Study: Private Equity Investors Lured by Higher Returns in Emerging Markets

(April 19, 2010) — According to a survey published today, more than half of private equity investors plan to invest in emerging markets.

Buyout shops are increasingly seeing emerging market investments, particularly in China, India and Brazil, outperforming European and US markets. That attraction to emerging markets is explained by China’s stronger-than-expected annual growth of 11.9% in the first quarter. Similarly, India is expected to grow 8.5% in the current fiscal year.

“Investors are clearly drawn to markets with strong underlying growth rates, which trumps leverage in driving returns,” said Sarah Alexander, president and CEO of EMPEA, in the release. “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 minimize investor risk.”

The study by private equity firm Coller Capital and the Emerging Markets Private Equity Association (EMPEA) found that 57% of investors plan to increase allocations to emerging markets over the next two years. A fifth of investors surveyed expect emerging markets’ net returns to exceed 25%.

Only 11% of investors intend to slow their new commitments to private equity in emerging markets, compared with 38% in 2009. Those investors cite cash constraints as the primary obstacle to maintaining commitments, followed by an over-allocation to private equity, the survey showed.

Following China, Brazil and India, emerging Asian markets in Vietnam, Indonesia and Thailand are expected to see the greatest expansion of investments. “Sophisticated investors who have built their exposure in China and India are now looking for the next frontier and see great investment opportunities in less penetrated markets,” said Alexander in the release, adding that Brazil continues to lead the emerging markets in terms of attracting new investors.