Raising Funds in Emerging Markets

The private equity industry in the emerging markets have been growing at astonishing speeds, however the bulk of capital has traditionally been sourced from North American and European institutional investors. There is serious change in progress. As economic stagnation continues in the developed nations, general partners are looking to institutional investors from many of the emerging markets.

To this end, general partners are realizing that traditional ‘unwritten rules and understandings’ between GP’s and LP’s, so strongly advocated by organizations such as ILPA, are being ‘re-written’. When approaching investors from emerging markets, one must first understand the business culture in an emerging market. At the risk of over-generalizing the facts, there are many similarities in how investors approach deals in any emerging market.

The first thing any general partner will notice is that many institutional investors from emerging markets will want to take part in the investment decision. The second thing any general partner will also notice is that institutional investors will want quicker exit times from portfolio companies and ultimately a shorter life-cycle for the fund itself.

So why do investors from emerging markets want these provisions before making a commitment?

We need to understand the dynamics of an emerging market before we can answer this. Tracking of an investment and a lack of world class (and... trustable) management has always been a point of concern in the emerging markets. One way to solve the problem was to have the investor take an active role in the company in order to protect its interests.

Wild economic swings are a common characteristic in any emerging market. The term ‘long term asset allocation’ has a different meaning to an investor from an emerging market than to an investor from a developed market. Traditionally, investors in emerging markets like to exit within two or three years from any deal.

Many traditional investment ‘rules’ have clearly been transferred to the private equity realm. The rules are changing and many general partners and industry organizations from developed markets must adapt if they wish stay in the business.

 

Comments

[Frontier Strategy Group]

The companies that have been most successful in attracting and retaining top talent have put in place formal processes for defining, differentiating, and instilling their corporate culture in their furthest-flung emerging market locations. Thus, for companies going into emerging markets, there is such a need to define their corporate culture.