Premier Destination for Emerging Market PE Investors: Brazil

(April 18, 2011) — Brazil ranks above China as the premier emerging market destination for private equity investors in the next 12 months, according to a recent survey.

The study — by the Emerging Markets Private Equity Association and London and New York-based Coller Capital — shows that China trails behind Brazil, with other emerging Asian countries following.

“Institutional investors facing escalating liabilities within the next 5-10 years find the growth opportunities in emerging markets very compelling,” said Sarah Alexander, President and CEO of EMPEA, in a statement. “While China and India still top LP wish-lists, investors are also shifting their gazes to the less penetrated markets of Latin America and Southeast Asia.”

The study found that 73% of private equity investors expect general partners to experience intense competition in China over the next year. Furthermore, limited partners expect the proportion of their private equity allocations directed at emerging markets to increase from 11-15% today to 16-20% in two years. Another highlight of the report: Environmental, social and governance (ESG) considerations are becoming more important, with two-thirds of LPs asserting that ESG materially impacts their GP selection process for emerging market private equity funds and 22% of them having investment mandates directly restricted by ESG issues.

With regards to investing in the Middle East and North Africa (MENA) and Sub-Saharan Africa, political risk is seen as a major deterrent. For investors in India, China and Brazil, political risk is viewed as the “biggest hurdle” for new investors, the survey said.

The study — which consisted of responses from 156 institutional investors in North America, western Europe, central and eastern Europe, Asia, Africa, the Middle East and Latin America — contrasts with an earlier report by State Street Global Advisors’ (SSgA), which showed that since January 1997, smaller markets such as Chile, Peru and Hungary outperformed BRIC countries (Brazil, Russia, India and China) within the emerging market world.

“Investors, while maintaining a core exposure to BRIC countries, should not close their eyes to other growth areas in the emerging world,” Chris Laine, portfolio manager for active emerging market equities at SSgA, said in the report. “Many of the smaller emerging and frontier economies have quietly been making investor-friendly reforms and deserve the attention of international investors,” he said, referring to the smaller markets of Columbia, Turkey, Chile, the Czech Republic, Egypt, Hungary, Israel, Peru, Poland, Thailand and the Philippines. “Many of these economies offer value, growth and solid profitability,” he added.