Private Equity Shifts Gears In Emerging Markets

Apr 22 2014, 6:51pm CDT | by

After surveying another year of disappointing results from their emerging market investments in 2013, many private equity (PE) investors that had enthusiastically piled into the big developing economies of Brazil, Russia, India and China (the BRICs) are rethinking their emerging market strategies.

As we discuss in Bain & Company’s 2014 Global Private Equity Report, the problem PE faces in emerging markets is stark: General partners (GPs) are failing to deliver on the job their limited partners (LPs) hire them to do—to generate market-beating returns. Indeed, returns of emerging market PE funds have been trending lower for nearly a decade. Even the best performers’ results have dropped steadily from their vintage peak.

These are not the results that LPs signed on for when they shifted their attention to the fast-growing emerging BRIC economies from the deteriorating conditions for PE in the advanced economics after 2008. Emerging market funds raised since the financial crisis have underperformed their developed market counterparts. Although these vintages are still very immature and have booked few realizations of gains, their interim results are disappointing.

The emerging market behemoths, China and India, have disappointed most of all. With too much money chasing too few deals amid the expectation that double-digit GDP growth rates would endure, some PE firms rushed to close deals without adequately preparing for the risks of a prolonged slowdown.

Recent disappointment, however, has not caused PE investors to lose confidence in emerging markets’ prospects. Drawn by the allure of diversification, GDP growth and rising middle-class incomes, many LPs are planning to boost their exposure to the emerging markets. In a 2013 global survey of LPs, conducted by EMPEA, the emerging market private equity association, one-third of LPs indicated that they plan to increase the share of their PE allocation in emerging markets. However, the pace of new commitments will likely slow in light of the big infusions of capital into emerging market-focused funds from 2010 through 2012, the huge pile of dry powder still waiting to be deployed, and the struggle

GPs have faced trying to unwind portfolio holdings and return capital to LPs.

Absorbing the lessons of what has not worked well in China and India, GPs and LPs are broadening their horizons beyond the BRICs to seek diversification in markets that will offer the next wave of growth, including Sub-Saharan Africa, Southeast Asia and Latin America (excluding Brazil). Both investment deal value and targeted new fund-raising reflect the increasing importance of these rising markets (see Figure).

GPs are also embracing a more hands-on investment model. Most are no longer willing to settle for the purchase of passive minority stakes in companies whose entrepreneur owners are reluctant to cede control. Instead, they are increasingly likely to hold out for deals where they can exert influence over the assets they acquire.

As PE expands its geographic reach and deepens its activist approach to portfolio management, GPs will need to develop distinctive ways to create value in order to succeed. Five skills are paramount:

  • First, GPs will need to build a proprietary deal network with strong industry sector skill in order to capitalize on deal sourcing and acquisition.
  • Second, the leaders will over-invest in differentiated due diligence to surface a potential acquisition target’s relevant opportunities and downside risks. They carefully vet the companies they consider buying to ensure that these companies are well within the firm’s predetermined sweet spot; put early warning systems in place to get a fast read on potential problems and deal breakers; and involve investment committee members early in the purchase decision process.
  • Third, operating as owner-activists, top GPs develop and pressure-test their investment thesis and operating blueprint that will guide their management teams throughout the time the fund owns an asset.
  • Fourth, they start thinking about their exit path from day one, continuously tracking options and identifying potential buyers from the start and preparing the business accordingly.
  • Finally, they nurture a deep pool of local talent that possesses the regional and global perspectives needed to build the firm’s capabilities. Scarce professional and managerial skills in emerging markets require top GPs to custom-tailor strategies for attracting, retaining and developing their own home-grown talent.

Will GPs that adapt their investment models to match today’s more tempered realities ultimately be able to crack the code for emerging market success? Certainly, there is a deep need for the role PE firms can play in spurring their growth while rewarding their investors. What remains to be seen is whether a repeatable model for success in emerging markets can put that capital to work productively.

Read the full report: Global Private Equity Report 2014

Written by Hugh MacArthur, Graham Elton, Bill Halloran and Suvir Varma, leaders of Bain & Company’s Private Equity Group.

 
 

Don't miss ...

