Investors maintain faith in emerging markets

By Martin Arnold in London

The fall in private equity funding is spreading to emerging markets, but funds focused on some countries, such as China, India and Brazil, are still attracting investors in spite of the downturn, research will show on Monday.

Three-quarters of investors in private equity in emerging markets plan to commit more money to funds in these regions, according to a survey of 156 financial institutions, including funds-of-funds, pension funds, endowments and rich families.

“In past downturns you have seen investors pulling out of these markets en masse, particularly in 1990-91,” said Sarah Alexander, president of the Emerging Markets Private Equity Association, which produced the research with Coller Capital. “But now they look at these markets and see growth potential they don’t see in western markets.”

Brazil is growing in popularity, with more than a quarter of investors aiming to start investing in the country or increase their exposure. China and India were rated as the two other most attractive markets.

However, Russia is set to lose investors, with three-quarters saying it was unattractive this year. Central and eastern Europe and Turkey also lost ground.

“Of the Bric [Brazil, Russia, India and China] markets, the one that seems to have stalled is Russia, which has really fallen out of favour,” said Erwin Roex, partner at Coller Capital, which invests in second-hand private equity assets.

“Brazil is an investment grade country and that has made quite a difference,” he added. “It has huge natural resources and reserves, its pension funds are supporting private equity and it is stable politically.”

Almost three-quarters of investors said emerging markets had become more risky in the past year. However, 77 per cent said they expected annual returns above 16 per cent over three to five years from emerging markets private equity, against only 43 per cent who expected the same for their global private equity portfolio.

“If you are investing very carefully with general partners who understand these markets, then they should absolutely outperform groups investing in a traditional way in US and western European private equity,” said Steven Cowan, managing director of PCGI, a Washington-based group with $1bn invested in non-US private equity.

Ms Alexander said the financial crisis had hit both private equity fundraising and investment activity in emerging markets in the first quarter, which dropped by about half to $8bn-$10bn and $5bn-$8bn, respectively.

Richard Laing, chief executive of CDC, the $4bn state-owned UK investor in emerging market private equity, said: “Fundraising in our markets is really tough and while most investors are still there, they are coming in for smaller amounts.”