The paper deals with Private Equity Investments in Emerging Markets. This asset class is associated with attractive opportunities and appropriate risk-adjusted returns. The Private Equity industry in Emerging Markets showed strong growth over the last few years – after a period of disappointment and unmet expectations.
Private Equity is a primary source of equity for small and medium sized companies. It is associated with higher default risk but offers the opportunity to receive higher returns. One special characteristic is the provision of ‘smart money’, the integration of investment banking and management consultancy.
The environment of Emerging Markets is challenging. The term refers to capital markets in developing countries with outstanding growth opportunities. 35 countries from Latin America, Central and Eastern Europe, Asia, Middle East and Africa belong to the group of Emerging Markets. These markets are characterised by weak legal institutions, political and economic risk, dysfunctional capital markets and a low standard of corpo-rate governance.
The combination of the high risk asset class Private Equity with the high risk environment of Emerging Markets results in high risk investments. But the superior return op-portunities attract more and more investors. After a period of disappointment and setbacks – due to an inappropriate approach – at the beginning of the 21st century this asset class took off. Fundraising figures from 2003 to 2006 are increasing strongly and the investors expect the growth to continue.
The macroeconomic environment, the legal framework and the quality of capital markets are the main determinants for Emerging Markets Private Equity. The introduction of good corporate governance is essential for the provision of a hospitable investment climate. If the legal framework is weak, efficient governance structures can serve as a substitute.
Intensive due diligence, monitoring, involvement, networks, diversification and exiting are the key success factors for Private Equity firms engaging in Emerging Markets. With an appropriate adjustment of the strategy, risk can be mitigated and the investment is likely to be successful.
Emerging Markets Private Equity can be beneficial for both the investors and the entrepreneurs. Especially small and medium sized enterprises and family-owned companies in Emerging Markets benefit from this source of equity while investors receive potential extraordinary returns and diversify their portfolio.
Table of Contents
- 1 Introduction
- 2 Private Equity
- 2.1 Definition
- 2.2 Early-Stage Financing: Venture Capital
- 2.3 Later Stage Financing: Private Equity and Buyouts
- 2.4 Exit Strategies
- 2.5 Agency Problems in Private Equity
- 3 Emerging Markets
- 3.1 Definition
- 3.2 Differences Among Emerging Markets
- 3.3 Specific Risks
- 3.4 Emerging Financial Markets
- 3.5 Emerging Market Corporate Governance
- 4 Private Equity Investment in Emerging Markets
- 4.1 History and Recent Developments
- 4.1.1 From the Late 1980s to the 21st Century
- 4.1.2 Fundraising in 2005 and 2006
- 4.1.3 Drivers of Limited Partner Interest
- 4.2 Determinants of Emerging Markets Private Equity
- 4.2.1 Macroeconomic Environment
- 4.2.2 Legal Framework
- 4.2.3 Capital Markets
- 4.3 Introduction of Good Corporate Governance
- 4.4 Key Success Factors
- 4.4.1 Due Diligence
- 4.4.2 Monitoring
- 4.4.3 Involvement and Value Creation
- 4.4.4 Networks
- 4.4.5 Diversification
- 4.4.6 Exiting
- 4.1 History and Recent Developments
- 5 Critical Analysis
- 5.1 The Investor's Perspective: Risk and Reward
- 5.2 The Entrepreneur's Perspective: Source of Equity
Objectives and Key Themes
This paper aims to analyze private equity investment in emerging markets, considering the unique challenges and opportunities presented by these markets. It explores the characteristics of private equity, the specific conditions of emerging markets, and the strategies required for successful investment in this context.
- Characteristics of Private Equity Investment
- Specific Risks and Opportunities in Emerging Markets
- Strategies for Successful Private Equity Investment in Emerging Markets
- Investor and Entrepreneur Perspectives
- Impact on Developing Countries
Chapter Summaries
1 Introduction: This introductory chapter sets the stage by highlighting the significant growth of private equity investment in emerging markets during the early 2000s, contrasting this with earlier periods of underperformance due to underestimated challenges. It outlines the structure of the paper, promising a definition of private equity, an overview of emerging markets, an application of the theoretical framework to the realities of emerging market investment, a critical analysis, and a concluding outlook.
