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LPs to shift private equity allocations from developed to emerging markets

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GLOBAL - Global limited partners (LPs) including pension funds are set to increase commitments to emerging market private equity over the coming 24 months, according to a survey by the Emerging Markets Private Equity Association (EMPEA).

EMPEA said three-quarters of the LPs that responded to its survey were planning to increase their exposure to emerging markets, while only a quarter were looking to expand investments in developed markets.

More than 70% of respondents said they expected 2011-vintage funds to deliver net returns of at least 16%. By comparison, only 26% expected similarly strong performance from developed market private equity funds.

Brian Lim, partner at Pantheon Ventures, said: "The picture has changed from over a year ago -sentiments have changed and the clouds are lifting.

"Investors in these markets are feeling more positive from the bottom-up fundamentals in their portfolios because the health of the underlying companies have picked up."

According to EMPEA's survey, more than half of LPs expect emerging markets to account for 16% or more of their total private equity allocation over the next two years compared with 2004, when 61% of LPs had no allocation directed toward emerging market private equity.

Sarah Alexander, chief executive at EMPEA, said: "This year's LP survey responses indicate that investors are continuing to shift capital from developed to developing countries in search of returns, which is consistent with EMPEA's market data, and we expect this shift to continue for the foreseeable future."

She added: "While China and Brazil are still very attractive, LPs are recognising the opportunities in other less-penetrated markets, such as Indonesia, Nigeria and Colombia.

"Deployment constraints are preventing capital from flowing in fast enough to catch up with investor interest - in short, demand is outstripping supply."

According to the report, Latin America ex Brazil has edged out Brazil itself as the most attractive destination for deal making, with China and Southeast Asia following close behind.

In addition, countries such as Mexico, Colombia, Peru, South Africa, Nigeria, Kenya, Ghana, Indonesia, Vietnam, Malaysia and Thailand are all set to see increased commitments coming from LPs in the coming years.

For more on emerging market private equity, see the May issue of IPE magazine.

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