these countries.”
Malloch-Brown also pointed to the large number of natural disasters in the region, reflecting factors such as cities located on low-quality land vulnerable to earthquakes.
Some industry experts say there is an increasing risk of funds making bad investments as competition increases and funds look to invest money quickly to show returns to their investors.
“In China and India, you could argue some of the competition is irrational,” said Vinit Bhatia of Bain & Co., speaking at a Reuters Summit in Hong Kong. “It’s really pricing deals out of the market for more traditional … players, and that’s a big worry.”
In the rush to deploy capital into fast-growing Asian economies, investors could be missing opportunities elsewhere.
“I don’t know if Russia is the best opportunity among the emerging markets … but what I am sure about is that it is the most misunderstood emerging market and it is also the most underrated,” said Michael Calvey, Moscow-based co-managing partner at Baring Vostok Capital Partners.
Calvey said that in the 17 years Baring Vostok has been investing in Russia, returns from the top-quartile private equity funds in the country have been higher than any other emerging market.
Russia has been a difficult market for global private equity firms, said Calvey, as it doesn’t have the same efficiency, intermediation and services that exist in countries in Asia.
He said foreign companies had instead been successful in Russia as they are typically willing to make large investments in infrastructure and in operating management resources.
Russia is a “huge, unexploited but complex market”, said Christopher Mackenzie, partner at Tangent Ventures, which is seeking to partner foreign firms looking to expand in Russia.
Africa is another region which has attracted comparatively little capital. At the conclusion of a panel discussion on emerging markets, one member of the audience asked why there had been no discussion on sub-Sahara Africa.
“I’m more of a bull on Africa which despite its conflicts nevertheless has many of the characteristics of Asia 25 years ago,” Malloch-Brown said.
He listed reasons such as a rapid rate of urbanization, “the world’s fastest growing cellphone market”, rapid growth in financial services and tourism and “the great big unnoticed factor that over half the world’s unused arable land is in Africa.”
(By Megan Davies and Simon Meads, additional reporting by Stephen Aldred in Hong Kong; Editing by David Holmes)