Brazil overtakes China in emerging private equity-survey

Brazil has overtaken China as the favourite market for emerging private equity deals over the next year, due to a stronger political and regulatory environment and lower valuations, according to a survey published on Monday.

Private equity investors want to increase their exposure to emerging markets as a whole, to 16-20 percent in the next two years from 11-15 percent currently. This is primarily due to the high economic growth in these markets, according to the Emerging Markets Private Equity Association and Coller Capital survey of 156 private equity investors globally.

“Brazil has leapfrogged China as the most attractive market for private equity fund manager dealmaking in the next 12 months — and the rest of Latin America is also now viewed as significantly more attractive than it was a year ago,” EMPEA/Coller Capital said.

Over three-quarters of investors surveyed expect annual net returns of at least 16 percent in emerging Asia, and nearly two thirds expect to see this in Latin America.

Fourteen percent of emerging maket private equity investors expect to begin investing in Brazil in the next two years.

“The assessment of political risk in Brazil is almost zero, in China it’s 24 percent (of respondents),” said Sarah Alexander, ceo of EMPEA, in a telephone interview.

“Regulatory and tax issues are seen as relatively easier in Brazil, and Brazil compared to India and China is not expensive.”

Political risk is a major deterrent to fund managers new to investing in Russian private equity, with 63 percent of respondents citing this as an issue, the highest for any region in the survey.

“It’s tied with how Russia is perceived in the outside world,” said Erwin Roex, partner at Coller Capital.

“Investors that are already in the Russian market have a quite different perception from those that are not in.”

Extensive news coverage of issues such as the legal spat between BP (BP.L) and Russian state-controlled Rosneft (ROSN.MM) over joint venture TNK-BP (TNBP.MM) are stifling new investment, but existing private equity investors are making strong returns, Roex added.

Investors in the survey were also deterred by political risk from investing in the Middle East and North Africa, but the survey was conducted in January and February, at the height of political tension in the region.

“Anything related to the Middle East would not be reflective of sentiment today,” Alexander said.