LPs to raise emerging markets commitments

The majority of limited partners expect 23 percent returns from 2008 emerging markets investments, according to the Emerging Markets Private Equity Association’s 2008 LP Survey.

Drawn by the promise of superior returns, 74 percent of limited partners expected to increase allocations to emerging markets private equity funds over the next three to five years.

The data, from the Emerging Markets Private Equity Association’s 2008 LP Survey, showed that 89 percent of LPs expected to be invested in Asia excluding Japan, or Asia ex-Japan, within three to five years. Asia ex-Japan was followed by 75 percent of LPs saying they would invest in Central and Eastern Europe, while 65 percent would invest in Latin America, 52 percent in Africa and 35 percent in the Middle East.

“Our survey findings illustrate that, despite managing greater risk in their developed markets exposure, LPs continue to diversify their private equity portfolios,” said EMPEA president Sarah Alexander in a statement. EMPEA surveyed 81 LPs in various geographies to generate the data.

The primary driver for increased investment was attractive risk-adjusted returns, cited by 46 percent of LPs as the most important reason for increased emerging markets investment. Expected returns from 2008 emerging markets investments were, on average, 23 percent. This represented a 6.7 percent premium over expected returns from the US buyout market.

A distant second placed reason was improvements in political and economic risks, followed by more qualified general partners. Despite an increase in the number of qualified GPs, the number remained insufficient as evidenced by 66 percent of survey respondents citing it as an important barrier to investment.

The survey results were substantiated by EMPEA fundraising data, which estimated that emerging markets funds have raised $25 billion between January and April of this year alone. In all of 2007, $59 billion was committed to emerging markets funds.

The EMPEA study reinforces the findings of the PEI-ILPA Global Limited Partner Survey 2008, which found a significant number of LPs to be planning increased emerging markets allocations over the next three years. PEI Media – publisher of PERE – found that 61 percent planned to increase allocations to Asia ex-Japan, 44 percent to Central and Eastern Europe, 31 percent to Latin America, 18 percent to the Middle East and North Africa and eight percent to sub-Saharan Africa.