December 18, 2011
Interviewed by: David Snow
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Emerging Momentum

While developed nations debate whether private equity is force for good or ill, in the emerging markets “private equity is seen as an absolutely critical source of growth capital to fund economic development,” according to Sarah Alexander, Founding President and CEO of the Emerging Markets Private Equity Association (EMPEA).

In a conversation with Privcap, Alexander describes the incredible advances made by the private equity asset class in emerging economies, and the role that EMPEA played and continues to play in promoting these markets. She discusses the efforts of EMPEA to educate regulators and institutional investors in the emerging markets, as well as to gather and unlock data.

While developed nations debate whether private equity is force for good or ill, in the emerging markets “private equity is seen as an absolutely critical source of growth capital to fund economic development,” according to Sarah Alexander, Founding President and CEO of the Emerging Markets Private Equity Association (EMPEA).

In a conversation with Privcap, Alexander describes the incredible advances made by the private equity asset class in emerging economies, and the role that EMPEA played and continues to play in promoting these markets. She discusses the efforts of EMPEA to educate regulators and institutional investors in the emerging markets, as well as to gather and unlock data.

David Snow, Privcap: Let’s acknowledge that EMPEA, the Emerging Markets Private Equity Association, has now been around for about seven years, and you’ve been with it the entire time.  You’ve been at the helm.  So, what to you has been a really striking and very interesting change in the emerging market’s private equity since you started EMPEA seven years ago?

Sarah Alexander, EMPEA: Well, there have been a number of quite significant changes.  I think that the biggest one is that there actually is an emerging markets private equity industry now that’s fairly accepted globally among the institutional investor world, that it is very much an asset class, and a place where they need to be.  They need to have exposure to these markets to really take advantage of where the growth is going on in the world, either growth markets or growth companies.

And so if we look at sort of what– the questions the industry was asking seven years ago, which were really much more sort of fundamental around, ‘Well, who are the players?  Are there enough players?  Can you get returns?’ The questions today from institutional investors are much deeper and more knowledgeable and tend to lean more toward the intricacies of how best to do business and how best to get access, not whether to.

Snow: Well, it’s interesting.  Seven years ago, private equity was very popular, but emerging markets private equity was not as popular.  And in fact, as you say, people were asking questions like, “Should I even be there?”  It’s almost gone to the other extreme where everybody is clamoring to get into certain markets.  The bricks come to mind.  But are there still challenges for emerging markets, private equity managers, broadly defined?

Alexander: Oh, absolutely.  I mean, on the one hand, we’ve seen, to give sort of some statistical color to what we’re talking about, if you look at the global fundraising environment, emerging markets has captured, has gone from 4 percent of global fundraising to 11 to 12 percent over the last two years.  So clearly it’s taken a larger slice of, albeit a smaller pie, because global fundraising numbers have gone down.

But, that doesn’t mean that all markets or all fund managers are having equal access to this newfound interest among institutional investors.  Clearly, India and China, over the last number of years, have attracted quite a bit of interest, so the Asia world tends to often be where institutional investors will go first with some exceptions around sort of home market bias.  Some European institutions may have been more comfortable initially investing in Eastern Europe and the accession countries.

But really only in the last year or two has sort of Brazil gotten onto the map.  And still while Brazil is extremely hot having raised, by the end of this year, they’ll probably be $8 to $10 billion-plus funds.  Those are large funds going after large opportunities, and there’s still a whole middle market that has been struggling to raise money outside of Brazil.

And then if you move beyond Brazil, India, and China, and India still has some challenges with fundraising, a number of the other markets are only beginning to register.  So Southeast Asia, Africa, they’re coming, but it’s harder.

Snow: Well, certainly one goal is to raise the image rates of profile of emerging markets managers among investors who provide them with capital.  But another challenge is to tell the story of private equity to the local regulatory bodies in these developing countries.  How challenging is that?

Alexander: Interestingly, private equity is very much welcomed in these markets.  It’s kind of an anomaly that the bad name around private equity is really the view of certain groups of politicians, actually, in developed markets.

In developing countries, emerging markets, private equity is seen as an absolutely critical source of growth capital to fund economic development.  Whether it’s in China, which is trying to really unleash the private sector, including to privatize some of its state-owned industries and where there aren’t large sources of bank loans to entrepreneurs and small and medium-sized companies, private equity is highly encouraged in these markets.  And that is true sort of across the board.

