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Private equity in emerging markets
A place to look for returns in the current
downturn?
Prof. Luc Nijs
Founder & Chairman Horizon Ltd
London, March 2, 2009
ICBI’s Fund Forum emerging markets 2009
Where to start?
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Why not fundraising!
Despite the market conditions EM PE raised $ 66,5 bio in 2008, a 12% rise
Proportional share in total global PE fundraising raising for 5 years in a row now
Relative decoupling & economic power shifting is reinforced by current
recession
Cyclical recession became a structural one and the risk of L-shape depression is
looming (cf. Ponzi economy)
Source: EMPEA Feb. 2009
Fundraising per region
A (new) inconvenient truth about risk
Emerging Markets Risks
Political instability
Market fundamentals
Counterparty
Emerging Markets
Curreny (F/X)
Pre-crisis Thinking
High Risk
High Growth
High risk
High Growth
Low Risk
Low Growth
High Risk
Low Growth
Post-crisis Thinking
Market fundamentals
Developed Markets
Legal / Regulatory
Developed Markets Risks
Structural issues
Environmental
Legal / Regulatory
Av. risk premiums in EMs (%, 2006-2008)
Another inconvenience
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Capital inflows to developing world
(Source: IFF, 27 January 2009)
Historic & projected EV/EBITDA
Source: Prop. Research, averages for the clusters
Market Outlook
 Cheaper valuations (although some parties sometimes are still in
denial)
 Attractive deal flow to arrive
 Capital constrained entrepreneurs & management
 BRIC as a catalyst gone?
 But major differentiators among emerging markets
 Semi-globalization = procession of Echternach
Market Outlook
But major differentiators among emerging markets
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CEE & CIS:
 Sovereign risk & currency management
 Debt-financed growth model is broke
 Euro and Nordic currency infrastructure has eroded fundamentals
 Mid/Long term catch-up dynamics still in place
 South-East Europe & Turkey still attractive
 Russia has a significant implied X-factor at present time
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MENA:
 Undeniable impact on economy
 SWFs are diverting capital flows back home
 Mid/Long term outlook still positive
 Valuations in region still need recalibration to new reality
Market Outlook
But major differentiators among emerging markets
 Mena:
 Still growth but impact of the credit situation trickling down
 Commodity play
 Sector focus
 Sub-Saharan Africa:
 Limited effect of credit situation
 Tremendous improvement in investment environment
 Good risk-adjusted returns
 GDP growth & overall economic development decoupled from
commodity play
Market Outlook
But major differentiators among emerging markets
 Asia:
 China as a manufacturing hub
 Semi-globalization shows
 Global gross capital formation (cross-border at risk)
 Unrealistic valuations in India at present
 Volume of investments dropped 38,5 % in 2008 to $ 10,7 bio and are expected to
drop to $ 5 bio this year
 3/4th of PE investments were done in listed entities
 Can they become our customers of last resort?
 Social unrest might destabilize the vulnerable progress made
 South Korea, Singapore, Malaysia etc weak on their feet for the
time to come
Something else that is inconvenient
Past performance & GP selection
Institutional investor views: EM versus
developed (December 2008)
PE penetration as an asset class
Source: Goldman Sachs, EMPEA
Expecting to grow
Source: EMPEA
Cause of…..
Source: EMPEA 2008
EM Private Equity performance
Source: Cambridge Associates LLC & prop. research,: pooled end-to-end returns, net of fees, expenses and carried interest
Comparative end-to-end results 6/30/2008
(*) Statistical noise likely due to low sample distribution
Source: Cambridge Associates LLC & prop. research,: pooled end-to-end returns, net of fees, expenses and carried interest
Impact on portfolio construction
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In 2008 about 1/3 of the total pool of LPs had some kind of exposure to EMs
Portfolio weighting somewhere between 10-30%
Do or die for LPs the next couple of years
Systemic risk in Western markets are not reflected in risk premiums
Source: Proprietary data
Portfolio exposure
Is this time going to be different for EMs?
 During previous booms and busts the developed
and developing world evolved in a parallel fashion
 This time there is a (partly) contra-cyclical pattern
 Political & regulatory impact
 HC issues
 Global versus local teams: the best of both
 Business model rethinking & paradigm shift
 EM debt usage less or more prudent
Let gravity have its way
Darwinian tsunami & paradigm shifting
Where are you?
Contact
Riga Graduate School of Law
Law & Finance Chair
Strelnieku iela 4k-2
Riga LV-1010
LATVIA
[email protected]
Tel. +37167039230