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Emerging markets boom to continue

The new wave of alternative investment in developing economies is fundamentally different than past expansions, Harvard professor Josh Lerner told attendees at the recent 2008 Emerging Markets Private Equity Forum in New York, co-hosted by Private Equity International and EMPEA.

The recent explosion in emerging markets fundraising and investment signals “a profound shift” in the private equity landscape, according to Josh Lerner, a Harvard Business School professor and prominent private equity academic.

While advising both LPs and GPs to appreciate the historic volatility of developing markets, Lerner argued that the current downturn in the US and Western European economies, combined with increasing regulatory pressure on private equity throughout the developed world, will continue to make emerging markets an attractive destination for private capital.

Lerner made the comments during a keynote address at the 2008 Emerging Markets Private Equity Forum, a conference in New York co-hosted by sister publication Private Equity International and the Emerging Markets Private Equity Association (EMPEA) in late March.

The high level of private equity activity in emerging markets is “not something that's going to go away”, said Lerner, who in January assisted in the publication of a report on private equity's impact on jobs for the World Economic Forum in Davos.

Fundraising for emerging markets increased by $26 billion (€16 billion) between 2006 and 2007, and many limited partners are upping their allocation to the developing world in response to the anticipated downslide in many OECD economies.

Lerner observed that emerging markets could benefit from liberalisation of rules on foreign investment.

His sentiments were echoed by EMPEA president Sarah Alexander, who was also upbeat on the prospects of alternative investment in the developing world. “Never has the industry looked so promising,” she said.

Alexander pointed out that emerging market investments should be relatively immune from the credit crisis, as most private equity deals in the developing world utilise considerably less leverage than those in the US or Europe.

Although most speakers at the conference agreed that the recent boom in emerging markets private equity would persist, there was some disagreement over the extent to which a US recession would affect developing markets.

“Decoupling is a myth,” said Joseph Ferrigno, partner in the Asia Mezzanine Finance Group, during a roundtable discussion on emerging market trends. Ferrigno warned the industry against exaggerating emerging market immunity to a US downturn, as many countries remain heavily reliant on Western consumers.