by The Financial Globe-Trotter Comments (32)

Private Equity in Emerging Markets: The Fastest Way to 26%+ Returns Even as the Rest of the World is Dying?

Private Equity in Emerging MarketsPop quiz: how could you have achieved a 26% return in 2010 or an 11% annualized return over the past 10 years, from 2000 – 2010? By investing in PE & VC in emerging markets!

Sure, you could have made a lot more or a lot less, but those are the pooled end-to-end returns according to the Emerging Markets PE Association (EMPEA).

Unfortunately for you, it’s not as simple as just finding a mysterious “emerging markets PE fund” and investing your life savings there – unless you’re fine losing your entire net worth in the process.

You can earn a lot if you invest the right way, but emerging markets are trickier to get a handle on than the traditional, developed markets of the US and Western Europe.

Here’s what you’ll need to know to invest successfully:

  • Emerging markets: What they are and why we hear about them all the time.
  • Why PE firms are racing to emerging markets: What makes them so attractive?
  • How PE in emerging markets is different from PE in developed markets.
  • Where the money is going – Hot markets and key industries.
  • Risks – Yes, emerging markets may not be able to generate incredible returns forever…

Emerging Markets … What Are They Exactly?

So you probably want to hear all about the hot markets, the different strategies and the outstanding returns, but first we need to understand what emerging markets are and what makes them attractive to investors.

Emerging Markets” is one of those buzzwords we hear all the time, but what really makes a market “emerging”? Different people have different opinions on the question and there are many different classifications such as the FTSE List, the Dow Jones List, MSCI List, the S&P List, etc.

Got Acronyms?

For the fastest growing and most promising emerging markets, we use several acronyms. Let’s have a look at a few:

  • The BRICs: By far the most famous acronym of them all. Invented by Goldman Sachs, it stands for Brazil, Russia, India and China, which many believe are the most dynamic and promising emerging markets. These four countries represent over 40% of the world’s population and 25% of the total land. As we’ll see later, this is where most PE activity is taking place.
  • The Next Eleven: Bangladesh, Egypt, Indonesia, Iran, Mexico, Nigeria, Pakistan, the Philippines, South Korea, Turkey, and Vietnam.
  • The CIVETS:  Colombia, Indonesia, Vietnam, Egypt, Turkey, South Africa.

Why Are PE Firms Racing to Invest in Emerging Markets?

The total private equity investment in emerging markets in 2010 reached USD $28.8 billion (13% of the global total) compared to only USD $2.0 billion in 2002 (2.5% of the global total).

There’s a real race going on, with tons of competition for the best deals in the hottest private equity markets: China, Brazil and India.

In short, PE investors are flocking to emerging markets because of… MONEY!

As of 2010, according to the Emerging Markets Private Equity Association (EMPEA), the annualized returns (pooled end-to-end) for emerging markets PE and VC stood at 26.6% (1 year), 7.3% (3 years), 15.9% (5 years) and 11% (10 years).

That compares to… much lower numbers overall in the US:

  • 1-Year Returns (PE, VC): 19.9%; 13.5%
  • 3-Year Returns (PE, VC): 2.8%; (0.3%)
  • 5-Year Returns (PE, VC): 9.5%; 5.7%
  • 10-Year Returns (PE, VC): 9.7%; (2.0%)

These “developed market” numbers seem quite pathetic in comparison – but if we compared them against the numbers for emerging markets in Asia only, they would look even worse.

Got Growth?

More specifically, emerging markets are attractive to investors because of the incredible economic growth and development taking place there, which should translate into higher returns.

Because emerging countries are in transition, their economy usually grows 2-3 times faster than developed economies.

For example, China’s GDP has increased by on average 10% per year over the past 30 years.

Emerging markets typically undergo economic and political reforms to achieve greater liberalization, privatization and openness to international trade & foreign investment, which also supports that growth.

What that translates into for investors: you don’t have to be a rock-star business owner in these markets to do well.

You just need to sell something to the rapidly growing middle class and take advantage of the rapid growth there, and you’ll do well – just ask Jim Breyer.

