Down but not out

According to research by Deloitte emerging market GPs expect deal activity to continue to fall, but the need for growth capital keeps investors bullish in the long term

General partners from emerging markets believe investment activity will continue to fall for the rest of the year. The bleak outlook, gleaned from a study of 200 plus GPs, masked the strongly confident view of private equity in the longer term.

GPs in China rated their long-term confidence for private equity as 8.3 out of 10 in the findings, undertaken by Deloitte. Hot on their heels was MENA with 8.2, India with 8.0 and LatAm with 7.8.

In line with this long-term confidence, there is a growing belief that private equity is gaining traction on the ground in these markets.

“In parts of the world where stock markets have been volatile in the last year, private equity is competing more effectively than an IPO as a source of raising capital,” said Chris Ward, global head of corporate finance and CEO of Deloitte Corporate Finance in the Middle East.

He added: “It’s very definitely the case that companies in some emerging market countries are starting to appreciate that having private equity as a shareholder gives them additional value. That is, they’re realising they’ll be worth more on multiple than a company without a private equity backer.”

For now, however, emerging market private equity activity is more depressed than global totals. Since the onset of the liquidity crisis in Q3 2007, private equity activity in emerging markets has dropped by 60% compared with a total fall of 53% globally.

By-and-large, the outlook of deal-doers for 2009 continues to reflect the downturn, with 60% of Indian respondents expecting that investment activity in that country will continue to drop-off. There’s slightly more optimism in China, however, where half of the GPs questioned expected investment activity to increase in 2009.

But for Ward, it is India that offers the most promising opportunities, he said, adding: “India is a great market. It’s very entrepreneurial. They’ve got a can-do attitude and fewer restrictions than some other emerging market countries. I’m very bullish about India.”

However, the private equity market in India is already overcrowded, with home-grown players vying with the likes of KKR, Carlyle, Apax and others for the best deals.

“There are too many private equity firms in India. This slowdown and correction is going to shake some out and they’ll wither away,” Ward predicted, adding that any private equity firm from the Western world wanting to enter the Indian market now would be best opting for a joint venture with a local team.

In these growing markets, success is driven by access to proprietary deal-flow. “Private equity firms in emerging markets have to recruit people who have the right connections,” said Ward.

“Falling entry multiples are a sign that there are better times to come . . .Given the financial and regulatory turmoil surrounding the industry, it is reassuring to see that the emerging markets still view the long-term potential of the industry positively,” he added.