The head of a major European private equity firm is fond of calling US private equity a ?high volume, low margin? business. Extending this metaphor, is emerging markets private equity is a low volume, high margin business? Potentially.
Such is the contrast between the world's most efficient private equity market and some of the least. With inefficiency, non-transparency, uncertainty and fear comes opportunity for great returns, but also total wipeouts. It is on the later contingency that many LPs focus when considering a commitment to an emerging markets private equity fund.
But according to its advocates, the fear factor of emerging markets is both higher than warranted and capable of being eased through local expertise and due diligence. In the February issue of Private Equity Manager, we look at important regulatory aspects of investing in emerging markets, among them Russia, Poland, South Korea, Brazil, China and India (see p. 16). We also look at best practices that the best emerging markets GPs adhere to.
Emerging markets have until recent years been viewed with great suspicion by LPs. But now some of the most successful investment groups, like KKRand Blackstone, are embracing large swaths of the world once deemed impenetrable by outsiders. Western private equity firms know they must expand their frontiers to find opportunities that will yield superior returns, and entering the smalldeal frontier is not an option (p. 26).
If a supportive back office and thinking strategically on regulatory risk are important in the US and Europe, these matters are essential for firms engaging in the complexities of cross-border investing, particularly when the investments are taking place in countries that are still emerging from controlled or collapsed economies.
Make no mistake – the smart money is eyeing markets not already swarmed by private equity capital. Firms that fail to structure themselves to act globally are failing to compete.
Take, for example, the views of Sam Zell, the famed Chicago real estate investor who is interviewed in this month's issue of sister publication Private Equity Real Estate. Zell's number one destination for investment opportunity? Libya. It has 700 kilometers of empty Mediterranean coastline and no investors. Rule of law? It's emerging.
Enjoy the issue,