The funds raised for emerging markets private equity funds tripled last year. In 2005, emerging markets managers raised $21.2bn, up from $6.1bn in 2004 and $3.4bn in 2003. And the outlook for the sector remains positive. The Emerging Markets Private Equity Association’s second LP survey reveals that 65% of respondents expect to increase their commitments to emerging markets over the next five years. Last year, just 45% of respondents reported an intention to increase their exposure.
The two factors considered most likely to encourage increasing levels of investment are reported to be greater confidence in the accounting and governance practices of emerging markets companies and greater certainty that emerging markets governments will implement sound economic policies.
“If anything the strength [of companies] is improving and is expected to improve in the coming months,” Bill Watson, chief investment officer at Societe Generale Asset Management told Emerging Markets. His main gripe: “too many people are becoming aware of our little secret.
Watson is building a €150 million fund to invest in central and eastern Europe. He’s actively targeting retail and other consumer businesses in Poland and Romania, manufacturing concerns in the Czech Republic and Hungary and keeping a watchful eye on progress in the Serbian economy.
However, Alistair Mackintosh, chief investment officer at Actis, a leading private equity investor in emerging markets with more than $3bn under management, believes that the surge of money into funds like his will bring new challenges for the industry itself. Referencing the negative sentiment surrounding Lone Star’s successful exit from Korea Exchange Bank, Mackintosh notes: “We are not seen as business developers, but business raiders – cutting costs, cutting jobs and making money only for ourselves.” He adds, “The situation in Korea illustrates how quickly the tide can turn against us. After the Asian meltdown in the late 1990s, the international private equity community was welcomed for the contribution it could make to rebuilding corporates and industry. Now we are in danger of being seen as parasites – and that is not a position that we want to be in.”
Mackintosh told delegates at the EMPEA/IFC 8th annual conference that the industry has to do a better job of explaining to policy-makers in emerging markets the benefits it can bring to their economies:
“We have to show the sceptics that private equity is not about milking investee companies for profit. It’s about business transformation. It is not about draining emerging market economies of their best assets. It’s about using our capital to help develop their economies.
“We have to show that we are responsible corporate citizens, who care about employees, the environment, health and safety issues. If we want to be successful for our investors; if we want to be seen as contributors to the emerging markets rather than locusts preying on their economies, we have to focus on business improvement and business transformation. We have to show that capital, used correctly, really does make a difference to emerging markets businesses.”