Private equity managers going into emerging markets in search of higher returns or in hopes of avoiding the global credit crunch won't escape the impact of a U.S. recession, the president of the Emerging Markets Private Equity Association, or EMPEA, said Thursday.
“At a minimum, a U.S. recession will negatively impact growth prospects for some, if not many of the companies in a fund manager's portfolio,” Sarah E. Alexander said at an EMPEA conference in New York.
But investors who got burned in emerging markets during the early 1990s recession should take comfort in the “fundamental shifts” and growth that emerging market economies have experienced. “Let me convince you that a crash is highly unlikely,” she said.
Many private equity managers have a lot riding on these fundamental changes. Last year, the private equity industry raised more than $59 billion for investments in emerging markets, a record and nearly double the amount raised in 2006, according to EMPEA data.
The industry's view is that these regions are finally getting their legal and regulatory houses in order. Unlike 10 years ago, they are consuming more and demanding better infrastructure, thus creating new opportunities for investors.
“The old adage of 'Go West' is over,” said Frederic Sicre, executive director of Dubai-based private equity firm Abraaj Capital. “The consumption level of the United States still fuels the global economy. But other countries are catching up.”
According to EMPEA, privatization in developing countries reached $70 billion in 2006, creating investment opportunities not just in major emerging economies such as China, India and Russia but also countries such as Egypt, Turkey, Romania, Serbia, and Kazakhstan.
The credit crunch that has stifled the U.S. financial markets is also benefitting domestic financial institutions in emerging economies.
In developing countries, private equity deals are done mostly with growth equity, rather than with debt and equity as in a buyout. But the number of buyout deals in emerging markets is growing, and private equity managers will find local banks receptive to their needs. In 2007, billion-dollar buyout deals took place in several emerging markets, according to EMPEA.
Alexander said private equity investors should take further comfort in the fact that local private equity managers are helping to institutionalize the industry in emerging markets.
Local managers are attracting local capital, making governments more interested in private equity and increasing the industry's growth prospects, she said.
But the road to higher returns remains risky and should be traveled with caution, she said.
“Your mettle will be tested during the next several years, as the industry faces normal challenges of any developing countries,” Alexander said.
Others at the conference agreed with the overall positive sentiment, but warned against the market's overly optimistic outlook for emerging economies.
The risks associated with investing in these countries are still substantial and widespread, said Harold B. Ehrlich, chairman of financial advisor Ehrlich Associates LLC, who also spoke at the conference.
Assessing risk in emerging markets is still a challenge, and the overall environment may not be as rosy as many may be led to believe, he said.
“I am talking about political, regulatory, cultural, fraud, managerial risk, currency risk,” Ehrlich said.
-By Giada Cardoletti, Dow Jones Newswires
Source: Dow Jones Newswires