Emerging markets offer vast opportunities for private equity
Private equity is facing an intensely more challenging environment than it was a year ago, including costlier leverage, lender difficulties in debt distribution, rising default prospects and less-levered capital structures.
These issues and more will weigh on the minds of bank regulators, members of the banking community, governmental officials, and academia at the Federal Reserve Bank’s annual private equity conference July 9-10 in Chicago. However, a panel of experts assembled by Thunderbird School of Global Management will bring an optimistic message.
“People will come to the conference expecting to hear bad news about the credit crunch and its impact on the global economy,” says Susan Boedy, director of Thunderbird’s Global Private Equity Center in Glendale, Ariz. “But there is an upside if viewed from the vast opportunities in emerging markets and specific areas of private equity.”
For starters, Boedy says private equity firms with a global mindset can find great opportunities for venture capitalism in Eastern European countries such as Romania and Ukraine.
She says this region, which offers skilled but affordable labor, remains under-penetrated by private equity.
“Opportunities for low-cost outsourcing are drying up in India,” Boedy says. “But new opportunities are emerging elsewhere in places such as Eastern Europe, which is an upside for venture-backed portfolio companies that are trying to keep costs down.”
Boedy will moderate a panel discussion on European private equity at the eighth annual conference presented by the Federal Reserve System’s Private Equity Merchant Banking Knowledge Center at the Federal Reserve Bank of Chicago. The conference, called “Navigating the New World of Private Equity,” will bring together bankers, regulators, government officials and scholars from across the United States.
Boedy’s panel of experts on European trends includes Paul J. Carbone, managing partner at Baird Capital Partners; Kurt Geiger, former head of financial institutions and equity at European Bank for Reconstruction and Development; Mark O’Hare, founder and managing director at Private Equity Intelligence; and Helge Petermann, director at Capital Dynamics.
“The panel represents a mix of global expertise from all areas of private equity,” Boedy says. “They represent limited partners, general partners, consultants and researchers with true global understanding.”
Boedy says the declining U.S. dollar has created favorable exchange rates in Europe, which has prompted many European funds to relocate to the U.S. East Coast. She says many private equity firms in Europe are focusing on buyout, real estate, infrastructure and mezzanine funds.
Overall, Boedy says, European firms raised 41 global funds in 2007 with combined commitments of $24 billion. However, the vast majority of these European private equity firms are small, having raised less than $100 million each in total.
At the other extreme, the largest 15 firms have raised almost $300 billion among them, almost half the industry total. Conversely, the smaller European venture sector has generally delivered poor returns and represents a combined total of only 2.5 percent, according to Private Equity Intelligence 2007.
Despite the trend, Boedy says California’s Silicon Valley continues to produce about half of the world’s venture funds. She says venture capitalism has continued to struggle in Western Europe, where bank regulation, an aversion to risk, a lack of entrepreneurial spirit and other factors hinder growth.
“Speaking generally, Western Europe does not have a culture of risk taking as compared to other high regions in the world with venture success,” Boedy says. “The venture capital opportunities are in Eastern Europe where a new frontier and entrepreneurial spirit can thrive along with lower costs and a younger population. Overall, there is a clear shift toward Central and Eastern Europe, where the region is expected to attract more private equity funds within the next five years.”
Other private equity opportunities during the sluggish economy can be found in secondary markets and distressed debt. Boedy says both of these areas tend to prosper as investors look for alternative ways to flatten the dreaded J-Curve.
“When things are bad in one region or with one type of private equity fund, there are almost always opportunities in other areas,” she says. “It’s the investors who are patient, look toward new frontiers and alternative ways of investing that will thrive.”