According to a study undertaken of 50 private equity firms, when investing in lesser-known EMs, more ground work is required than for developed markets. The solution is to adopt a full integration approach – less necessary for developed markets investments. This is because EMs come with additional risks than developed markets.
What are the benefits of an integrated approach? It results in vigorous scrutiny of both the commercial and reputational concerns of EMs. (This is crucial for when issues of jurisdictions and government involvement arise.) The problem is, however, that establishing an integrated approach is not so straightforward. Indeed, according to global editor-in-chief of ‘Mergermarket,’ Giovanni Amodeo, it is costly. Private equity houses require on-the-ground experience, which means they need to ascertain a comprehension of the local, political and regulatory environment of the regions as well as the operations of the target company and any potential corruption issues that may arise.
That is very much where the issue is. The fact that it is quite challenging for private equity firms to set up this integrative investigative approach is exactly what renders it so important. It has been shown through the Transparency International’s Corruption Perceptions Index that EMs have a much lower rating than their developed market counterparts. On a scale of 0-10 (with lower figures reflecting higher incidence of corruption), the best score in an EM region was a mere 3.6 (for the Middle East). Thus it is clear that a much “tougher” approach is required for EMs, as Amodeo notes. Developed markets have a totally different – and usually more reliable – accounting process than their EM counterparts.
Nonetheless, despite all these issues, EMs are still attractive regions for private equity firms to invest in. Out of the 50 investors surveyed, 34 recognize growth potential in BRIC countries; 25 in Central and Eastern Europe and 22 in sub-Saharan Africa.
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