Page 4 - HKUST IEMS Spring 2018 Newsletter

THE PRIVATE EQUITY ADVANTAGE
Although the private sector in
China now accounts for about
70 percent of economic output,
many small and mid-size firms
persistently underperform
relative to their counterparts
in developed countries. At
an IEMS & IPP -- EY Emerging
Market Insights presentation,
Roger Leeds (Johns Hopkins)
drew on his recently published
book "Private Equity investing
in Emerging Markets" to explain
why private equity investors
are uniquely qualified to
address two of the main causes
for this underperformance:
(i) Limited or no access to
medium and long term capital
on affordable terms that companies require to grow,
compete and generate sustained profitability; and (ii)
limited specialized business expertise that small and
mid-size businesses need as their growth accelerates,
placing new, more complex demands on management.
He explains why the case for this specialized investment
mechanism is even more compelling in developing
countries, where alternative sources of capital and
business expertise are relatively scarce.
Private equity has a number of specific characteristics
that sharply distinguish it from all other sources of
capital available to private firms. In contrast to most
Western countries, the companies targeted by most
private equity investors in developing countries reside in
the so-called “missing middle” - a vast universe of under-
served, growth-oriented small and mid-size businesses.
Leeds outlined a number of reasons as to why private
companies consistently underperform in Emerging
Markets. Private equity in developing countries bears
little resemblance to its counterparts in more advanced
countries, where it benefits from a supporting ecosystem
which includes: credible public policy environments;
confidence inducing legal frameworks; enforcement
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of the rule of the law and
efficient financial markets that
offer firms affordable access to
diverse sources of capital.
It is the absence of these
success factors in emerging
markets that allow private
equity investors to capitalize
on these opportunities whilst
mitigating the risks. These sharp
distinctions in private equity
investing between emerging
markets and developed
countries not only create
greater risks for developing
countries, they also create
greater opportunities for certain
types of companies. These
riskier environments have the potential to generate more
private equity investment opportunities by capitalizing
on inefficiencies and information asymmetries. It is for
these reasons that private equity has been growing so
rapidly and has seen success in many emerging markets.
'Prof Leeds' talk was part of the HKUST IEMS & IPP - EY
Emerging Market Insights Series, and was co-organized
by HKUST Institute for Public Policy with support from
E Y.
Policy and Business Talk, “Private Equity
Investing in Emerging Markets: Risk and
Opportunities” by Roger Leeds (Johns
Hopkins) on 2017.11.28
Video available at http://iems.ust.hk/eyleeds