Emerging managers look beyond returns

Responsible investing is gaining greater importance in emerging markets, according to Arnab Barnerji, non-executive director of CDC Group, the UK government-backed fund of funds that focuses on developing countries.

He told delegates at a private equity conference hosted by the International Finance Corporation and the Emerging Markets Private Equity Association that the global financial meltdown has caused a backlash against free market capitalism. As a result, various stakeholders will be closely watching how firms and their portfolio companies operate, especially emerging market communities where companies are located.

“Answering to these constituencies and achieving these returns puts you in an impossible situation. It’s important to satisfy your own conscious,” Barnerji said. “You’ll have to have more sensitivity than ever before.”

Private equity’s track record in terms of bringing benefits to the larger community – beyond returns to investors – is “mixed”, said Jonathon Bond, partner with emerging markets-focused firm Actis.

“Let’s hope we can prove private equity can help these cultures,” Bond said. “We can only do that if we’re mindful of the responsibility on us.”

He noted emerging markets managers will have to change the way they do business to survive the financial meltdown, but those who stick with the asset class will see phenomenal returns.

“We’ve had life easy for the past five or six years, the wind has been at our backs,” Bond said, noting the amount of capital limited partners allocate to private equity – and therefore emerging markets – will decrease in the next three to five years.

“As an LP in New York, or London, or Singapore, the emerging markets don’t look that compelling” compared to other options open to LPs like distressed investment and secondaries funds, Bond said. “We’re a young asset class and we have a great deal to prove. This is a moment of truth.”

About a third of the emerging markets private equity firms will disappear in the next few years, especially those who practiced undisciplined investing in the heady years of cheap credit, he said.

The good news for emerging market investors is that the economies of many developing countries continue to grow, according to Jeff Leonard, president and chief executive officer of the Global Environment Fund.

In a way, the financial crisis was a “Godsend” as it is cleaning out competition, especially undisciplined investors, and washing debt out of the system, Leonard said.

“We’re going to benefit in the long-run,” he said, appealing to limited partners to “step up and fund those managers with proven track records”.