2 Private Equity: This chapter provides a foundational understanding of private equity, acknowledging the lack of a universally accepted definition and the often blurred lines between private equity and venture capital. It explores various forms of private equity investment, encompassing early-stage financing (venture capital) and later-stage financing (private equity and buyouts). The chapter also addresses critical exit strategies and the inherent agency problems within private equity investments, laying the groundwork for the subsequent analysis of these issues within the context of emerging markets.
3 Emerging Markets: This chapter defines emerging markets and explores the diverse characteristics and significant differences among them. It identifies specific risks associated with investing in these markets, focusing on the complexities of their financial systems and corporate governance structures. This detailed examination of the unique aspects of emerging markets is crucial for understanding the challenges and opportunities presented to private equity investors.
4 Private Equity Investment in Emerging Markets: This chapter applies the theoretical framework established in the previous chapters to the practical realities of private equity investment in emerging markets. It traces the historical development of this investment strategy, analyzing trends from the late 1980s to the 2000s, including fundraising activities and the factors driving investor interest. The chapter further delves into the key determinants of success, such as the macroeconomic environment, legal framework, and capital markets. It also emphasizes the importance of good corporate governance and identifies crucial success factors, including due diligence, monitoring, value creation, network building, diversification, and exit strategies.
Keywords
Private Equity, Emerging Markets, Venture Capital, Investment Strategies, Risk Management, Corporate Governance, Developing Countries, Due Diligence, Exit Strategies, Macroeconomic Factors, Legal Framework, Capital Markets.
Frequently Asked Questions: Private Equity Investment in Emerging Markets
What is the main topic of this document?
This document provides a comprehensive overview of private equity investment in emerging markets. It analyzes the characteristics of private equity, the specific risks and opportunities in emerging markets, and strategies for successful investment in this context.
What are the key themes explored in the document?
The key themes include the characteristics of private equity investment, specific risks and opportunities in emerging markets, strategies for successful private equity investment in emerging markets, investor and entrepreneur perspectives, and the impact on developing countries.
What is the structure of the document?
The document is structured into five chapters: an introduction, a chapter on private equity, a chapter on emerging markets, a chapter focusing on private equity investment in emerging markets, and a final chapter offering a critical analysis. Each chapter is summarized within the document.
What is private equity, as defined in this document?
The document acknowledges that there's no universally accepted definition of private equity, and the lines between private equity and venture capital can be blurred. It explores various forms including early-stage financing (venture capital) and later-stage financing (private equity and buyouts), along with exit strategies and agency problems.
What are emerging markets, as defined in this document?
The document defines emerging markets and highlights their diverse characteristics and significant differences. It emphasizes the specific risks associated with investing in these markets, particularly concerning their financial systems and corporate governance structures.
What are the key success factors for private equity investment in emerging markets?
Key success factors identified include thorough due diligence, effective monitoring, active involvement and value creation, strong networks, diversification of investments, and well-defined exit strategies. The macroeconomic environment, legal framework, and capital markets are also crucial determinants of success.
What are the perspectives considered in the critical analysis?
The critical analysis section examines the investment from both the investor's perspective (risk and reward) and the entrepreneur's perspective (private equity as a source of equity).
What is the historical context provided on private equity investment in emerging markets?
The document traces the historical development of private equity investment in emerging markets, analyzing trends from the late 1980s to the 2000s, including fundraising activities and the factors driving investor interest.
What are some of the specific risks associated with private equity investment in emerging markets?
Specific risks highlighted include those inherent in the complexities of emerging market financial systems and corporate governance structures. These are explored in detail in the document.
What are the key words associated with the document's content?
Key words include: Private Equity, Emerging Markets, Venture Capital, Investment Strategies, Risk Management, Corporate Governance, Developing Countries, Due Diligence, Exit Strategies, Macroeconomic Factors, and Legal Framework.
- Quote paper
- Benjamin Heckmann (Author), 2007, Private Equity Investments in Emerging Markets, Munich, GRIN Verlag, https://www.grin.com/document/133898
