Private Equity’s Public Preference Probe

The latest EMPEA trade association annual survey of over one hundred  private equity institutional investors with $500 billion in dedicated global assets averaging one-fifth in emerging markets offered mixed sentiment, as dollar levels are due to rise while allocation size in the overall  portfolio shrinks. While developed market exposure continues to rise in contrast, bigger managers with $10 billion or with a decade or more experience are more likely to increase the relative share. Private pension funds will forge fewer general partner (GP) relationships while development lenders plan to extend them with at least five new ones, as both groups stress operating savvy rather than buyout approach as their main selection factor. Co-investing and deal by deal structures are important and local currency returns are no longer the decisive benchmark in light of recent volatility implying resort to hedging strategies. India is the number one preferred destination and attracted $8.5 billion the past two years, Southeast Asia is in second and Latin America ex-Brazil took third as almost 20 transactions were completed in Argentina after a long drought. Sub-Sahara Africa beat out China, which takes one-quarter of capital deployed, and Russia and Turkey were at the bottom of the heap. Brazil’s standing rose but 15% of respondents will cut or end involvement there with continued political upheaval despite economic stabilization and growth return. By industry consumer goods and healthcare were the runaway favorites, with the former attracting $25 billion in 2015-16. Although half of investors complained about lack of exit and fund distribution, only 15% are considering secondary sales for cash and liquidity as they await efficiency and transparency improvements. Currency risk topped the list of macro concerns after the dollar’s recent surge erased local unit gains, and GP team stability was the chief operational one, especially with regular talent poaching and spinoffs from original vehicles reshuffling personnel. While 70% of limited partners polled thought their portfolio performance met expectations, only a minority still believe the previous 15% desired annual return is in reach. They assume developed markets will continue to lag and tap Asian funds as the top prospects, while Europe/MENA and Russia-Turkey offerings are not likely to gain 10%.

Sponsors have looked to Gulf sovereign wealth pools for anchor money, but with Saudi Arabia’s $20 billion commitment to a Blackstone infrastructure fund announced during President Trump’s trip there for an Arab summit, PE attention has turned to possible local deals that could be targeted in the mandate. The stock exchange was down through April on the MSCI index, but public capital market development is a core component of the 2030 plan’s modernization push, with equities to be further opened to foreign investors who currently account for 5 percent of activity. The June index review may position the bourse for an upgrade from frontier status, amid preparations for an historic IPO by oil and non-oil behemoth Aramco awaiting sensitive balance sheet and government relationship disclosures that may not satisfy global asset manager demands. They are otherwise dubious of reform intentions to stoke 1 percent GDP growth, expand private sector share, and restrain the budget deficit after civil servant allowance reinstatement and a new housing and debt restructuring stimulus package estimated at tens of billions of dollars over the near term without a convincing exit strategy.

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