Private Equity Investing In Emerging Markets

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Seaf Selected As Emeritus Impact Manager For Impactassets 50 2022

Private Equity in Emerging Markets

SEAF is pleased to announce that it has been selected as an Emeritus Impact Manager by ImpactAssets for the ImpactAssets 50 2022 . IA 50 Emeritus category recognizes impact fund managers who have been on the IA 50 for at least five years. Each year, IA 50 fund managers who achieve this status will be recognized in the Emeritus category.

Fighting Climate Change Through Smes

SMEs are often overlooked as part of the solution to climate change, despite having an enormous impact on their communities and local economies. Attention is primarily given to investing in climate mitigation and resilient infrastructure for adaptation. What we are overlooking is that SMEs can create local solutions that drive adaptation and build resilience to climate change, becoming agents of climate resilience themselves, if given the right tools and investment, which they currently do not have.

How To Win In Private Equity In Emerging Market And Developing Economies

    The past decade has not been easy for equity investors in emerging market and developing economies . Emerging markets lag developed markets in the MSCI public index. They also lag in the Cambridge Associates index of private equity and venture capital performance, especially outside Asia, where one region, Latin America, has seen negative returns. In Sub-Saharan Africa, where many saw a strong investment case early in the decade, several major fund managers are now pullingback.

    These recent results raise questions about the financial case for investment outside high-income economies. Although there are examples of investors that have prospered, their experience may be an exception rather than the rule. Under what circumstances do EMDEs outperform developed markets?

    Overall, we find that this portfolio has outperformed the S& P 500 by 15 percent since 1961. In comparison, the median leveraged buyout fund in developed economies, which also invests in private equity, outperformed the S& P 500 by 16 percent. So long-run returns comparable to those in developed markets can be achieved through a global, diversified emerging market strategy and when the aim is to have positive impact alongside financial return.

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    Forces Lined Up Against Em

    Valuations are low for several reasons, of course. Chief among them, says David Hauner, head of EM strategy and economics at Bank of America Global Research, is tightening global financial conditions, as the US Federal Reserve, the worlds biggest central bank, begins raising interest rates and reversing the flood of stimulus it has poured into markets during the pandemic.

    The prospects for EM assets can mostly be summarised by the level of global liquidity, which in this case is clearly getting worse, Hauner says.

    The amount of liquidity, or money looking for investments, in global financial markets is a core driver of asset performance. Since the global financial crisis of 2008-09, central banks in advanced economies, led by the Fed in the US, have run aggressive bond-buying programmes to encourage investors to buy risky assets, hoping this will boost economic activity and output.

    It is debatable whether such purchases, known as quantitative easing or QE, did much to drive economic growth. But they have certainly done a lot to boost asset prices. Now, however, those policies are going into reverse. This year, the Fed has begun to raise interest rate and to swap quantitative easing for quantitative tightening, or QT.

    Drawing a direct correlation between global liquidity and global wealth, CrossBorder Capital says: A rising tide may well float many boats but a tsunami of monetary tightening unquestionably sinks asset markets. More pain lies ahead.

    What Are The Potential Benefits Of Emerging Market Equity Investing

    Private Equity Investing in Emerging Markets: Opportunities for Value ...

    Emerging market equity investing offers many potential benefits, including improved global diversification and the opportunity to access growing economies and undervalued securities.

    • Diversification: International diversification is one way to possibly reduce your overall volatility. EM equity funds can help you take this a step further by investing in markets that don’t move in sync with each other.
    • Opportunity: One of the biggest potential benefits of EM equity funds is the potential to improve your portfolio’s overall long-term returns. According to the International Monetary Fund, EMs and developing economies recently accounted for nearly 80% of global economic growth. That share is increasing as infrastructure improves and demand for goods and services from these regions increases.
    • Valuation: While companies in developed markets already have valuation factored into the price of their stock, those in EMs often don’t. This creates potential for active fund managers to identify stocks that are trading at inexpensive valuations relative to their growth outlooks.

