Investors with capital currently tied up in emerging markets* may be concerned about current economic uncertainty and instability facing the BRICs and other industrializing economies. Despite this, Preqin’s Investor Intelligence database currently tracks 1,730 institutional investors that are targeting private equity vehicles focused on emerging markets, with aggregate assets under management (AUM) of just under $45tn. These investors have an average current allocation to private equity of 10.7% of total assets, with an average target allocation of 11.7%.
Buyout (72%), venture capital (69%) and growth (59%) funds are the most common fund strategies targeted by institutional investors with a preference for emerging markets. Control-oriented investments, such as buyouts, have become much more commonplace in recent years, particularly especially in more advanced emerging economies like China. This is likely due to the liberalization of domestic markets allowing for increased levels of foreign ownership, as well as growing cross-border activity leading to a more buoyant exit climate for private equity firms. Growth funds also have a large presence in newer emerging markets, given that many businesses operating in these regions are family owned and are therefore more unwilling to sell majority stakes to foreign investors. Despite these trends, the largest private equity vehicle currently fundraising targeting emerging markets is the Kerogen Energy Fund, a natural resources fund, with a target size of $1.5bn.
The most numerous LPs that target emerging markets-focused funds are foundations (17%), endowments (14%), and public and private sector pension funds (14% each respectively), as seen in the above chart. The majority of emerging markets-focused investor capital is supplied by North America-based investors (66%), with smaller portions coming from Europe (20%), Asia (6%) and Rest of World (11%).
While institutional investors may be wary of broad emerging market exposure given the current climate, they may seek exposure to specific countries and sectors that still offer promising growth prospects. One notable example is India, which has benefited from the rout of the commodities market due to its status as a net energy and commodity importer. Strong fundamentals including a growing middle class, improving infrastructure, more liquid markets, and a long-term shift from an export-driven economy towards consumption-driven growth, still make emerging markets a viable investment destination.
* Emerging Markets as defined by Preqin: Argentina, Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Israel, Malaysia, Mexico, Morocco, Myanmar, Pakistan, Peru, Philippines, Poland, Romania, Russia, South Africa, South Korea, Taiwan, Thailand, Turkey, United Arab Emirates.