Buyout firms, already struggling to find U.S. companies to buy, are now diving deeper into emerging markets as investors crowd countries like China and India, making deals more expensive, according to sister news service Reuters. Since the financial crisis hit growth in the United States and Europe, the shops have increased their interest in Asia and South America.
But the flood of money chasing growth in countries like Brazil, China and India has raised concerns that valuations have become too heady, forcing firms to look even farther out over the globe. Said David Mussafer, managing partner and head of North America at buyout firm
Speaking at the Super Return conference in Boston this month, Mussafer said his company is pushing into areas that aren’t so crowded and that Advent was opening an office in Colombia this year and last year opened an office in Istanbul. “We are trying to push further into new areas to find opportunities where you have growth characteristics but they aren’t as well traveled,” Mussafer said.
Other firms have been pushing into new markets.
Charles Stucke, chief investment officer at Guggenheim Investment Advisors, said he found Poland and Turkey exciting investment opportunities. However, he said in much of Eastern Europe, it was difficult to find global economic opportunities. “If you have 7 million people speaking a single language in a side-corner of a major market it is hard for us to believe there’s economic scalability and value there,” Stucke said.
The rush of money into Brazil, China and India has drawn concerns that valuations are getting too high.
“Some people have noted that there’s more and more money heading to Asia, particularly China, and they’re worried about a bubble,” said Drew Guff, a managing director and founding principal of
Guff said that while China was absorbing more capital, “going in” prices are still among the lowest of the emerging markets. He stressed the importance of finding sophisticated private equity investors who are moving outside high-trafficked areas.
“The cycles of sophistication are changing too,” Guff said. “Ten to 15 years ago, beer and cement were popular. Today, (investment opportunities) are more varied—for example, Internet, broadband, health care, IT, wireless services. It is a far more diversified basket of private equity opportunities.”
China has witnessed a proliferation of Western firms raising RMB-denominated funds and combing the landscape for deals. The yuan is also known as Renminbi, or RMB.
“We’re finding very good opportunities at attractive prices (in China),” said Alexander Navab, co-head of KKR’s North American Private Equity business. “There is an overall view that there are high valuations in China, but we are finding very good, attractive long-term valuations and we’re looking at a five-to-10 year window.”
The percentage of money raised to invest in emerging markets has been increasing in the past few years, according to data from London-based private equity research firm Preqin. So far this year, the aggregate capital raised to invest in the emerging markets is about 19 percent of global capital raised; compared with 15 percent in 2010 and 11 percent in 2009.
Guggenheim’s Stucke said his firm had made a fairly large bet on India. “From a legal perspective it has had a fairly stable legal regime,” Stucke said on a panel at the conference. “From a commercial practice we’ve seen serial entrepreneurs in India by the dozens, so that’s encouraging.” Stucke said the “pecking order of valuations” in emerging markets reflects people’s nervousness about legal structure and exit.
Scott Kleinman, lead partner of private equity at
The lion’s share of conference goers at Super Return picked Brazil as the most attractive market, in a poll which asked them to name which country they would choose to invest $100 million in out of China, India, Russia, Brazil and Israel. India followed in popularity, and then China.
The U.S. and European economies need to “fit an overall portfolio construction,” said David Roux, co-founder of technology-focused private equity firm
(Megan Davies is a New York-based correspondent for Reuters news service; additional reporting by Nadia Damouni in Boston and Stephen Aldred in Hong Kong.)