Native Expertise will Drive PE Investments in EMs: CRISIL
MUMBAI, India and NEW YORK: CRISIL Global Research & Analytics (GR&A), the world’s largest and top-ranked provider of high-end research and analytics services, believes private equity (PE) 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 PEs relying less on leverage, strong local market knowledge, focus on domestic-consumption-driven sectors and investing in established companies – rather than in early-stage ones – 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 the general partners (GPs) 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 (read cash), intense competition and pressure to deliver following a decade of weak returns, GPs 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, are easier to exit and fetch better returns. Limited partners (LPs), on the other hand, are waiting for GPs to utilise the available dry powder and deliver before committing further funds.
There is space for large-sized funds, too. BRIC countries, given the magnitude of their economies, are expected to offer big-ticket opportunities creating the ideal environment for large funds to flourish. Mid-sized funds, however, are set to get squeezed out – they are unable to offer the attractive returns generated by the smaller funds or compete with the big boys on large deals.
CRISIL GR&A also presented an analysis of the performance of PEs in emerging markets by using new data, discussed key trends and flagged opportunities.
For LPs, asset allocation rather than fund manager selection is turning crucial as the difference in performance between the top and bottom quartile performers is getting smaller. In a similar vein, the performance premium of global players over local peers is also becoming insignificant. Says Suprabha Dikshatha, Global Head of Financial Research, CRISIL GR&A, “Native PE players have learnt best practices from their international counterparts and have managed to combine these effectively with their local market knowledge to improve performance.”
The study also highlights that besides diversification, investments in emerging market PE opportunities are better opportunities than the public markets there. Significantly, LPs are looking to increase allocation to emerging markets while simultaneously reducing their expectations on returns. This augurs well for the future and points to emerging market PE becoming an asset class in itself.
About CRISIL Limited
CRISIL is a global analytical company providing ratings, research, and risk and policy advisory services.
We are India’s leading ratings agency. We are also the foremost provider of high-end research to the world’s largest banks and leading corporations. With sustainable competitive advantage arising from our strong brand, unmatched credibility, market leadership across businesses, and large customer base, we deliver analysis, opinions, and solutions that make markets function better.
CRISIL’s majority shareholder is Standard and Poor’s(S&P). Standard & Poor’s, a part of McGraw Hill Financial, is the world’s foremost provider of credit ratings.
About CRISIL Global Research & Analytics
CRISIL Global Research & Analytics (GR&A) is the world’s largest and top-ranked provider of high-end research and analytics services. We are the world’s largest provider of equity and credit research services. We are also the foremost provider of end-to-end risk and analytics services to trading and risk management functions at world’s leading financial institutions and corporations. We operate from research centers in Argentina, China, India and Poland, working with our clients across several time zones and in multiple languages. Being part of CRISIL enables us to attract and retain top quality talent. We have over 2,300 employees, 75% of whom hold advanced degrees in finance, accounting and management. We employ the largest number of CFAs and CFA aspirants in India. We won top honors at the NASSCOM Exemplary Talent Practices Award (NExT Practices) for the second year in a row in 2012. The award recognizes us as a firm that has the vision to proactively invest in its people and get them future-ready. We are committed to delivering cutting-edge analysis, opinions, and solutions. This underscores our proposition of being the best people to work with.
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