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    How Do Blackrock Emerging Market Equity Funds Compare To Others

    Emerging market ETFs make it possible to tap into the diversification and performance benefits of EM in the way that best suits your needs. In addition to actively managed emerging market mutual funds and broadly diversified ETFs, we offer a range of solutions, including funds that seek to reduce risk, mitigate currency risk and pinpoint specific markets.

    The world of EMs is constantly in flux. One constant is BlackRock’s commitment to providing investors with EM expertise, across many different market cycles, regions and industries.

    China Latin America Fuel Activity So Far This Year Africa Fund Raising Rises

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    LOS ANGELES — A $1.1 billion investment in a Chinese life insurer and the buyout of an Indonesian retailer are among the deals that are part of an overall rise in private-equity investment in emerging markets so far this year, and the pace of transactions is on track to surpass last year’s total, according to an industry group.

    In the first half of 2010, emerging-markets private-equity investment totaled $13 billion, up from $8 billion at the same time last year, according to new figures from the Emerging Markets Private Equity Association, a Washington-based nonprofit.

    The total value of private-equity investments made in the first half of 2010 was $4.5 billion more than that invested through the same period last year. There were 402 deals done in the first two quarters, an increase of 44% from the same period last year, and quarterly transaction volume was tracking slightly ahead of the pace before the financial crisis.

    “There are more and better quality deals in the pipelines the continued easing of price expectations among sellers means managers have been more successful in closing transactions,” said Sarah Alexander, president and chief executive of EMPEA, in a statement.

    “Emerging-market fund managers are increasingly bullish in light of stabilizing markets and lower valuations.”

    Increased activity in China, India and Latin America has fueled 90% of the rise in both transaction volume and in total investment so far in 2010.

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    Em Equity Funds Misunderstandings

    Perhaps one of the more common sources of misunderstanding is what constitutes emerging.” At a basic level, countries that fall into this category are moving from a closed economy to a market-based one, but the opportunities and risks therein can vary greatly.

    For example, some countries, such as Poland and Hungary, are considered emerging because they are undergoing political transition. In others, such as China, improving infrastructure or changing demographics are the defining factors.

    A second common myth is that EM equity funds carry high expenses. While many do have slightly higher expense ratios than their developed-market peers a reflection of the higher cost of investing in these markets that is not always the case.

    Emerging Markets: Future Investment Themes

    Actis: Emerging Market Private Equity

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      The rate at which emerging markets have recovered from the recent pandemic has surprised a number of investors, even though perhaps they shouldnt have been the current emerging market landscape is significantly different from that of the last few decades.

      Emerging markets have evolved many have adopted more orthodox fiscal and monetary policies which has enabled them to become more dynamic and less cyclical in nature. This stable economic environment has also allowed companies in emerging markets to thrive and become competitiveon a global scale.

      There are going to be a number of opportunities for investors over the coming decade, with various sectors predicted to grow, such as travel where demand is seeing a revival, the e-commerce sector, and sectors which benefit from the continued adoption of digital services.

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      What Are Emerging Market Equity Funds

      Emerging market equity funds offer investors access to countries and regions that are undergoing economic transition. While there are many ways to define emerging markets , the term typically refers to the two dozen countries that are part of the MSCI Emerging Market index. Just as mutual funds and exchange-traded funds vary greatly in focus and strategy, so do EM equity funds.

      BlackRock offers investors broad EM exposure and regionally focused strategies via our actively managed mutual funds. BlackRock and iShares ETFs that range from globally diversified strategies, such as the iShares MSCI Emerging Markets ETF, to funds that focus on specific regions like Latin America and countries like China and India.

