Is The Timing Finally Right For PE In These 5 Emerging Markets? by Kevin Dowd, PitchBook
Sometimes it’s boom. Sometimes it’s bust. So it goes for the world’s developing and emerging markets, the wide swath of countries outside North America, Europe and East Asia battling to establish their bona fides to investors—countries where any number of geopolitical factors and financial vagaries can have an outsize impact on economic health.
The winds of fortune blow swift and unpredictable, with markets rising or falling in the public eye based on the strength of their currency, political upheaval or the results of new elections. Here’s a checkup on five emerging markets that have been the source of particular intrigue so far in 2016.
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The second-largest country in South America has been largely absent from the international markets this millennium after defaulting on $100 billion in debt during 2001, at the tail end of a four-year stretch of major economic turmoil.
With the election of free-market proponent Mauricio Macri as president last November and the resolution of a longstanding debt dispute with Elliott Management, however, Argentina could become an increasing target of private equity investment.
Already this year, the country has been the site of several PE deals, including the add-on of Hibu Argentina by Evolvere Capital’s Publicar Publicidad Multimedia. And there are other signs of a potential Argentine turnaround. On June 6, coffee shop operator Havanna raised $11.5 million in a public offering, the country’s first local IPO in years.
For more than half a century, “capitalism” has been a four-letter word on the little island barely 100 miles from the southern tip of Florida. But as the country’s closed economy slowly opens—with U.S. President Barack Obama’s recent visit serving as the latest sign that change is afoot—there are reasons to believe Cuba could be a major future destination for international dollars.
Airlines, hotels and cruise lines all eager to gain access to the cloistered country, a tourism uptick alone could be a major boost to the Cuban economy, not to mention the other opportunities that would accompany a complete lifting of the American embargo. Airbnb has added locations in Cuba to its offerings. And investors like Thomas Herzfeld, manger of the Herzfeld Caribbean Basin Fund, are already raising capital to funnel into the country. “We welcome the risk, we want the risk,” Herzfeld said in an interview with CNBC.
But there are plenty of reasons for caution, too. In fact, with the largest population in the Caribbean, an educated citizenry and close proximity to an economic juggernaut, Cuba cuts a similar profile to Turkey circa 2010, shortly before a bullish PE market in the Mediterranean nation went bust. There is very little existing investment infrastructure in Cuba: the PitchBook Platform tracks zero private equity deals in the country this millennium. If Cuba does ultimately emerge down the line as a target for PE, there will certainly be many more steps along the way.
As far as emerging markets go, India is pretty well emerged, dwarfing the other countries on this list in terms of deal count. But the nation still has tantalizing potential for investors, with a population of more than 1.3 billion people and an economy that’s undergone explosive growth in recent years. Most of the requisite pieces are in place for India to be an increasing target of private equity dollars.
That doesn’t mean the road will be free of bumps. With the rupee in decline during the early months of 2016, PE activity has seen a corresponding dip. Specifically, transactions in the B2B space have been waning in the past three years, falling from a 37% share of India’s PE deals in 2014 to a 26% proportion so far in 2016. There’s been a converse increase in the financial services sector, with those deals making up a recorded high of 20% of activity this year, a leap from 14% in 2015.
In terms of who’s doing the investing in India, two firms clearly lead the way. Since 2006, Blackstone has logged 59 deals in the country and the International Finance Corporation has logged 50; no other firm tops 32 transactions.
From the Iranian Revolution of 1979 until earlier this year, the idea of Western investment in Iran was purely an abstraction. But with the lifting of economic sanctions against the Middle Eastern powerhouse in January, the flood of dollars, euros and pounds might not be far behind.
In fact, the first streams of capital are already starting to flow. Less than two weeks after the sanction lifting, Iran-based Turquoise Partners announced plans to start a $200 million private equity fund in concert with the Dubai unit of Swiss bank Reyl & Cie. The vehicle will be used to back Iranian companies working in the sectors of consumer goods, pharmaceuticals, consumer finance and hospitality.
Yet while periodic deals in the country will likely become more frequent in the near future, there’s still a long ways to go before Iran becomes a consistent location for investment. The heavy sanctions may be gone, but the fact remains that there are major political, social and economic differences between Iran and the West that figure to be a barrier to widespread investment. PE investors are often looking for consistent, reliable returns, and the current political climate in the Middle East could make such a thing difficult to come by for the foreseeable future.
Brazil is discussed more frequently as a sleeping giant in Latin America, but Mexico is making its own case to become the region’s primary driver of private equity investment. Relative political stability, a series of pro-market reforms, steady GDP growth and a healthy pool of startups are just some of the reasons deal count in the country could continue to rise. During the past decade-plus, private equity activity has meandered upward—increasing one year, declining the next, but following an inexorable path to the upper right.
While deals in the B2B and B2C spaces account for more than 50% of yearly activity, increased opportunities in the energy sector have been another major catalyst of recent growth. Seven energy deals were sealed in Mexico during 2014 and 10 more in 2015; the previous high was just four deals. Among last year’s most notable energy transactions were a $900 million investment in PEMEX’s Los Ramones II gas pipeline projects by First Reserve and BlackRock, along with a $500 million funding from Partners Group to help Fermaca expand its gas infrastructure platform in Mexico.
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