Frequent references to the investment opportunities posed by emerging markets permeate the financial press and will continue to do so while the traditional western investment world struggles to cope with a myriad of economic woes.
Emerging markets are benefiting from the generic notion that public equity markets in these geographies are what investors should look to if they want to avoid the slower intrinsic growth of the mature markets. The press are also quick to highlight the relatively better financial and market performance of western corporates which feature higher levels of overseas sales.
One of the most telling recent press comments on the theme of emerging markets investment has been the result of a survey of institutional investors which suggests the proportion of private equity commitments to these regions will double to 11-15% in two years. This survey coincided with news that Advent had raised $1.65bn for Latin American buyouts and Carlyle had raised $2.6bn for its latest Asian fund.
With leverage opportunities for “traditional” private equity remaining limited (albeit improving slowly) and few quality businesses for sale at reasonable valuation multiples, the scope to find good private equity opportunities in the Western markets is already limited, so the interest in emerging markets is not surprising. Nevertheless, what has attracted less comment is the likely appetite from Western corporates – big and increasingly small - to seek strategic acquisitions or alliances in these end markets.
The logic of strategic acquisitions in emerging markets is compelling on many fronts e.g. short-term revenue growth in geographies with high GDP forecasts; tapping into demographics which imply long-term benefits to the acquirer; potentially higher margins driven by lower operating costs, less intense competition etc.
The question is whether or not “the leap of faith” needed to undertake an acquisition in the fast growth economies is one which Western companies are willing to take. For sure the “leap” has been taken many times by major FTSE-100 or equivalent businesses – particularly where they operate in sectors where there are few strategic opportunities remaining in the home markets – or their business is resource related and therefore limited to very specific (usually emerging markets) locations. On the other hand, there are many major corporates in Europe and North America which have yet to venture beyond familiar (and geographically/culturally adjacent) shores – even if the imperative from their investors is to do so and to do so with some scale and speed.
Amongst mid cap/smaller businesses (both public and private) those that have invested in emerging markets have typically done so to procure low cost manufacturing and the exposure to these markets would not rock the boat back at HQ. Needless to say, the returns available to family offices by investing in emerging markets can be substantial (and of course in theory carry commensurate risk). The risk element is, however, arguably at relative historic lows at the moment. Risk is a combination of factors such as overall economic context, cultural difference, the challenges of long distance management and so on while the returns are considered in the context of likely returns nearer to home (with the possible risks there probably also more weighty than usual).
At the most basic level, and without seeking to differentiate between specific emerging markets (a basic first step in its own right), the options for family offices to invest in these markets include:
• Quoted equities/bonds – with funds offered by a multitude of institutions;
• Private equity – an asset class where the skill and competitive advantage
of the specific fund manager is vital (recognising also that in certain emerging markets there are large amounts of, often local, committed capital which has not yet been spent and returns have not been consistently compelling); and
• Direct corporate investment – either supporting family office owned businesses seeking to capture accelerated revenues and profit or partnering with ambitious but capital constrained western businesses to acquire relevant strategic businesses. In both cases the financial argument is acquisitions would power earnings in the short term at a time when existing revenues may be muted – and importantly, emerging markets exposure also implies multiple expansion for the acquirer on exit.