      Agency Problems In Private Equity

      There are two sources for agency problems associated with Private Equity: The relationship between the LP and the GP as well as the relationship between the PE firm and the entrepreneur. In order to avoid these problems incentives and monitoring are necessary. Incentives for mutual gains bring the objectives of the PE firm and the entrepreneur in line.28 Monitoring starts with an extensive due diligence, assessing all relevant aspects and figures regarding the investees business, and is continued by frequent visits and meetings with the company management and involvement in the board of directors.29

      The agency problems between PE firms and LPs are minimized by the short life span of the fund and the possibility to withdraw funds or withhold new funds in later stages.30

      1 See Fenn et al. , p. 1.

      2 See Zalan , p. 2. Jeng/Wells , p. 243, also include investments in publicly quoted companies in the term Private Equity, which will not be regarded in this paper.

      3 See Zalan , p. 2.

      4 See Leeds/Sunderland , p. 9.

      5 See Berger/Udell , p. 614.

      6 See Cumming/Johan , p. 4.

      7 See Berger/Udell , p. 614 and Eckstaller/Huber-Jahn , p. 11.

      8 See Zalan , p. 4.

      9 See Cumming/Johan , p. 5.

      10 See Lerner/Schoar , p. 7.

      11 See Jeng/Wells , p. 242.

      12 See Jeng/Wells , p. 243.

      13 See Millson/Ward , p. 79.

      14 See Gupta/Sapienza , p. 349 and Eckstaller/Huber-Jahn , p. 22-23.

      15 See Wright/Robbie , p. 526.

      16 See Jeng/Wells , p. 243.

      17 See Wright/Robbie , p. 527.

      19 See Jeng/Wells , p. 244-245.

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      What Are The Different Types Of Emerging Market Equity Funds

      Once a niche asset, EM equity funds have steadily evolved to include different areas of focus and accommodate various investment styles. For many investors, the decision starts with whether to take an active or an indexed approach to investing in EM equities.

      • Active EM equity funds. These funds draw on market expertise and stock research to identify equities that offer potential for above-market returns. Proponents of active investing note that the inefficiencies of EM offer advantages to stock pickers who can spot them while sidestepping risks.
      • iShares EMETFs.Index strategies, such as those offered through iShares ETFs, aim to mimic various indexes, from the widely followed MSCI Emerging Market Index to those tied to specific regions and countries. One advantage of ETFs is low fees.
      • Global region- or country-specific funds. While many funds shop the globe for EM equities that best fit their objectives, others home in on specific regions or individual countries.

      Most individual investors, whether using active or ETF strategies, tend to get their EM exposure via more diversified portfolios to help mitigate risk. That said, regional funds and country-specific funds or ETFs are ways for investors to act on a specific market view or target the parts of the world that interest them most.

      As with any mutual fund or ETF, EM funds can be further broken out by investment style and market capitalization.

      Later Stage Financing: Private Equity And Buyouts

      Private Equity Investing in Emerging Markets: Opportunities for Value ...

      Private Equity financing is a general term and can be divided into subcategories. The distinction is mainly based on the financial involvement of an existing or external management team or the debt-equity ratio .

      When a portfolio company moves past the early stage, the need for expansion makes later-stage financing necessary. This type of investment is on the border of Venture Capital and Private Equity.19 Firms in financial distress are also included in this target group. Besides the mere provision of funds as an equity stakeholder of a not publicly listed company buyouts play an important role in the PE industry.

      Management buyouts and management buyins describe the involvement of the management team. By exercising a MBO the existing management team takes control over the company, assisted by external financing through a PE firm. A MBI basically describes the same issue, but in this case an external management team buys the company from the vendor and replaces the current management team. In both cases the PE firm takes a majority stake in the company. The involvement of the management guarantees a higher degree of commitment and entrepreneurial leadership.20

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      Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested. Exchange rate changes may cause the value of any overseas investments to rise or fall.

      Emerging markets generally carry greater political, legal, counterparty and operational risk.

      *Source: Schroders as at 30 September 2019

      Important Information

        Ey Emerging Market Insights Series

        This talk is a part of the HKUST IEMS EY Emerging Market Insights Series. It is presented by HKUST IEMS with support by EY. Check out the next event in this series at .

