Private equity investors are increasingly looking at emerging markets for investments as the balance of economic power is gradually shifting towards these markets.
Between 2005 and 2009, the emerging markets? share of the total number of private-equity deals more than doubled, from 12% to 30%, and the share of total deal value nearly tripled, from 8% in 2005 to 21%, in 2009.
These numbers are from a Boston Consulting Group report, which says that emerging markets are not only generating more returns than their developed counterparts but are more resilient to the current financial crisis as they are less dependent on leverage than in developed markets. Moreover, emerging markets have a higher long-term GDP growth rate and the gap between the GDP growth rate for emerging markets and developed markets has widened from 1.63 percentage points between 1990 to 1999 to 4.45 percentage points between 2000 to 2009. The gap is expected to remain large at 4.13 percentage points from 2010 to 2014, which will sustain the pulling power of emerging markets for private equity firms.
Even returns from emerging markets have improved significantly. Before 1990s, the portfolio was producing an average return of around 4%, which rose to 5.3% during 1990 to 1999 and rose a whopping 17% during 2000 to 2006. In fact, the gap between private equity?s returns in emerging markets and developed markets have been narrowing since 2000, with returns from emerging markets pulling ahead in recent years by a significant margin. About 26 of the world?s 30 largest private-equity firms have invested in emerging markets in the last one decade and more than half of these firms now have local offices in emerging markets.
Going ahead, the report, quoting an Emerging Markets Private Equity Association survey, says 67% of the private equity players plan to increase their exposure to emerging markets in 2011. Investors are looking at sectors like telecommunications, healthcare and materials in the emerging markets for growth.