Are Emerging Markets Taking Over the World?

Emerging markets now play a key role in the world and drive global growth. Twenty years ago, emerging markets represented 20% of the global GDP;  today, they represent 40%.

In addition, emerging markets are home to 80% of the world’s population, account for 80% of mobile phone subscriptions and 46% of retail sales, and they consume over 50% of most major commodities.

So this is why top VC firms such as Accel Partners now have more Partners in China than in the US – emerging markets have the majority of the world’s population and will account for the majority of its growth going forward.

How is PE in Emerging Markets Different?

Because PE investors in emerging markets are looking for growth, most of the funds are growth capital funds – in other words, they don’t focus as much on “financial engineering” (adding leverage to deals to attain high returns) but instead focus on finding great companies that need capital to expand.

Infrastructure funds are also common, especially in India. Buyout funds do exists, but they are less prevalent than in developed markets and you rarely see highly leveraged buyouts.

For this reason, funds and deals tend to be smaller than in developed markets.

Deals are done on the basis of topline revenue growth, improved efficiency, and attractive industries, not on leverage and financial engineering.

Plenty of PE Investment Opportunities

Emerging markets have a large and young population, with an increasing number joining the middle class every year.

The income level increases drive savings and consumption, which creates great opportunities in the consumer and financial services industries.

In terms of infrastructure, several emerging countries, including Brazil and India, have insufficient or crumbling infrastructure which is a weakness from the country’s perspective – but an opportunity from a PE investor’s perspective.

Several emerging countries, including China and India, are manufacturing countries and their economy relies heavily on exports due to the low cost and abundance of labor force. This creates investment opportunities in the manufacturing sector.

With communications & technology, if you look at the internet penetration rate, for example, you can see that it has increased in most emerging markets, but is still extremely low as a proportion of the total population – which also creates great opportunities for investors.

Also, several emerging markets (e.g. South Africa, Russia, China and Brazil) are resource-rich, which also attracts PE investment.

Hot and Bubbly – The Most SoughtAfter Markets

In 2010, $28.8 billion was invested in emerging markets in over 800 deals. But where is all that money going?

Here’s the full breakdown for 2010 (as a % of total PE investment in emerging markets):

  • Emerging Asia (including China and India): 64%
  • Latin America & Caribbean (including Brazil): 23%
  • Central and Eastern Europe & Commonwealth of Independent States (CEE & CIS): 8%
  • Middle-East North Africa (MENA): 3%
  • Sub-Saharan Africa: 2%

Approximately 70% of the $28.8 billion went to the top-three markets: China ($9.2B), India ($6.2B), and Brazil ($4.6B).

In addition to Brazil, India and China, a large proportion of the growth comes from emerging Asia (excluding India and China) and Latin America (excluding Brazil).

Interestingly, Russia has not yet been able to attract investors and accounts for only around 5% of total PE investment in emerging markets because of the country’s less attractive risk/return profile.

As a matter of fact, GDP growth is low in Russia compared to other emerging countries (4% in 2010, -7.8% in 2009, 5.2% in 2008), and the business environment is not very attractive due to corruption, bureaucracy and weak rule of law.

Where the Money is Going – Leading Industries

Overall, the top 4 industries for PE investment in emerging markets in 2010 were Industrials & Manufacturing (16% of total deals), Technology (15%), Consumer (12%) and Energy & Natural Resources (12%).

Of course, the attractiveness of industries depends on the country you’re in. Here are the top industries for the top markets in 2010:

  • LATAM (ex- Brazil): Energy & Natural Resources, Agribusiness, Banking & Financial Services.
  • Brazil: Energy and Natural Resources, Industrial & Manufacturing, Infrastructure.
  • India: Industrials & Manufacturing, Technology, Banking & Financial Services, Services, Infrastructure.
  • Asia (exChina & India): Technology, Energy & Resources, Industrial & Manufacturing, Consumer.
  • China: Industrial & Manufacturing, Consumer, Technology.

