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The Financial Crisis and Emerging Markets

L to R: Peter R. Ryder, Victor Z. Gao, Henny Sender
by Stephanie Valera
18 May 2009

NEW YORK, May 18, 2009 - Despite the unprecedented changes brought
on by the global financial crisis, some observers predict optimistic
long-term prospects for private equity, particularly in emerging
markets. Despite the recession, these markets—in particular China,
Vietnam, and India—offer attractive opportunities for patient and
experienced investors.

At a recent discussion at the Asia Society headquarters in New York, moderated by Financial Times International Financial Correspondent Henny Sender,
a panel of experts discussed how emerging markets are coping with the
changes caused by the economic slowdown and identified countries that
are geared for positive growth driven by private equity.

China and India remain relatively insulated from the downturn though
even they are seeing slower growth. Late last year, the Chinese
government quickly responded to early signs of a recession, announcing
a sweeping stimulus package. "The banking system in China is relatively
unhurt," said Victor Z. Gao, executive director of the Beijing Private Equity Association.

In the last ten years, China's largely publically owned economy has
reorganized to accommodate a fast-growing private sector which now
accounts for one-third of the Chinese market. That growth is a result
of both the highly deregulated markets and high competition on the
micro-level. Gao said small-to-medium sized companies offer the best
opportunities for private equity and will fuel the country's future.

"The famous phrase coming out of India is ‘we are open for business'
and now we are open for business without any hindrances, we have a
clear roadmap, we know what we have to do" said Sanjay Nayar,
CEO and Country Head, India, Kohlberg Kravis & Roberts. He said the
Congress Party's recent election victory is good news but "there is
always a hit and miss in India and I think it boils down to the
conviction that this government will have to bring to the table to
really prove the naysayers wrong."

Nayar argued that India's single largest vulnerability is its large
fiscal deficit, adding that the government can print money, raise
taxes, or introduce serious divestments or land sales to resolve it.

The panel also spoke about some of the commonly-made mistakes in
India. "I have seen a lot of managers force a western paradigm of
investing into local markets, you can't do that, and in India
particularly… where the best assets are not necessarily for sale,"
warned Shad Azimi, managing partner at Vanterra Capital. He said the most important thing is finding the right local partner.

In India and other emerging markets, it's important to understand culturual nuances and how they affect how business gets done. John Schumacher,
founder and CEO of New York Life Capital Partners, said this
necessitates due diligence, involving locals who speak the language and
are familiar with the native business customs. With fewer arbitrage
opportunities in the current market, it is especially important to work
with locals to help identify ventures that offer organic operational
improvement and value creation.

Looking ahead, Vietnam holds a lot of promise with a legal structure
that mirrors China's and a demographic structure similar to India's. In
the months ahead, according to Peter R. Ryder,
co-chairman of IndoChina Capital, we will see more private equity in
Vietnam, which in his view increasingly appears to be a hybrid of China
and India.

The Middle East, with its embryonic stock exchange and largely family-owned market-space, also holds potential, said Khaled Al-Muhairy, founder and CEO of Evolvence Capital.

Despite the added challenges of investing in emerging markets in our
current environment, the panel remained optimistic on the long-term
prospects for private equity and predicted an amplified interest in the
clean energy and infrastructural development sector.

Reported by Chandani Punia