Private equity investors are turning towards emerging economies, which have become attractive as they continue to chart growth, while their developed peers are in negative terrain.
"Emerging economies have positive growth rates, while the developed peers are lagging in negative zone. In such times PE players look forward to investing in those economies which can absorb the shock and reap returns on their investment," SMC Capital Equity Head Jagannadham Thunuguntla said.
According to Emerging Market Private Equity Association, institutional investors believe emerging markets will continue to present attractive investment opportunities in the coming year and plan to maintain or expand their exposure.
"Investors recognise that emerging economies are the only ones still growing, and they also know that, since private equity deals in emerging markets do not rely on debt, the collapse of the global leveraged finance markets will not impede deal flow," EMPEA President Sarah Alexander said.
Of the BRIC (Brazil, Russia, India, China) economies, the fund partners ranked Brazil as the second most attractive destination for investment in the next 12 months behind China and just ahead of India, according to a survey by EMPEA.
"In India transactions are in the form of equity with no debt component. In contrast, the US and the Europe focussed funds are more into leverage buyouts for which they raise bank loans," Venture Intelligence CEO Arun Natarajan said.
Analysts said India focussed funds mostly target growing companies, while the US and the Europe focussed funds are more into 'buyout investments'.
"A majority of investors committed to recent emerging markets (EM)PE funds expect them to outperform developed market funds of equivalent vintages. Moreover, they expect this out-performance to continue for new commitments they will make over the next few years," UK-based Coller Capital Partner Erwin Roex said.
Analysts feel that despite PE investors shifting towards the developing economies, actual investment in those countries are going to take time, as fund managers are waiting for the global economic condition to improve.
"Fund managers have evinced their interest in emerging economies, but converting that into investment will mostly be after a recovery in the global markets," Thunuguntla added.
New investors will continue to enter emerging markets in 2009, but at a slower rate. The majority of fund partners believe the risks of EM PE have increased over the last year, especially in Russia, Central and Eastern Europe, and Africa, EMPEA said in a statement.
"However, four out of five existing investors who think risk has increased nonetheless expect to expand their exposure to EM PE within the next five years," the EMPEA survey stated.
Emerging markets might see slightly higher allocation of funds and more PE transactions when market improves, but developed economies will continue getting a big chunk of the pie, Natarajan added.