Why Private Equity Needs to Venture Beyond BRICS

The world is never short of crises. Whether it is another incursion of the radical Islamic group ISIS into a new city or an escalation of the conflict in Gaza, the globe can be a dangerous place. Investing in emerging markets especially during tumultuous times is not for the faint of heart. But for the forward-thinking investment firm that goes in with its eyes — and wallets — open, the rewards can be plentiful.

Of course, private capital has long treaded this risk-reward relationship in emerging markets. But fresh thinking out of the recent U.S. Global Growth Markets Forum in New York, put on by The Abraaj Group, makes the case that these markets are undergoing a structural shift that cannot be ignored by investors seeking robust returns for the long term.

“What’s going on in emerging markets, and the growth that is emanating from most of them, is a structural issue, it’s a transformational issue, and this is not a one-off event,” said a former World Bank official who spoke at the event. “It is dramatically and fundamentally shaping globalization of the world economy and it has enormous implications.”

Emerging markets, he contended, will be the engine of growth for the world economy well into the future, a status previously conferred on developed nations. Already, these markets are outpacing advanced economies: Annual, real GDP growth in the 120 countries classified as emerging markets has been growing two to three times faster.

And opportunities are not limited to the well-trodden BRICS — Brazil, Russia, India, China, South Africa — but also much of Latin America, sub-Saharan Africa and Southeast Asia. “Focusing the discussion only about BRICS is missing the boat big time,” the official said.

However, outdated assumptions are fueling investor trepidation about venturing deeply into these other markets. For instance, Africa weathered the recent global financial crisis better than most other regions because of hard-won reforms in many sub-Saharan nations in the prior two decades — a belief that on the surface may sound counter-intuitive.

While investors from developed countries hesitate about going in, China and India — themselves emerging markets — are forging ahead. Indeed, they exemplify a recent trend that speaks to the structural shift in emerging markets: the virtual explosion in trade and investment within these economies. The old status quo of capital flows emanating from developed nations to emerging markets is eroding.

Consider this: 15 years ago, the trade and investment activity among emerging nations composed only 3% of world trade. Today, it is 25%. Indeed, a third of foreign investment coming out of an emerging market goes into another emerging market.

If U.S. corporations do not move more quickly, a forum presenter said, they will be ceding first-mover advantage to countries such as China and India. But this is where private equity can step in and become a first mover as well to take advantage of emerging market opportunities.

Originally published by Knowledge@Wharton June 3, 2015

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