The real opportunities for emerging market private equity investors lie in the less popular markets, but those markets are precisely the ones that are most likely to get hit hard when developed economies slow. That’s the view of David Rubenstein, co-founder and managing director of the Carlyle Group.
Rubenstein, talking to delegates at the IFC/EMPEA’s private equity conference in Washington DC cautioned that while the current environment is supportive, returns are robust and private equity is seen as a relatively safe investment, the markets will – inevitably – stutter at some point. When they do, it is the second tier emerging markets that are likely to suffer.
Says Rubenstein: “The real test will come when the western economies retract and capital availability is reduced. When that happens, honestly, some emerging markets will return to their former status of disfavour among private equity investors.”
Rubenstein believes that there is a set of emerging markets that should now be classed as ‘emerged’ and that these economies – the BRIC countries plus Korea, Taiwan and South Africa – will continue to receive private equity inflows even in difficult markets.
According to Rubenstein, the characteristics that those markets share are as follows: governments that are generally favourable to private equity investing; private equity firms already operate successfully there; GDP of over $500 billion; public market exits are readily available; market capitalisations of more than $200 billion and debt is readily available locally to support transactions.
Rubenstein tagged another 15 economies as likely to graduate from ‘emerging’ to ‘emerged’ over the next several years. Those included: Czech, Chile, Hungary, Nigeria, UAE, Kuwait, Jordan, Turkey, Thailand, Argentina, Poland, Egypt and Malaysia.
But he also pointed out that the greatest opportunities were likely to be found in Africa (ex SA), the Middle East, smaller SE Asian economies and LA (ex Brazil) and that declines in those markets should be seen as buying opportunities.
Says Rubenstein: “Money should really rush in and not out. It will be a once in a lifetime opportunity for private equity investors in the true emerging markets.”
“The emerging market of the 19th century was the US. The emerging market of the 20th century was Japan. In this century, the emerging market is China. China will become the dominant economic force in the world. By the end of the year, we will have $1 billion of equity capital in China. The land rush that you see in China is recognition that the opportunities there are fabulous.” But, he said: “The real opportunities are in countries where the hotel rooms aren’t yet filled and which aren’t as easy to get to.”