Private equity (PE) has invested more than US$36.5 billion in emerging and developing markets over the past decade. However just three countries, China, India and Brazil, have accounted for two thirds of its cross-border deals (64%) and financial commitments (63%) according to new research by international law firm Freshfields Bruckhaus Deringer.
The research offers fresh insight into PE’s high-growth markets investment approach and how it differs to corporates’ investment strategies. Over the same period, corporates completed four in every 10 of their deals in the same three markets, committing 42% of their overall spend.
"Comparing investment patterns in emerging and developing markets over the past decade shows a clear propensity for PE to focus on just a handful of economies, primarily China, India and Brazil, and to a lesser extent Mexico and Turkey," says David Higgins, head of Freshfields’ Global Financial Investors Group. "Where deals were done in other jurisdictions they tended to be comparatively small."
Corporate M&A in emerging and developing economies on the other hand has undoubtedly been broader in reach. All four BRIC economies dominate with China and Brazil leading, followed by Russia, which to date has not been a particular focus for PE, and India. Sizeable investments have also been seen in Turkey, South Africa, Mexico, Chile and Malaysia among others.
Emerging markets have historically been home to fewer high-value assets, riskier investments and less straightforward exit routes, all reasons that help explain why PE have been less active across a wider spectrum of frontier markets than corporates.
"However, as markets have matured so have the opportunities for larger and more sophisticated deals, leading to a ramping up in focus on other emerging and developing markets," says Higgins.
Despite Private Equity’s recent propensity for focusing on China, India and Brazil, the industry’s investment reach appears to be broadening.
"As growth in many of the original BRICs has started to slow a little, and as PE continues to chase strong investment returns in emerging markets, we are seeing a gradual shift in geographic interest, specifically towards Africa, Indonesia and Vietnam," says Higgins. "Already we’ve seen some strong activity in these markets but the trend is set to grow substantially."
PE investments in emerging and developing markets over the past decade have focused on financial services companies (41% of investments), followed by retail (16%), high technology (11%) and telecoms (10%).