Balancing Risk & Reward – Investing in Emerging Markets
Balancing Risk & Reward
Investing in Emerging Markets E
merging markets have been commonly explored in recent years and the on-going financial turbulence in the developed world will continue to act as a catalyst for investors to look further afield. While there are significant macroeconomic trends that make emerging markets attractive destinations for private equity funds – elevated economic growth rates, higher expected returns and diversification benefits - substantial risks remain. The financial crisis has taught us all just how closely investments are tied with politics and economics and investing in emerging markets is a very complicated process; the financial world moves extremely quickly and it’s essential to have the best and latest financial information to make well-informed decisions about risk and return. Acquisition International speaks to Henry Potter, Partner at Alpha Associates in Zurich. Alpha Associates is an independent private equity fund-of-funds manager with approximately $2bn of global private equity assets under management. “We further manage private equity accounts for institutional clients and are the leading private equity fund-of-funds manager for CEE and Russia/CIS where we have been active since 1998. We invest in leading funds in the region while making acquisitions of fund positions in the secondary market. At the same time our longstanding relationships in CEE and regional expertise enable us to carry out selective direct co-investments.” What skill set is required to successfully invest in an emerging market? “In general the skill set for investing in an emerging market is not very different to that of investing in a developed economy, as investing in private equity funds is ultimately
about backing talented people. That said, in emerging countries factors such as in-depth understanding of the country’s commercial environment, as well as a deep local and global network are even more critical. Experience of investing in the respective market is invaluable and key to limiting investment risk and delivering superior returns.” Why do you invest in CEE? “The region provides an interesting hybrid of developed markets risk and emerging markets growth. GDP growth remains significantly stronger than in Western Europe and the US, while all countries in the region are democracies and most members of the EU. We can rely on stable legal and regulatory frameworks, functioning capital markets and in general a developed market infrastructure. Performance in CEE has been very good. In fact, the region’s private equity industry has outperformed Western Europe on a five and 10-year basis as well as other emerging markets based on data provided by the EBRD, Cambridge Associates and the European Venture Capital Association. At the close of 2009, the 10-year net horizon returns for CEE private equity were 16.9% in US dollar terms.” What are the prospects for the region? “CEE is not a homogeneous block. Don’t forget that Poland was the only country in Europe to grow in 2009. In aggregate, the region has a solid balance sheet, with debt levels far better under control than western European countries. In particular, Poland and the Czech Republic, where most of our CEE portfolio is invested today, have performed well and are best prepared for a deepening of the financial crisis. The private equity asset class has a terrific opportunity now. The fund managers are capable and have proven their ability to generate returns.
Capital is scarce and demand for capital is rising with more and more succession transactions and a general acceptance of the business model. In twenty years’ time, people may well look back and think these were the best years to invest in private equity in the region.” Can you name us a notable deal you’ve recently been involved in? “In September we co-invested in a $100m funding round of OZON.ru, the undisputed leader in the Russian e-commerce sector. The company, labelled the “Amazon of Russia”, has shown annual revenue growth by more than 40% and we’re excited to support such a fast growing business and emerging household name in Russia.” Sounds promising. So should everyone be investing in CEE then? “We encourage investors to add the region to their allocation based on the specific argument that emerging Europe is converging with developed economies and that benefits outweigh the risks. However, to be successful in CEE it is important to have local knowledge and investment experience. Historically, investments in the region have done well in the aftermath of crises, such as the 1998 Russian crisis and the crisis in CEE in 2001. We believe history will repeat itself.”
Henry Potter henry.potter@alpha-associates.ch www.alpha-associates.ch Tel: 0041 43 244 3100 Talstrasse 80, PO Box 2038, CH-8022 Zurich
Seventeen