EM PE Quarterly Review – Volume V, Issue 1

Viewpoint from Sarah Alexander

Emerging markets continue to feel the shockwaves of the global financial crisis. Net private capital flows are at their lowest level in six years; the World Trade Organization predicts a global drop in trade volume of 9% in 2009, the largest decline since WWII; exports are down 25%–45% in various markets; the strengthening dollar has increased import costs and reduced dollar-based returns; and, although it’s since recovered somewhat, the MSCI Emerging Markets index lost 54% of its value in 2008. These developments have investors questioning whether to maintain allocations to emerging market managers and pose challenges for GP portfolios across the globe.

The results of a just-released EMPEA/Coller Capital LP Survey suggest, however, that the private equity industry in the developing world will withstand the global shockwaves as LPs continue to see attractive investment opportunities in these markets (see the full results on EMPEA’s website). The record-breaking US$66 billion raised for EM PE in 2008 is unlikely to be replicated in 2009.

As Eric Johnson of Cambridge Associates writes in our feature guest article, LPs still maintain a long-term outlook on the asset class, but will be picking the highest quality GPs with strong track records. Based on Cambridge’s performance benchmark series, Eric provides an analysis of how emerging market managers’ performance over the past decade stands up to public market alternatives as well as PE in the West. He challenges the oft-quoted thesis that post-crisis vintages yield better performance, suggesting average performance of EM PE funds is underwhelming, but that top quartile managers continue to beat the benchmarks.

Risk assessments for PE in general, and emerging markets in particular, have risen, and corporate governance issues are paramount in the minds of LPs. Our article on Corporate Governance underscores how transparent, open and consistent communication with LPs about underlying company performance and outlook is critical in these times, as is vigilance in managing risk with respect to fraud.

The good news for our industry is that emerging markets are not strangers to economic crises, and there is a solid group of managers that have emerged from prior economic meltdowns with strong investor returns and new capital under management. The depth of the industry compared to just a decade ago is remarkable and provides a solid base for weathering the economic storm. Many emerging economies continue to grow, albeit at a slower rate, and the less frequent use of debt in transactions means companies are better poised to ride out the storm.

From May 12–13 in Washington, DC, we will once again serve as co-host with the IFC to the world’s largest global PE conference. We have lined up an extraordinary program to allow all of you to explore these and other industry challenges and opportunities with leading industry players, global economists and thought leaders. I hope to see you there.