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Goldman treads lightly in emerging markets

Unpredictable capital flows and managers often relying on minority stakes are two reasons why the banking giant’s private equity group will only increase exposure to emerging markets private equity at ‘a measured pace’.

Goldman Sachs’ private equity group is taking a cautious view of emerging market private equity investment, says managing director Marc Boheim. “Our allocation to emerging markets will go up, but at a measured pace,” he told delegates at a conference in London Tuesday.

Part of Goldman Sachs Asset Management, the bank’s private equity group invests in private equity funds, direct co-investments and secondary fund positions on a global basis. It currently has an exposure of between 5 and 10 percent to emerging markets private equity.

Boheim pointed to a number of reasons why the group would not be accelerating emerging markets private equity activity, including the fact that capital generally moves in and out these markets too quickly.

He questioned whether the investment methodology of many emerging markets funds would generate returns during a downturn. “Many emerging markets managers tend to buy minority stakes alongside the owners of the business, which is great as long as the market growth is there,” he said.

Superior risk/reward profiles could be generated through investments in debt in the Western markets, and, if seeking exposure to emerging markets, the undervalued stock markets in those regions could provide both better returns and “quasi-liquidity”, he said.

Boheim was speaking on a panel at the London School of Economics’ Alternative Investments Conference.

On the same panel Michael Dee, who heads up international investments for the $135 billion Singaporean investment firm Temasek Holdings, defended emerging markets private equity against questions of heightened business risks.

“Governance issues and market risks are not exclusively emerging markets phenomena,” he said, making reference to the Enron scandal in 2002 and the current financial crisis.