Private Equity in Emerging Markets: Drivers in Asia Compared with Developed Countries

Abstract

This article reveals interesting structural differences in private equity fundraising in Asia compared with developed markets. Exit opportunities and the amount of credit provided by the banking sector are found to be strong determinants of new funds raised. Unlike in developed markets, however, emerging markets are negatively impacted by the amount of credit provided by the banking sector: Funding of transactions stands in direct competition with banks in these markets as more credit is provided by the banking sector. Fewer investment opportunities remain for private capital. The negative relationship with credit provided by the banking sector is reflected in different business approaches. In developed markets, banks financially leverage private equity transactions to a substantial degree to magnify returns to investors. In emerging markets, private equity transactions use less leverage. Differentiating along investment stages, economic growth and research and development (R&amp;D) expenditures are found to be of particular importance to venture capital. For later-stage leveraged buyouts, the degree of recent deals negatively impacts funds raised. As competition for attractive deals among private equity funds intensifies, investor return expectations deteriorate and fundraising is reduced as a consequence. <b>TOPICS:</b>Private equity, emerging, portfolio construction, statistical methods