Private Equity’s Paused Penetrating Insights
First half EMPEA statistics, collected by the Washington based private equity body in cooperation with country and regional counterparts, show sharp drops in funds raised and capital invested, at $15 billion and $13billion respectively, in comparison with 2015’s pace. The full year corresponding totals then were $48 billion and $32 billion, almost triple current figures. This year’s fundraising has increased 5 percent away from private equity to infrastructure and credit as separate asset classes, but it is less than one-tenth the US total as opposed to almost 20 percent last year. Emerging market investment is constant at 7 percent of the global sum, but penetration as a fraction of GDP is only one-quarter the US-UK’s and half of Israel’s for the best performer India at under 0.4 percent. The ten other markets surveyed are all 0.2 percent or below, led by Korea and South Africa, with Russia and Turkey at the bottom. Brazil, China, Poland and Sub-Sahara Africa are in the middle, while Indonesia and MENA are also laggards. The venture capital data suggest that such long-term illiquid allocation has not received the heavy sudden inflows as in public markets fleeing negative and negligible returns elsewhere. Traditional limited partners like big pension funds and insurers express concern about immediate balance sheet holes as well as the asset-liability mismatch over time that place a premium on higher yield and tradability, and also seek to reduce susceptibility to political shocks that have proliferated in major developing economies. They argue that hybrid offerings combining public and private equity and debt features may be a more viable medium-term model, and caution that as emerging world central banks consider their own quantitative easing programs purchasing securities the product landscape could be further constrained. China’s G-20 summit will emphasize possible member shifts from monetary to fiscal policy reliance, with infrastructure commitments assuming priority, but conventional loan and bond financing will be the preferred route. Small business credit access, high on the agenda under Turkey’s previous hosting, will be another topic where venture capital could be cited as a secondary contributor, but participants will focus on mainstream bank outreach.
On other themes, China’s outbound investment will come under the microscope after national security controversies around company takeover attempts in the US, UK and Australia, and criticism that Beijing does not offer reciprocal access. Experts have recommended the establishment of independent global panels to resolve clashes over portfolio and direct ownership stakes, which could be affiliated with the WTO as the main multilateral trade body. The gathering will also reflect the leadership and credibility challenges facing the IMF and World Bank as they convene their annual meetings in October. Civil society representatives have blasted proposed new Bank project environmental and social rules, updating a 1980s formula, as granting too much leeway to borrower countries as President Kim seeks a second term despite vocal staff opposition. The US Treasury Department praised his record and submitted the nomination for approval ahead of the November presidential election, but analysts argue that the decision should be delayed for the next White House occupant. At the Fund Europe’s influence separately provoked a firestorm with an internal evaluation finding that the Greek bailout circumvented normal channels, and Managing Director Lagarde beginning another stint has since moved to distance the organization from the EU’s sway and program content.