We were talking to the South African regulator yesterday at this conference and the South African regulator has just increased the amount that South African pension funds can invest in private equity up to 10 percent, which is pretty high.  And the same is true in other markets.  So, in Columbia, in Brazil, they’re all encouraging private equity.  So, getting the message to regulators around how this is important development capital and should be encouraged in these markets is not that difficult.

What is difficult and does remain a challenge is really educating the institutional investors in these developing markets about what it means to be a limited partner and how to both engage with fund managers and manage the risk around it.  And so not all the regulatory regimes in these markets actually encourage the formation of a domestic capital.  And we believe that the formation of domestic capital available to these fund managers is over the long term a critical part of developing the industry.

So for example, in India, pension funds are still not allowed to invest in private equity.  And while that is a judgment for the Indian government, of course, to take, it does inhibit the availability of capital for Indian managers.  And many institutional investors outside of a specific country look for local participation in these funds to give them comfort.

Snow:  Well, setting aside the challenge of capital formation with the local investors, it is ironic.  I mean, who would have thought that seven years later, possibly GPs in developed markets would look with envy upon the emerging markets as places where they’re raising a lot of capital and the regulators tend to like them?

Alexander: Right. Well yeah, and it is true that what you see, another big trend now is that emerging markets and actually therefore EMPEA’s mandate, it’s not really about raising capital in the West or trying to introduce just these fund managers and the opportunities to developed market institutional investor because it’s also about educating the institutional investors in these markets about the opportunities outside of emerging markets.

And so, when we are working with pension trustees in Africa and teaching them about private equity, we’re not doing so with necessarily, with a bias that they must invest only locally.  We’re trying to teach them – this is why it’s emerging markets – about the importance of private equity, how it can help from their perspective to meet their long-term goals, which is to pay pensions and meet insurance claims and etc.

So what you see now are many of the global firms, regional firms, actually down in Latin America or in Africa and in Asia, with a number of the sovereign funds, fund raising there as well.  So, trying to diversify their LP base.

Snow: Sarah, over the past seven years, what have been some of the more successful initiatives that EMPEA has embarked upon?  And by contrast, what have been some of the challenges that you’ve found as you’ve pursued the several goals of EMPEA?

Alexander: I think there have been a number, it’s sort of hard to point to only one key ingredient for how not just EMPEA has made itself relevant but, also helped to raise the profile and understanding of private equity emerging markets.  But, I think one of the keys to our success in promoting this asset class was around a very early decision to think about what institutional investors need to make decisions and to look through their lens as they are making these decisions.

And so when we began, we began gathering statistics and data and framed it and gathered it and presented it in a way that made it very easy for them to compare emerging markets to what they were much more familiar with at that time, which was developed market opportunities.  And that then has allowed us, over time, to be a resource for those institutional investors about how the trends have changed, where the opportunities are, how things compare.

So we work quite closely with developed market organizations as well, because again, our job is to put emerging markets into a global context, and that really is where we’re focused and then to highlight differences and similarities between and among regions and countries in emerging markets.

The other, perhaps the more challenging side, is that as this market has exploded and there’s activity going across in every single country, well, not every single country, many of the developing countries, is really ensuring that the data is robust and really getting fund managers to take the leap; I call it the transparency leap.  Where they may not give their data to the general public, but that they understand it’s their responsibility to provide it either to us or to another entity so that we can make sure that the data we’re presenting globally, and not just the data, but the data is what then allows us to do the deeper analysis around these opportunities.

So, we did a huge report on Africa that really, about a year ago, that was the first report that really looked at the private equity history and opportunity in Africa. And through that, had an incredible collaboration from fund managers and all of our members in really making sure that we were presenting Africa accurately.

We again don’t have- we’re not promoting a country or a region, we are promoting an understanding of an industry and how it can help the providers of capital.  How it can help companies.  How it can help countries.  And how it can help communities.  And that’s the whole sort of ESG area that we’re talking about at this conference as well.

Snow: Well, the challenges of rapid expansion sounds like a high-class problem.  So, it sounds like things have been going well for the past seven years, and thank you for taking your own transparency leap and coming on Privcap.

Alexander: Absolutely my pleasure.  Thank you very much, David.

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