Private Equity Shifts Toward Emerging Markets

IESE and BCG Study Reveals PE Share has Quadrupled In a Decade


Emerging markets are generating increasingly high returns for private-equity investors and could soon account for the lion's share of deals, according to a new study from IESE Business School and The Boston Consulting Group (BCG). However, the most attractive markets are not necessarily the ones that have captured the headlines in the past, and the key success factors for investors differ significantly from those that have worked in developed countries. 

The study, which is based on an analysis of the largest data set of its kind, reveals that emerging markets' share of deals has increased steadily from 5 percent in 1998 to 30 percent in 2009, when the United States and Europe accounted for 34 percent and 38 percent of deals, respectively. Over the same period, emerging markets' share of deal volumes more than quadrupled to 21 percent. Moreover, there are strong signs that investors plan to step up their involvement in these markets. Approximately one-fifth of global dry powder, equivalent to about $231 billion or seven times annual deal volume (based on a five-year average), is earmarked for these markets, spanning all investment stages.

"The economic scale of a market is obviously critical for private equity but socioeconomic factors such as the market's degree of openness, legal protection for investors, and the liquidity of its local stock exchange is equally important if investors are to realize the market's full potential," says Professor Heinrich Liechtenstein of IESE Business School, one of the leaders of the study. "The most attractive markets for private equity are not necessarily the biggest economies."

Key conclusions of the study included the following:

  • Emerging markets' share of private-equity deals has increased from 5 percent to 30 percent over the last decade, rivaling the proportion of deals in the United States and Europe - and it is expected to increase.

  • Returns from emerging markets have more than tripled since the 1990s to more than 17 percent today.

  • The most attractive markets combine economic scale and favorable socioeconomic conditions, such as Brazil, Turkey, and Malaysia. Other high-profile markets such as Russia and Argentina appear to offer less potential.

  • "Western" investors will have to rethink their business models to succeed, including accepting minority rather than majority stakes in businesses, and generating value via operational improvements rather than leverage. 

  • Local private-equity firms in emerging markets could be tomorrow's giants.

Download the study