The allure of portfolio diversification, exciting levels of GDP growth and the prospect of attractive returns coinciding with the stagnation of developed markets have historically attracted private equity investors to seek new opportunities in emerging markets. Furthermore, with many LPs in developed markets concerned about allocating capital to illiquid investments, emerging markets-based investors are becoming an increasingly important source of capital for managers looking to achieve a successful fundraise.
Preqin's Investor Intelligence service tracks 522 active emerging market-based LPs, with the largest proportions based in China and South Korea (25% and 14% respectively). Preqin’s data also illustrates the structural difference between emerging and developed markets; it shows that the make-up of private equity investors among emerging markets is not wholly consistent with the composition of the overall limited partner universe, which is led by foundations, pension funds and endowment plans, in terms of most prominent private equity investor types by number. In contrast, corporate investors account for the largest proportion of emerging market-based investors (14%), followed by government agencies (12%) and private sector pension funds (11%).
Institutional investors based in emerging markets evidently have a strong preference for private equity funds targeting the economic region, with 72% having either previously invested in emerging markets-focused vehicles or have expressed a preference for doing so. LPs within emerging markets do seem less inclined to allocate capital outside their geographic region. This is conveyed most poignantly in Asia where a vast majority of LPs (77%) are considering funds targeting their own region, whereas less than a quarter will consider investing outside of Asia. An example of this is New China Life Insurance which will target buyout and growth funds in the Asia-Pacific region over the coming year.
Eighty-seven emerging markets-based investors indicated to Preqin that they will be actively targeting or considering allocating capital to the private equity asset class within the next 12 months. Emerging markets-based LPs looking to make commitments to private equity vehicles in the next 12 months are also open to a range of fund types, with 68% targeting buyout funds, 52% looking to growth funds and 51% venture capital funds.
Emerging market-based LPs, although representing a relatively small proportion in the sizable private equity industry, have great potential to provide GPs with alternative streams in raising capital. As economic market conditions in different regions fluctuate and the LP community grows in sophistication, the role of emerging market-based investors will evolve, rising in prominence in GP fundraising efforts, and playing a key part in bringing wider benefits to the economic region itself.