The private equity action is moving eastwards. A new survey released by the Emerging Markets Private Equity Association (EMPEA) shows an aggressive direction in investment by limited partners towards Asia, especially the Southeast Asian countries.

The Coller Capital Emerging Markets Private Equity Survey, which gathered interview data from 156 private equity investors in top Western and Asian-Pacific markets, expect the proportion of their PE allocations directed at emerging markets to increase from 11-15% today to 16-20% in two years’ time, suggested the survey.

India, in particular, will see about 30% to 40% of emerging market LPs expanding their exposure to the country with about 10% of new LPs also beginning to make commitments here. This only goes on to show that India is high on radar of the LPs and that institutional investors just can't afford not to have an exposure in the emerging markets.

Advantage Asia

Nearly three-quarters (73%) of LPs expect that 2011-vintage EM PE funds will outperform developed market funds of the same vintage. More than half of LPs (54%) expect annual net returns from EM PE of 16% or more (compared with one-third of LPs who expect similar returns from their global PE portfolio). LPs have the highest return expectations for Emerging Asia PE funds, with three-quarters (78%) expecting them to deliver annual net returns of 16% or more.

While China and India continue to head the top of the list for emerging market investments, according to EMPEA’s President Sarah Alexander, but growing environmental, social, and political stability in Southeast Asia is increasing attractiveness for countries such as Vietnam, Thailand, and Malaysia.

So, does all this point to the fact that it's an advantage being an Asia or an emerging markets focused in these times. Perhaps Yes, according to Erwin Roex, Partner, Coller Capital, “Fundraising is never easy. It always depends upon an indiviudal managers' skill, right proposition, stable team and operating in an attractive PE market. Having said that, I think that there is a positive bias from the LPs if you are a fund coming from an emerging markets."

Roex added that emerging markets now form very much a part of the allocation in the PE portfolio for LPs and from having a fringe presence in the portfoio of the LPs, they have now moved to form a core part of their allocations.

Boosters & Deterrents

The growing domestic private equity market is being seen as a huge positive by the institutional LPs. The large majority of LPs (84%) believe the participation of local LPs in an EM PE fund is advantageous. (Where LPs were wary, they saw potential misalignment of interests between local and non-local investors as the issue most likely to cause friction).

However, over two thirds (68% of LPs) believe GPs investing in India will face intense competition for deal flow. One of the biggest concerns for  the LPs (58%) remains the fact that the entry valuations are too high. About 14% of LPs believed that there are a limited number of established GPs and also weak exit environments. "LPs feel that the Indian market is fully priced or perahaps overpriced and that there are more attractive investment propositions available in other markets," Roex adds.

Almost three-quarters (73%) of LPs expect GPs seeking deals in China to experience intense competition over the next 12 months.  Although China is seen as the most competitive market for GPs seeking deals in the next 12 months, investors are not deterred. In fact, China will see the greatest expansion in commitments from current investors in the next 2 years, with 40% of LPs planning to increase their exposure.

Brazil has leapfrogged China as the most attractive market for GP dealmaking in the next 12 months. The nascent Asian PE markets are now perceived to be as attractive as China. While LPs are comparatively bullish on EM PE returns, the 2011 Survey revealed that investors’ return expectations for an individual PE market vary depending on whether they have exposure to that market. LPs without exposure to Emerging Asia are even more optimistic than those with exposure, while those without exposure to CEE, Russia and Sub-Saharan Africa are more pessimistic—especially in the case of Russia.

The 2011 Survey revealed that ESG considerations materially impact the GP selection process for two-thirds of EM PE investors (with 22% of them having investment mandates directly restricted by ESG issues). "The fact that such a large number of LPs are factoring ESG considerations into their manager selection decisions signals the link increasingly being drawn between manager focus on these issues at the portfolio company level and the ability to create value and generate stronger returns,” notes Alexander.


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