Post-pandemic attitudes towards investing in emerging markets
Emerging markets have had something of a bumpy ride when it comes to LP attention. In the early 2010s, many investors flocked to emerging markets as more developed markets worked through the aftershock of the Global Financial Crisis. In 2011, for example, 32% of private capital funds closed worldwide were focused on emerging markets, accounting for 24% of aggregate capital raised, according to Preqin figures.
After dipping for a few years as investors returned to developed markets, the proportion rose again from 2015 to 2017. Yet the environment has been more challenging since then. In 2019, 23% of private capital funds raised were focused on emerging markets, accounting for 15% of capital raised, while in 2021 to mid-June, just 13% of funds closed and 10% of capital are destined for emerging markets.
These figures suggest that, while appetite relative to developed markets was already waning, the pandemic has further weakened LP interest in emerging markets.
It’s a view backed up by Janusz Heath, Head of Investment Management, Emerging Markets, at Capital Dynamics. “Those of us who specialise in emerging markets are passionate about the opportunities they present,” he says. “Unfortunately, those with capital to deploy are currently rather less passionate. There is a lot of caution among the investors we speak to, irrespective of the growth we are seeing in many of these markets.”
“It’s a time of dislocation and we are seeing a lot of risk aversion,” agrees Sebastian Schroff, Global Head of Private Debt, Allianz Investment Management. “This is particularly so for emerging markets.”
Part of this is likely to do with the fact that returns in developed markets have remained strong over recent years as asset pricing has continued to hold up, even through the disruption of 2020. At the same time, many investors perceive risks to remain high in emerging markets relative to regions such as Europe and North America.
Indeed, the key risk remains currency fluctuations, according to Abderahmane Fodil, Senior Partner at idi Emerging Markets, which makes fund and direct investments. “Many of our investors are dollar or euro-based,” he explains. “We don’t hedge our positions because private equity is either not easy to hedge or too expensive.” Others include political risks and inflation.
Yet many of those with emerging markets exposure spanning back a number of years say these risks are often over-stated and can usually be mitigated. “It is possible to compensate for currency risk,” says Fodil. “You have to have a strongly diversified portfolio across emerging markets, so that you are not over-exposed to certain currencies and you have to identify opportunities where you can generate extra returns.”
Heath adds that targeting growth is the most effective way of managing currency issues in emerging markets. “Currency is the enemy of institutional investor attitudes towards emerging markets,” he says. “If you are in markets where there is a risk of devaluations, you have to invest in companies with high growth and actually, if you have that you are also much more able to cope with inflation. In fact, you could argue that emerging markets businesses are better equipped to deal with inflation than their developed markets peers - they are usually growing faster and are more able to outpace inflation.”
Meanwhile, political risk can be managed by targeting sectors that are less affected by shocks, says Fodil. “It is important in our markets but, as we’ve seen over recent years, political risk can also be a factor in so-called developed markets,” he says. “To mitigate this, you have to spend time analysing the geopolitical situation in each market and look at sectors that will continue to perform well regardless of what happens politically.”
For idi Emerging Markets, that means consumer-related sectors. He adds, “The core thesis is that we are seeing the quasi-exponential growth of the middle class in these markets and people continue to consume, whatever the political or currency situation.”
Another of the big issues many LPs cite that prevents them from investing in emerging markets is realisations – there are sometimes fewer exit options than in developed economies. And COVID-19 has only exacerbated the situation. An International Finance Corporation report published last year on the pandemic’s impact on emerging markets private equity and venture capital points to fewer sales to other fund managers, given their need to support existing portfolio companies, a scarcity of strategic investors in assets because travel restrictions hamper due diligence and a more challenging IPO environment.
Yet, says Fodil, the situation has brought some positives. “Exits have been delayed,” he says, “and that’s partly because of volatile public markets and partly the result of lower valuations in some companies – this does require some patience. Yet we are now seeing the development of dual track processes for some companies even where an IPO had been the clear exit route. This is an improvement on emerging markets private equity exit strategies and it’s likely to stay.”
The outlook for emerging markets is promising. “Investors are increasingly positive about investing in emerging markets in the medium term,” says Dorothy Kelso, Global Head of SuperReturn. When investors were asked where they saw the best private markets opportunities in 2025, a third of respondents to a Preqin survey named emerging markets, up from 19% in 2020 and higher than Europe, which just 21% of respondents ranked as the top destination in four years’ time.
And one part of the private markets looks set for significant growth, according to Schroff. “So far, private credit hasn’t played much of a role in emerging markets,” he says. “They have historically been all about equity. But however difficult private credit currently is in emerging markets today, the markets are growing and accelerating while bankruptcy and insolvency regimes are improving in certain countries. We’ve seen this happening the US, then Europe – emerging markets are likely to be next.”
Indeed, Heath believes that investors will need to get going now if they are to capture the opportunities they appear to be anticipating in emerging markets.
“In 10 years’ time, demographics and economies will have moved,” he says. "As an investor, you want to be with access-restricted managers – and these will emerge over the coming years in emerging markets. If you are not building relationships today, you won’t get into the star preforming funds of tomorrow. To investors, I’d say: ‘Come on in, the water may be choppy, but it can be quite lovely - with care’."
