360° Coverage : Private Equity Shifts Gears In Emerging Markets

2 Updates

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...

Filed under: news

 
 
 

20 weeks ago

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.

 
Update
2

2 weeks ago

Khazanah throws MAS RM6b lifeline

Aug 29 2014 5:01pm CDT | Source: Business Times Singapore

August 30, 2014 1:15 AMKHAZANAH Nasional will inject RM6 billion (SS$2.4 billion) over three years to resuscitate loss-making Malaysia Airlines (MAS) under a recovery plan that includes even an Act of Parliament. Other key moves are migrating its operations, assets and liabilities to a new company (NewCo) and slashing ...
Source: Business Times Singapore   Full article at: Business Times Singapore
 

 
Update
1

2 weeks ago

MAS posts loss of RM307m for Q2

Aug 28 2014 5:00pm CDT | Source: Business Times Singapore

August 29, 2014 1:13 AMMALAYSIA Airlines (MAS) registered a loss of RM307 million (S$122 million) for the second quarter to end-June, but warned of worse to come in the second half when the "full financial impact of t ...
Source: Business Times Singapore   Full article at: Business Times Singapore
 

 

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

70 scientists focussing on Bigfoot research
San Francisco, Sep 15 (IANS/EFE) Seventy scientists from around the world, defying widespread scepticism, have been involved for the past four decades in the search for "Bigfoot", the large and hairy beast allegedly seen in remote areas of the US, Rhettman Mullis, founder and chair of the Western Bigfoot Society, said.
 
 
Kenya to host regional conference on Ebola
Nairobi, Sep 15 (IANS) African governments are due to meet in Nairobi from Tuesday for a regional conference on Ebola virus disease preparedness, Kenya's health ministry said Monday.
 
 
Ebola: EU members urged to step up response
Brussels, Sep 15 (IANS) The European Union Monday called on member states to step up support for pressing needs such as effective treatment centres and sufficient numbers of health workers in response to the Ebola virus disease epidemic.
 
 
Indians in Saudi Arabia appeal to Modi for 'massive' help in Kashmir
Riyadh, Sep 15 (IANS) About 20 Riyadh-based Indian organisations have urged Prime Minister Narendra Modi for a massive response to the unprecedented disaster caused by floods in Jammu and Kashmir on a scale similar to that carried out during the Uttarakhand landslides.
 
 
 

Latest from the Network

Pakistani court orders murder case registration in activists' killing
Islamabad, Sep 15 (IANS) A court in Pakistan Monday ordered registration of cases in the killing of opposition activists during the anti-government protests in Islamabad, lawyers said. Clashes erupted between the...
Read more on Politics Balla
 
Egypt's Muslim Brotherhood chief gets 25 years in jail
Cairo, Sep 15 (IANS) Egypt's Giza Criminal Court Monday sentenced terrorist Muslim Brotherhood (MB) supreme guide Mohamad Badie along with 14 other leaders to 25 years in prison over clashes in Bahr el-Azam, Giza, the...
Read more on Politics Balla
 
Was MH370 plane crash actually suicide by pilot?
London, Sep 15 (IANS) The pilot of the missing Malaysia Airlines flight MH370 killed himself and passengers by switching off oxygen supply in what is the sixth example of such a suicide, an aviation expert has...
Read more on Politics Balla
 
China, Maldives agree to establish all-round partnership
Male, Sep 15 (IANS) Chinese and Maldivian leaders agreed here Monday to establish a future-oriented all-round friendly and cooperative partnership between their two countries. "For the sake of upgrading bilateral...
Read more on Politics Balla
 
ICRC provides emergency relief for thousands displaced in Syria
Geneva, Sep 15 (IANS) The International Committee of the Red Cross (ICRC) Monday said it provided emergency relief for over 50,000 Syrian people amid the recently intensified clashes between Syrian government forces...
Read more on Politics Balla
 
Six killed in fresh fighting in Ukraine
Kiev, Sep 15 (IANS) Six civilians were killed during renewed intense fighting between government troops and independence-seeking insurgents in Donetsk, the main rebel-held city in eastern Ukraine, municipal authorities...
Read more on Politics Balla
 
Kenya to host regional conference on Ebola
Nairobi, Sep 15 (IANS) African governments are due to meet in Nairobi from Tuesday for a regional conference on Ebola virus disease preparedness, Kenya's health ministry said Monday. The Sep 16-17 regional conference...
Read more on Business Balla
 
Angus Lennie has died aged 84
'The Great Escape' actor Angus Lennie has died. The 84-year-old star passed away at a nursing home in Acton, west London last night (14.09.14), the Daily Record newspaper reports. The Glasgow-born actor was best known...
Read more on Movie Balla
 
Ben Affleck hoping for Batman education
Ben Affleck hopes starring in 'Batman v Superman: Dawn of Justice' will be ''an education''. The 42-year-old actor was a controversial choice to appear as the Caped Crusader in the sequel to 2013's 'Man of Steel', but...
Read more on Movie Balla
 
Sikhs open free school in Britain
London, Sep 15 (IANS) After facing a lot of disappointment in Britain's Coventry schools, members of the Indian-origin Sikh community have set up their own school for their new generation. Opened in Coventry, a city...
Read more on Politics Balla