 

<a href="/latest_stories/all/all/30" rel="author">Forbes</a>
Forbes is among the most trusted resources for the world's business and investment leaders, providing them the uncompromising commentary, concise analysis, relevant tools and real-time reporting they need to succeed at work, profit from investing and have fun with the rewards of winning.

 

blog comments powered by Disqus

Latest stories

UN warns of worsening food crisis in Somalia
United Nations, Nov 1 (IANS) A UN food agency Friday warned that poor rains in Somalia may worsen the country's food crisis, a spokesperson said.
 
 
Canada suspends issuance of visas to Ebola-hit African countries
Ottawa, Nov 1 (IANS) Canada has suspended issuance of visas to residents of West African countries with "widespread and persistent-intense transmission" of Ebola virus disease, a media report said Friday.
 
 
Chinese unmanned lunar orbiter returns home
Beijing, Nov 1 (IANS) China succeeded Saturday in the world's first mission to the Moon and back, becoming the third nation to do so after the former Soviet Union and the US.
 
 
China pledges $81 mn financial assistance for Afghanistan
Beijing, Oct 31 (IANS) China Friday pledged to provide non-reimbursable assistance of 500 million yuan (about 81 million dollars) to Afghanistan this year at an international meeting on Afghanistan held here.
 
 
 

Latest from the Network

Amanda Bynes to remain under conservatorship
Amanda Bynes is set to remain under a conservatorship. A lawyer claiming to represent the 28-year-old actress, who was released from a psychiatric treatment facility in Pasadena, California on Thursday (10.30.14) after...
Read more on Celebrity Balla
 
Ben Affleck broke Jennifer Lopez's heart
Jennifer Lopez says Ben Affleck was the first guy who broke her heart. The 'Booty' hitmaker, who got divorced twice before she started dating the 'Gone Girl' actor in 2002, was completely devastated when they ended...
Read more on Celebrity Balla
 
Alicia Key's son is ready to be a big brother
Alicia Keys' son is ''so ready'' to be a big brother. The 33-year-old singer and husband Swizz Beatz are set to welcome their second child into the world on New Year's Eve (12.31.14) and says their four-year-old Egypt...
Read more on Celebrity Balla
 
UN warns of worsening food crisis in Somalia
United Nations, Nov 1 (IANS) A UN food agency Friday warned that poor rains in Somalia may worsen the country's food crisis, a spokesperson said. The Food and Agriculture Organisation (FAO) issued the warning that an...
Read more on Business Balla
 
1.26 mn uprooted Iraqis need shelter: UN
United Nations, Nov 1 (IANS) The UN Office for the Coordination of Humanitarian Affairs (OCHA) said that some 1.26 million internally displaced people (IDPs) throughout Iraq need shelter and basic supplies, UN...
Read more on Politics Balla
 
Price expects ghosts in new house
London, Nov 1 (IANS) Singer Katie Price feels that her new house is going to be full of ghosts. She recently moved into a west Sussex nine-bedroom mansion with husband Kieran Hayler and her five children. She's...
Read more on Celebrity Balla
 
Canada suspends issuance of visas to Ebola-hit African countries
Ottawa, Nov 1 (IANS) Canada has suspended issuance of visas to residents of West African countries with "widespread and persistent-intense transmission" of Ebola virus disease, a media report said Friday. The Canadian...
Read more on Politics Balla
 
Sheen keen to return to 'Two and a Half Men'
Los Angeles, Nov 1 (IANS) Actor Charlie Sheen says he is open to a return to popular TV show "Two and a Half Men". Sheen, who was was fired from the sitcom in March 2011 after a series of negative headlines, says he...
Read more on Celebrity Balla
 
14 killed in Honduras bus crash
Tegucigalpa, Nov 1 (IANS) At least 14 people were killed and scores injured when a bus carrying them plunged into a ravine in western Honduras, media reports said Friday. The accident, which occurred early in the day...
Read more on Politics Balla
 
US urges peaceful transition of power in Burkina Faso
Washington, Nov 1 (IANS) The US Friday called for a "peaceful" transition of power in Burkina Faso, but refused to label the military's take-over as a coup. "We underscored our commitment to peaceful transitions of...
Read more on Politics Balla