Private Equity in Emerging Markets: Where did it all go wrong?


April 24, 2014

Financial newswires have been buzzing in the early part of 2014 with talk of private equity (PE) houses looking to get out of emerging markets or looking elsewhere for opportunities.


The main focus of these articles have specifically been the BRIC nations. Bain & Company recently released their Global Private Equity Report for 2014, which is one of the first big pieces of analysis into why PE is shying away from some emerging markets and from the BRIC nations in particular.


Usually, this trend is put down to a weakening or plateauing economy, but Bain have gone further to provide some excellent insight.


What is the Problem?
The biggest problem in emerging markets is not that there aren’t returns being made; rather, that the returns are nothing like as big as were expected. During the financial crisis, conventional wisdom stated that developing markets were where the PE action was, given that most of the developed world was in the mire financially. However, funds raised and investments made in the BRIC nations and indeed in emerging markets overall have actually underperformed in comparison to those in developed markets.


China & India’s Impact
China & India have long been regarded as the biggest opportunity for PE investors looking at emerging markets. However, this outlook is the reason why these two nations have actually been the biggest disappointment. Overall, attractive deals in China & India have been relatively low.


At the same time, PE firms and businesses have flocked to these countries, and many deals have been closed without a great deal of due diligence or real thought being conducted. The focus was all about getting a foothold in these markets, so investments were often much higher than what would have usually been considered a reasonable price. Consequently, the finance industry discovered that things weren’t always as they might have seemed in these two countries, and as such saw lower than expected returns.


An additional problem that occurred across all emerging markets, again driven by the desire of PE firms to establish a presence, was that firms were happy to take minority or non-controlling stakes and leave inexperienced entrepreneurs or business leaders in charge of their companies.


This meant that firms had little say on what occurred during their holding period, and this lack of influence is what ultimately led to diminished returns on occasions.


Where will it start to Go Right?
Non-BRIC investments dropped dramatically in 2010, with 2009’s figure not being met once again until 2013. Emerging market fundraising specifically targeting non-BRIC nations also fell from 2009 – 2011, but is again growing.


Fundraising specifically for BRIC investment has reduced dramatically and is at its lowest level since 2009, and is a trend that is likely to continue. Although Africa is widely cited as the big emerging market opportunity for the industry, BRIC nations and other emerging markets remain attractive.


This is true so long as firms adopt the approach they have taken to the developed world, in that they take their time over investing and are careful to complete all steps of the process to ensure they are only investing in the very best businesses.

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