Private Equity’s Public Market Pummel
A new paper commissioned by the Dubai-based Abraaj Group and written by Harvard Business School professors cites long-term performance and diversification advantages of private over public equity in 25 “global growth” markets across all developing regions, and urges they be complementary allocations in a balanced institutional portfolio in contrast with consultants’ frequent either-or approach. In 2014 less than one-tenth of private capital inflow came through stock exchanges and the ratio to FDI is under 0.2/1, the research comments. For the markets under review the allocation as a portion of GDP is just 40 percent on average, but their size still swamps private equity where the highest penetrations are 0.2 percent. Recent World Bank figures show they were 30 percent of worldwide capitalization, half the economies’ corresponding share of output. They are illiquid and low-volume in comparison with developed markets, whose share turnover is double and typically dominated by a handful of big firms posing concentration risk. In Colombia, for example state oil giant Ecopetrol is one-quarter of exchange value, and the ten main listings are 80 percent of the total. Smaller firms are shut out and instead issue overseas, and venture capital-related IPOs are around 20 percent of global activity. Public debt markets too are typically closed with limited creditworthiness, and many industries like consumer goods and healthcare are excluded with banks the overwhelming weighting. According to corporate databases, the earnings in overlooked segments are often superior, and have contributed to triple PE over MSCI emerging market index 3-year returns at 12 percent and 4 percent, respectively. Over 10 years the Cambridge Associates’ reading for the former maintains a 3 percent lead. The paper points out that top-quartile managers exceed the benchmark and have staying power, and that results are uncorrelated with other asset classes while both public emerging and frontier market co-movement has increased. It concludes that the latter are “immature” and that to spot and cultivate good investments both tracks should be pursued, especially to find them outside traditional financial and capital-intensive areas.
Outside its Middle East-Africa base Abraaj named battered markets like Argentina and Ukraine in its growth universe, and celebrated macro-investor Soros just took PE stakes in real estate and telecoms ventures in the duo. Argentina’s stocks and bonds have rallied on the Macri presidential election victory despite the no-preference stance of third party candidate Massa, who broke from the ruling Peronistas and their standard-bearer Scioli. A televised debate did little to erode Macri’s post first round momentum, as a central bank police raid focused attention on the outgoing government’s strong-arm tactics and possible dismantling of capital controls, as officials there were investigated for questionable currency deals. Formal devaluation is widely expected as reserve conversion may be needed for a holdout settlement, and the trade surplus dwindles on flat agricultural exports. Ukraine sovereign bonds are up 40 percent after a successful restructuring restoring the “B-minus” rating and a positive GDP reading. Russia’s $3 billion deal in the twilight of Yakunovych’s rule was left out, and President Putin floated a payment delay compromise without the same creditor “haircut.” The IMF must still determine if the relationship is official or commercial as it updates its lending-into-arrears policy to reconcile public and private interests.
