CRISIL Global Research & Analytics (GR&A) believes private equity investment in emerging markets is no longer a simple play on high economic growth through beta and leverage. At the 7th Annual SuperReturn US 2014 conference held in Boston recently, CRISIL GR&A said beta-driven prospects appear restricted to relatively newer regions such as MENA and Sub-Saharan Africa. With private equity firms relying less on leverage, strong local market knowledge, a focus on domestic-consumption-driven sectors, and investing in established companies (rather than on early-stage companies) have become critical to their success in emerging markets.
As a private equity investment theme, emerging markets are maturing, and certain blocs, such as BRIC, are highly competitive, making fund-raising, deal-making and exits challenging. Yet, given their high growth potential, they continue to offer significant opportunities, provided that the general partners exploit inefficiencies in the environment to generate alpha. The CRISIL GR&A analysis also showed smaller funds and deals are becoming the order of the day. With high levels of dry powder, intense competition and pressure to deliver following a decade of weak returns, general partners have become averse to taking big bets.
From their angle, smaller funds can be closed quicker, while smaller deals can be executed at more attractive multiples and are easier to exit and fetch better returns. Limited partners, on the other hand, are waiting for general partners to utilize the available dry powder and deliver before committing further funds.