        Light refreshemnts and drinks will be served between 12:15pm to 12:25pm on a first come first serve basis.

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        Deploying Significant Capital Into Privately Held Companies And Funds With High Growth Potential

        Established in 1995, our $24.8 billion well diversified and high performing global portfolio contains privately-held companies through both direct investments and funds. Our activities are driven by our sector focus we invest in the industrial, healthcare, financial and business services, technology, and consumer/retail sectors.

        In 2022, we opened our first international office for private equity in New York City. Having a team in the largest global investment hub enables BCI to foster new relationships while generating additional opportunities to invest capital through our direct and fund investment programs.

        PRIVATE EQUITY PROGRAMPERFORMANCE

        Annualized returns for the periods ended December 31, 202111Assets in the private equity program are valued annually at December 31. Returns for the program are calculated on an internal rate of return basis and benchmarks are presented on a time-weighted rate of return basis.

        GLOBAL DISTRIBUTION OF PRIVATE EQUITY PROGRAM

        As at December 31, 20211

        What Are Some Risks Associated With Emerging Market Equity Funds

        Actis: Emerging Market Private Equity

        As part of a long-term strategy, EM equity funds offer investors the potential for greater returns than they might get if they invest exclusively in developed markets. Of course, where there’s the possibility of additional return, there’s the possibility of additional risk.

        EM equity funds may be prone to more volatility than funds that focus on developed countries. These markets are typically smaller and often more vulnerable to political shifts, commodity price swings and changes in monetary policy, among other risks.

        Many EM funds also carry currency risk that is, the value of their holdings vary not just by increasing or decreasing security prices, but by the value of their currencies relative to the dollar. It’s important to weigh the pros and cons of investing in an EM equity fund that hedges currency risk, versus investing in one that offers currency exposure.

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        Figure : There Is Substantial Variance In Performance Of Investments Within The Portfolio

        Notes: The multiple of the S& P 500 is calculated as the public market equivalent , a measure of financial return that compares the investment to an equivalently timed investment in the public index. The PME is preferred to alternative measures of return because the PME accounts for the value of payouts that are less correlated with the market, as in the capital asset pricing model. Investments in the chart are grouped by vintage yearthe year of first cash flow.

        There is large variance in returns across investments within this strategy . Our analysis identifies three factors that drive investment performance at the country-level, providing insight for any international investor who contemplates investing in EMDEs to realize an above market return on equity.

        Second, focus on the forecast of macroeconomic fundamentals, rather than the situation at the time of investment. A surprising result is that country risk factors, including political risk, perceived corruption, and the ease of doing business, do not significantly predict financial performance when measured at the time of investment. However, macroeconomic conditions over the course of the investment have material effects, with a 1 percent increase in cumulative annualized real GDP growth over the life of an investment increasing the annual excess return by almost 1 percent.

        There are of course some caveats.

        Private Equity Talent Management In Emerging Markets

        | SPECIAL REPORT: PRIVATE EQUITY

        Financier Worldwide Magazine

        In the competitive profession of private equity, what keeps managing partners up at night? For many prominent emerging market fund managers, some of whom seemingly face few binding resource constraints, the answer is often something unexpected: an empty desk. According to the Emerging Markets Private Equity Associations inaugural Private Equity Talent Management in Emerging Markets Survey, competition for qualified talent, which is expected to intensify in most emerging markets over the next five years, is a key challenge for the private equity industry.

        When global fund managers set about building new country teams, finding the right person to head the office can sometimes take years. Even when there are sufficient numbers of qualified candidates seeking private equity positions, that desk may be too expensive to fill, and even then, may not stay occupied for very long. In discussions with private equity practitioners, we have found that talent management remains one of the key pain points for private equity fund managers in emerging markets, where the pools of experienced human capital arent as deep as those in developed markets. Moreover, given that private equity is patient capital, the learning curve for industry professionals can be longer than that of their peers in other industries. As a result, a proven track record in the asset class can be an especially rare and sought-after qualification.

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