Overall, manufacturing investments are the most common deal type in China, India, and Central & Eastern Europe.

In the Middle East, Russia and Asia (ex- China & India), technology deals account for the largest proportion of investments – and even in China and India, technology deals are not far behind manufacturing.

Finally, energy & natural resources rank first in Latin America, including Brazil, which makes sense given the richness of resources in the region.

See: more on Latin America investment banking.

Wait, Aren’t There Any Risks?

Higher potential returns in emerging markets also means higher risk, but many people forget there is no such thing as a free lunch and only see the bright side.

Returns for PE in emerging markets before the early 2000s were not nearly as good as they currently are, and the future is anything but certain.

Political instability is always a concern in emerging markets. In the most extreme case, your portfolio company could be expropriated or nationalized.

A less extreme case would involve conflicts, manifestations, coup d’états, etc. which still make it a much harder environment to operate in.

In the short to medium term, most emerging countries face the risk of overheating and inflation, which affects corporate earnings and lowers real returns.

If you invest in a country where the inflation rate is 10% and your investment generates a 15% annual return, your real return is only 5% – and inflation rates of 5 to 10% or more are the norm in emerging markets.

So those returns above look a lot less impressive once you adjust them for inflation across the board.

Also, entry valuations are a key concern.  Because of high growth assumptions, optimism and high competition for good deals, entry valuations in PE are very high in some emerging markets – particularly in China and India, and to a lesser extent in Brazil.

The key concern is whether emerging markets can sustain their current level of growth: For how long can China grow at 10% per year?

Currency risk is another factor sometimes overlooked by investors, but the devaluation of a local currency can easily wipe out an investor’s return in USD/EUR/GBP terms.

Finally, keep in mind that PE investors are more vulnerable because their investment is illiquid since the life of the fund is usually 10 years. So if, as an LP, you invest in a PE fund in a specific country and a terrible crisis occurs, you cannot exit like someone investing in the stock market could.

To Be Continued

You have now learned the basics of PE in emerging markets, and why some of the mind-boggling returns you always hear about aren’t so impressive once you adjust them for inflation, risk, and other factors.

Stay tuned for the next article on “emerging markets PE,” where we’ll have the chance to chat with a PE Portfolio Manager that has close to 10 years of experience working in Latin American private equity.

Source of Figures: EMPEA, The Economist.

About the Author

The Financial Globe-Trotter started investing at age 11, after drawing inspiration from It's a Wonderful Life. She's from Canada and has worked in investment banking and private equity around the world.

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  1. I’ve been looking at firms out of the Middle East/Africa region. I’m curious why the majority of firms advertise themselves as buyout firms even though such a high number of their deals are more similar to growth equity? Is the limited number of growth equity funds active in the region because of issues exiting positions?

    1. Marketing and fundraising… “buyout fund” sounds more appealing than “growth equity.” See the recent article on PE in the Middle East.

  2. Hi! Great article. I have just started my interest in Private Equity and reading more about it these days. I came across this short article which others might find interesting.

    Question though, any links as to where I can find out more about PE firms in the Philippines?

    1. M&I - Nicole

      If you have access to PE databases you should have a list of PE firms in Philippines:

      Otherwise, check out

      This article may also help you, though it is more about PE in general:

  3. When was this post written? There’s no date. Is there an update if it’s old?

    1. M&I - Nicole

      End of 2011 / early 2012

  4. Bbbanker

    Hi, I am an associate with a bulge bracket firm (gs/ms/jpm) in one of the emerging markets. I am an Mba from asia, I now have an offer to join a growth pe fund (think summit/ta/sequoia). What is the kind of offer I should expect? Is around usd 200-250k all in ok?

    1. M&I - Nicole

      Congrats! I think readers are better positioned to answer your question…

  5. Hi, I am brazilian and I was looking for internships in the emerging countries area. Which private equity companies do you suggest me to apply?

    Thank a lo.

    1. M&I - Nicole

      I’m not quite sure of your background so I can’t really say. I’d suggest you to narrow down your country of focus and target PE companies in that area.

