Are Emerging Markets Still Emerging? Assessing Private Equity Activity in Emerging Economies Before and After the Global Financial Crisis
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Authors
Svintsitski, Ilya
Issue Date
2010
Type
Thesis
Language
en_US
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Alternative Title
Abstract
Global economic development is an issue of great significance for the world community.
Governments, corporations, non-profit organizations and even individuals rely on its growth
projections to make a variety of decisions every day. This growth has been exacerbated since
the turn of the 20th century. Through events such as the industrial revolution, expansion of
international trade, increase in multinational business ventures and increasingly open foreign
policies, the global economy has increased at exponential rates. According to the World Bank,
global GOP had nearly doubled by 2008 from its 2000 levels, even amidst the economic
recessions which occurred during this period. Industrial nations like the United States and the
United Kingdom, for example, had expanded by 45% and 82%, respectively.
Among emerging economies and developing markets this growth was even more dramatic:
the economy of the Russian Federation had increased 6-fold, while Georgia grew by 430%. This
growth is critical to these countries; it can drastically improve the living and social conditions
for millions of people within the nation's borders. In contrast, a lack of economic progress, as
seen in a variety of third-world countries, can result in civil unrest, high crime rates, and even
widespread hunger or disease. Thus, the improvement of economic conditions in nations
around the world has helped people achieve better standards of living, enjoy longer life
expectancies, and dream of brighter futures.
However, the widespread economic buoyancy that characterized the primary years of the
new millennium became jeopardized in mid-2007. Market conditions began to deteriorate and
by the second half of 2008, global illiquidity, overly leveraged corporations and falling U.S.
house prices fostered the largest and most widespread recession the world had seen since the
Great Depression. Hundreds of financial institutions, some of which were over a century old,
began to go bankrupt. Public equity markets plunged to previously unimaginable lows,
unemployment skyrocketed, and nations' consumption, production and fixed investment levels
were decimated. Soon enough, even companies outside of the financial industry began to feel
the pinch as consumers' wealth dwindled away and they were forced to take heavy spending
cuts. In order to prevent further damages, governments around the world were in turn
compelled to enact series of massive fiscal bailout packages, worth anywhere between
hundreds of millions to trillions of U.S. dollars.
Investor sentiment also sank to historic lows as financial institutions and investment
professionals scrambled to sell off assets in order to cut their losses and/or avoid the market
volatility. Consequently, millions and in some cases billions of dollars worth of capital fled many
emerging economies in the second half of 2008 and first half of 2009. The massive capital
outflows and flights of educated investors from the perceivably riskier emerging markets
presented these countries with a very critical problem. Now starved of the necessary funds and
resources required to maintain the previously witnessed growth rates of their economies, it
became questionable whether these nations, which have in the recent past been described as
"emerging," would still have the capacity to emerge and thus improve the economic conditions
of their respective citizens.
Fortunately, some hope still remains. Although public equity markets have suffered from
massive volatility and heavily depressed valuations, and foreign direct investment (FDI) became
much too risky during the market uncertainty of the crisis, private capital investments were not
subject to the same shocks as the two previous forms. Additionally, private capital, or private
equity (PE) investments are usually more sophisticated on an aggregate level than those made
into public equities and FDI and, as such, present a more reliable picture of how investors see a
certain country's current investment climate and/or future investment potential.
Encouragingly, many academic and professional studies have shown that private equity
investments can directly improve, enhance, and even turn around a company's performance.
Private equity investments have increasingly proven to be followed by significant increases in
new product development, engagements in entrepreneurial ventures and technological
alliances, and increased R&D and patent citations made by the investee companies.
Furthermore, PE funds often contribute to keeping value-adding strategies on track as well as
assisting in broadening market focus and in being able to assess investment in product
development. Through different types of investments private equity firms thus enhance
company performance, facilitate strategic change, and promote organic growth.
PE investments differ significantly from other investment forms. Notably, they are made for
the long term - usually a minimum of 3-5 years. This lack of liquidity contrasts from investing
capital into a public equity market where the investment can be sold on short notice. Private
equity investments consequently require a country to demonstrate political stability and bright
prospects for sector and/or economic growth in order to ensure profitability. In line with this
notion, private equity funds require very high projected returns on their investment before
committing capital- usually these range between 25%-30%. Hence, when private equity
investments are made and returns on these investments are realized, the company and hence
the nation's economy are growing.
From these characteristics, it is clear that examining the trends in private equity fundraising,
investment, exits and performance within a given nation can provide a strong idea of the long-term
economic potential it retains. As such, studying the PE market in various countries
presents the opportunity to examine not only the current attractiveness of their investment
environments, but also their perceived potential as future investment destinations.
To answer the question of whether or not emerging markets are still emerging, this project
aims to gain a comprehensive understanding of the development and potential of the private
equity industry in several developing economies. Four countries are examined - the United
States, China, Russia and India. The United States serves to act as a control group- a developed
nation and the birthplace of private equity. Studying the United States, private equity's largest
market, and comparing and contrasting it to the respective markets of China, Russia and India,
provides a solid insight into how the PE industry has developed and fared in the three latter
countries. Drawn from a variety of professional databases and publications, statistics have been
examined from 2001 through 2009 - before, during, and shortly after the major effects and
outcomes of the credit crisis. To control for any outside influences on the private equity
markets other than those that originated directly from the global credit crunch, broader
economic and political developments during the given time frame have also been considered
for each country.
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