A convenient truth

Private equity firms are venturing into new markets at a dizzying pace as they hunt for new locales to deploy those swelling war chests. Certainly there’s an appetite for geographic expansion on the part of general partners, but how ready are these locales for them?
Since last year, Apax Partners has attempted to answer this question by publishing an annual ranking of the quality of a country’s environment for private equity activity.
This year’s ranking held few surprises, with the US, the UK and Canada topping the list.
Rankings were calculated by taking into account several factors: overall environment for private enterprise, financing environment, market opportunities, legal and policy environment, entrepreneurial environment, and for the first time, risk. Apax used data primarily from the Economist Intelligence Unit to score the firms in each of these categories.
Risks that affected a country’s score included risks pertaining to currency, the banking sector, sovereignty, political climate, and overall economic risk. Adding this cumulative risk factor buoyed several European countries from last year’s ranking, but on average, they still fared poorly.
Anglo-Saxon markets fared particularly well using this criteria.
Relatively minor markets such as Ireland came in at eight, and New Zealand, at 11, offering a better environment than Germany at 12, France at 15, and Italy standing at 25 out of the 33 countries ranked. The inclusion of the risk factor pushed Turkey down five places since last year to bottom out the list, though Hungary wasn’t far behind at 27. Another surprise was that South Korea, despite all the hand-wringing over the Lone Star litigation, placed at 19, above Japan at 21, and China, which landed at 32.
As part of the ranking report, Apax also provided a separate ranking for each country according to each factor used. Australia topped the chart for overall environment for private enterprise, while countries like Belgium and Netherlands topped the chart for the least amount of risk, but fell to 14 and 23, respectively, for entrepreneurial environment.
The scores on the chart below are z-scores, which is a statistical device to measure the distance from the mean average. A country with a positive score is above the mean; while a negative score is below the mean. So regardless of the results of the regulatory crackdown in the US and the UK, they may still top the list next year, but that may mean they’re the friendliest markets in a far less friendly world.