Why private equity?
Private equity entails investing directly in companies that are not quoted on a stock exchange. This investment approach has several benefits, especially in frontier and emerging markets.
- Underdeveloped capital markets in frontier and emerging markets mean assets are more likely to be mispriced, creating significant opportunities
- PE investors legally obtain “inside information” about their portfolio companies and can therefore realise more value from investments than their peers in listed markets. The more ‘inefficient’ a financial market, the more value can be added by good GPs
- Experienced GPs have more opportunities to improve governance and add strategic and operational value
- PE investing exhibits better alignment of interest than listed equity as GPs invest alongside LPs
- With a holding period of 4-7 years, PE is patient capital allowing for sustainable growth
- Less competition in these markets can mean better entry multiples for disciplined GPs
- PE in developing markets displays weak correlation with other markets, whether listed or private, creating valuable diversification in a global portfolio
Sarona believes the best risk-adjusted opportunities for investors lie in high-growth sectors that are set to benefit from the rapidly growing middle class in these markets. As people’s purchasing power increases, they typically spend more money on healthcare, consumer goods and education. As the graph above illustrates, listed equities in emerging markets are heavily slanted towards financials and energy. In contrast, more than half of PE exposure focuses on the high-growth sectors we believe best captures the growth opportunity within these markets.
The graph above illustrates why it is difficult for investors to capture the growth in frontier and emerging markets by simply investing in listed equities. In Peru, 75% of listed equities are focused on mining and financials, which only constitute 15% of the GDP. PE gives you better access to sectors such as consumer goods, utilities and industrials, which are more representative of the real economy.