Private equity in emerging markets

A place to look for returns in the current downturn?

Prof. Luc NijsFounder & Chairman Horizon Ltd

London, March 2, 2009ICBI’s Fund Forum emerging markets 2009

Where to start? Why not fundraising!

Despite the market conditions EM PE raised $ 66,5 bio in 2008, a 12% rise

Proportional share in total global PE fundraising raising for 5 years in a row now

Relative decoupling & economic power shifting is reinforced by current recession

Cyclical recession became a structural one and the risk of L-shape depression is looming (cf. Ponzi economy)

Source: EMPEA Feb. 2009

Fundraising per region

A (new) inconvenient truth about risk

Political instability

Legal / Regulatory

Curreny (F/X)

Market fundamentals

Counterparty

Market fundamentals

Structural issues

Environmental

Legal / Regulatory

Pre-crisis Thinking

Post-crisis Thinking

Em

ergi

ng M

arke

tsD

eveloped Markets

High riskHigh Growth

High RiskHigh Growth

High RiskLow Growth

Low RiskLow Growth

Emerging Markets Risks Developed Markets Risks

Av. risk premiums in EMs (%, 2006-2008)

Another inconvenience

Capital inflows to developing world

(Source: IFF, 27 January 2009)

Historic & projected EV/EBITDA

Source: Prop. Research, averages for the clusters

Market Outlook

Cheaper valuations (although some parties sometimes are still in denial)

Attractive deal flow to arrive

Capital constrained entrepreneurs & management

BRIC as a catalyst gone?

But major differentiators among emerging markets

Semi-globalization = procession of Echternach

Market Outlook

But major differentiators among emerging markets

CEE & CIS: Sovereign risk & currency management Debt-financed growth model is broke Euro and Nordic currency infrastructure has eroded fundamentals Mid/Long term catch-up dynamics still in place South-East Europe & Turkey still attractive Russia has a significant implied X-factor at present time

MENA: Undeniable impact on economy SWFs are diverting capital flows back home Mid/Long term outlook still positive Valuations in region still need recalibration to new reality

Market Outlook

But major differentiators among emerging markets

Mena: Still growth but impact of the credit situation trickling

down Commodity play Sector focus

Sub-Saharan Africa: Limited effect of credit situation Tremendous improvement in investment environment Good risk-adjusted returns GDP growth & overall economic development decoupled

from commodity play

Market Outlook

But major differentiators among emerging markets

Asia: China as a manufacturing hub Semi-globalization shows Global gross capital formation (cross-border at risk) Unrealistic valuations in India at present

Volume of investments dropped 38,5 % in 2008 to $ 10,7 bio and are expected to drop to $ 5 bio this year

3/4th of PE investments were done in listed entities

Can they become our customers of last resort? Social unrest might destabilize the vulnerable progress made South Korea, Singapore, Malaysia etc weak on their feet for

the time to come

Something else that is inconvenient

Past performance & GP selection

Institutional investor views: EM versus developed (December 2008)

PE penetration as an asset class

Source: Goldman Sachs, EMPEA

Expecting to grow

Source: EMPEA

Cause of…..

Source: EMPEA 2008

EM Private Equity performance

Source: Cambridge Associates LLC & prop. research,: pooled end-to-end returns, net of fees, expenses and carried interest

Comparative end-to-end results 6/30/2008

(*) Statistical noise likely due to low sample distribution

Source: Cambridge Associates LLC & prop. research,: pooled end-to-end returns, net of fees, expenses and carried interest

Impact on portfolio construction

In 2008 about 1/3 of the total pool of LPs had some kind of exposure to EMs

Portfolio weighting somewhere between 10-30% Do or die for LPs the next couple of years Systemic risk in Western markets are not reflected in risk premiums

Source: Proprietary data

Portfolio exposure

Is this time going to be different for EMs?

During previous booms and busts the developed and developing world evolved in a parallel fashion

This time there is a (partly) contra-cyclical pattern

Political & regulatory impact HC issues Global versus local teams: the best of both Business model rethinking & paradigm shift EM debt usage less or more prudent

Let gravity have its way

Darwinian tsunami & paradigm shifting

Where are you?

Contact

Riga Graduate School of LawLaw & Finance ChairStrelnieku iela 4k-2

Riga LV-1010LATVIA

luc.nijs@rgsl.edu.lvTel. +37167039230