LPs look to emerging markets

The emerging markets continue to attract LPs globally and commitments to emerging market private equity funds are expected to rise from between 6 percent and 10 percent today to between 11 percent and 15 percent in two years’ time, according to the results from the 2010 EMPEA/Coller Capital Emerging Markets Private Equity Survey.

Fifty seven percent of LPs currently invested in emerging market private equity plan to increase their new commitments to the region over the next two years, the survey shows.

This compares to only 11 percent of investors that intend to slow their new commitments to emerging market private equity – a number that stood at 38 percent in last year's survey. Of those who do intend to slow the pace of commitments to emerging market private equity, most cite cash constraints as the primary obstacle, followed by an over-allocation to the asset class as a whole.

“Investors are clearly drawn to markets with strong underlying growth rates, which trumps leverage in driving returns,” Sarah Alexander, President and CEO of the Emerging Markets Private Equity Association, said in a statement.

Sixty one percent of LPs believe the risk-return profile of emerging market private equity investment has improved over the last 12 months, according to the survey, and the same proportion are of the view LP-GP alignment in emerging market private equity is just as strong as that in the developing markets. An additional 23 percent sees a greater alignment of LP-GP interests in the emerging markets. 

“LPs now see a mature group of fund managers with the skills and experience to capture the private equity opportunities fueled by growth and to minimise investor risk,” Alexander added. 

Many more LPs have higher return expectations from their emerging market private equity portfolios than they do from their commitments to private equity globally. Seventy seven percent of LPs expect net annual returns of more than 16 percent from their emerging market private equity portfolios as compared to just 29 percent of LPs that have the similar return expectations from their global private equity portfolios. 

In fact, 17 percent of LPs expect annual net returns of more than 25 percent from their emerging market private equity portfolios, as compared to just 3 percent who have similar expectations of their global portfolios. 

Emerging markets take the lead in terms of return expectations from 2010-vintage funds as well. Fifty nine percent of LPs expect emerging market private equity funds of this year’s vintage to generate higher returns than developed market funds of the same vintage.

“Investors are still increasing the proportion of their private equity commitments targeted at emerging markets. Why? Quite simply, because LPs expect emerging market funds to outperform developed market ones,” Erwin Roex, partner at Coller Capital, said in a statement.

Of all the emerging markets, China continues to be the most attractive investment destination, followed by Brazil and then India. However, other emerging Asian markets such as Vietnam, Indonesia and Thailand are poised to see the greatest expansion in commitments from current investors, according to the survey. 

The EMPEA/Coller Capital Emerging Markets Private Equity Survey reflects the views of 151 private equity investors from around the world.