  6. Very great article. Will an article discussing about markets in South East Asia, particularly Indonesia come out anytime soon? haha thanks

    1. M&I - Nicole

      I will revert your thoughts to my team

  7. Hey guys, just need some quick advice (unrelated to the article if that’s OK). I work at a mid sized investment bank in M&A. I have been here for over a year. While I enjoy some of the work and the pay is obviously great, I want to move to a job with a significantly better lifestyle. Think 9 to 7 every day, maybe a little (but not a lot!) more if its busy and rare weekend work. My question, is there a job out there that’s similar to investment banking (I don’t mind the work too much – the valuation work can be interesting and I like the idea of building relationships and networking with business leaders as you get more senior) but that offers a much better lifestyle? I don’t mind the pay being lower, its the lifestyle I am after. I need time outside work to pursue my own personal projects and do my own thing (and maybe have fun once in a while too…) This is important. PE doesn’t sound too appealing as I have heard the hours can be just as bad even at small places. I don’t want to take the chance. Hedge funds too high risk and too similar to being in markets. Would appreciate any insight. Thanks.

    1. M&I - Nicole

      You can look at corporate development –
      Private banking might be interesting too

  8. I published a paper on pricing a derivative. Should I put this on my resume?

    1. M&I - Nicole

      Yes, if you are applying for “derivative”-related roles

      1. What about IB?

        1. M&I - Nicole

          I don’t think it will help much.

  9. Great article once again Brian. I am such a big fan of the whole site and I’ve literally read every article on this site.

    I need couple advices on my situation. I will be graduating in next fall semester so I am graduating little early since I took extra courses (+1 or 2 in each semester) so I can graduate early. Then I don’t have any banking internships to put in my resume for the future. Do banks offer internships for students who will be graduating in the fall instead of winter? (since they recruit around december that’s about the time I graudate)

    Thanks a lot!

    1. M&I - Nicole

      I think they do though I’d suggest you to speak to respective banks’ HR department to understand their procedures etc

  10. Great article and insight on emerging markets and investing options in emerging markets,investing or acquiring in Emerging markets can lead to long-term growth and a competitive advantage when the global economy recovers,companies that are in a position to capitalize on the current environment can enjoy rewarding M&A opportunities .Just read an informative whitepaper,Opportunistic M&A in emerging markets on due diligence and integration techniques in emerging market M&A @

    1. Thanks for sharing, interesting read

  11. Great article! Would be better if you could provide some insights into PE recruiting in emerging markets and frontier markets (e.g. Vietnam, Cambodia, Laos)!

    1. More material on recruiting and on-the-job is coming up. Not sure about SE Asia specifically but there will be a couple interviews on Latin America soon.

  12. Most of the leading US PEs have offices in India and China – Blackstone, KKR, Apollo, Carlyle, TPG, Bain Capital, Apax, Warburg Pincus, Providence to name a few.
    But most of these PEs have a separate growth fund dedicated to emerging Markets and big ticket acquisitions are funded out of their global fund. Carlyle, for example, has 2 different teams sitting out of Bombay – one for growth opportunities and another one focused on Buy-outs

    1. Thanks for adding that, interesting to note

  13. Really cool article. Looking forward to the next one!

  14. Thanks for the article! I’ve been interested in this for a while now. Which US PE firms are the best at emerging markets PE and as an analyst, is it possible to be working on specifically deals in those markets or are you more of a generalist?

    1. Thanks! Not sure offhand which US PE firms focus on it, but in most cases private equity is a hyper-local business, especially in emerging markets, so many US PE firms have not seen too much success in these places. See: for more on that.

      VC firms have fared a bit better (Accel being one of the better examples) because the startup market is extremely under-served in many countries.

    2. Check out and their members section. Not all the members will actually be investing in the LatAm markets, but a few will.

    3. M&I - Nicole

      I think it depends on which markets you are referring to. Many top global funds like KKR are strongly positioned in emerging markets. In China, there are local PE funds which only invest in Chinese companies. Work-wise, I’d say it depends on the fund and your team.

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