GLOBAL - Limited Partners (LPs) canvassed for the seventh annual EMPEA/Coller Capital Emerging Markets Private Equity Survey expect better returns from emerging markets (EM) than developed markets (DM) for the 2011 vintage.
They are also set to increase their new commitments to EM private equity, despite some signs concern is growing over entry valuations in certain markets.
The survey of 156 global private equity investors found 54% expecting annual returns of 16% or more from EM private equity over the next 3-5 years, and almost one in four anticipating returns above 20%.
Only one-third of LPs had similar expectations for their global private equity portfolios, and almost three-quarters expected 2011 vintage EM funds to outperform 2011 vintage DM funds.
The survey also found two-thirds of LPs that already invest planning to increase the nominal value of new commitments to EM private equity in 2011-12 compared with 2009-10.
The typical LP expects the proportion of its private equity allocation directed at EM to increase from 11-15% today to 16-20% in two years' time.
But there are concerns about entry valuations. Apart from political risk in the Russia/CIS market and a lack of established general partners (GPs) in sub-Saharan Africa, the factor that most LPs picked out as likely to deter investment was high entry valuations in China and India.
Valuations were also a concern in Brazil. LPs expect their GPs to face 'intense competition' for deals in China (73%), India (68%) and Brazil (46%).
Erwin Roex, a partner at Coller Capital, said: "Valuation is a concern, but it doesn't stop LPs putting their money into these markets.
"The main attractiveness is a combination of economic growth and consequently higher expected returns, which counterbalances the fact GPs are paying higher entry multiples for the deals they are doing.
"The companies that the good GPs buy should grow in-line with or ahead of GDP, which should feed through at the EBITDA level and therefore the multiples on exit."
Almost three-quarters of respondents (73%) planning to accelerate their new commitments to EM private equity cite the desire for exposure to high-growth markets as their primary motivation.
There are markets where GPs are expected to face much less competition: only 4% of respondents anticipate it to be intense' in Russia/CIS, for example.
Market perception appears to be important. Investors without exposure to emerging Asia tend to be slightly more optimistic about that region's outlook than those that are already invested, and yet investors without exposure to Russia/CIS tend to be much more pessimistic than those already committed there.
EMPEA director of research Jennifer Choi said: "The EBRD is very active in Russia, and it has enjoyed pretty strong returns from its Russia and CIS portfolio.
"A lot of LPs simply aren't aware of that yet. LPs haven't looked at Russia seriously for four or five years.
"But a lot of investor education only happens once you have high-calibre fund managers in the market, actively raising funds - and a number of funds are raising capital right now.
"What I expect to see over the next year or so is an increase in the number of LPs actively considering Russia, just because they are going to start hearing these pitches from veteran managers."
Of the 156 respondents to the 2011 survey, 33% were based in Europe, 14% were pension funds, 11% government-owned organisations and 6% endowments and foundations.