GLOBAL - Emerging markets will capture an even greater share of investor allocations to private equity as limited partnerships (LPs) aggressively seek exposure to high growth markets, research suggests.
A survey by the Emerging Markets Private Equity Association (EMPEA) and Coller Capital found LPs expect the proportion of their PE allocations directed at emerging markets to increase from 11-15% today to 16-20% in two years' time.
It also found nearly three-quarters (73%) of LPs expect that 2011-vintage EM PE funds will outperform developed market funds of the same vintage, while more than half of LPs (54%) expect annual net returns from EM PE of 16% or more (compared with one-third of LPs who expect similar returns from their global PE portfolio).
LPs have the highest return expectations for Emerging Asia PE funds, with three-quarters (78%) expecting them to deliver annual net returns of 16% or more. However, Brazil is now seen as the most attractive market for GP dealmaking in the near term-pushing China into second place. Brazil will also gain the largest influx of new investors, with14% of LPs planning to begin investing there.
Meanwhile, the nascent Asian PE markets are now perceived to be as attractive as China, and will see increased investment from both current and new investors, with 36% of LPs expanding commitments and 12% beginning to invest.
Environmental, social and governance (ESG) considerations are also becoming increasingly important, with two thirds of LPs claiming ESG materially impacts their GP selection process for EM PE funds and 22% of them having investment mandates directly restricted by ESG issues.
"Institutional investors facing escalating liabilities within the next five to 10 years find the growth opportunities in emerging markets very compelling," said Sarah Alexander, president and CEO of EMPEA. "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 fact that such a large number of LPs are factoring ESG considerations into their manager selection decisions signals the link increasingly being drawn between manager focus on these issues at the portfolio company level and the ability to create value and generate stronger returns."
Coller Capital partner Erwin Roex added: "In reality, where competition is increasing in EM PE markets it tends to be concentrated within a handful of sectors or a particular tier of the market where deals are large enough to attract global funds. Investors recognize there are still plenty of opportunities for skilled managers to supply value-added capital and to create returns for LPs."
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