The Financial Crisis and Emerging Markets

L to R: Peter R. Ryder, Victor Z. Gao, Henny Sender

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