Courtesy of The Financial Times, an interesting article on private equity’s interest in emerging markets:

A year ago, who would have thought Myanmar would be in the spotlight on the private equity stage? It turns out that those PE funds with an eye on geopolitics, are also seeing potential in the Middle East and north Africa in the wake of the Arab Spring .

Interviewing 143 private equity executives between July and September, Grant Thornton, the accoutancy firm, considers the attraction of these embryonic emerging markets:

As well as the high growth characteristics of many of these frontier markets, another particular attraction for GPs is the current low penetration of private equity.

To deal with the higher risks these destinations present, funds are setting up shop in regional hubs. Mo Merali, a partner at Grant Thornton, told beyondbrics: “In the same way that London has been hub for pan-European funds, India and China are hubs for pan-south-east Asian investment activity. Funds base themselves in India and use the quality of people and skills based there.”

And so we have an unexpected trend: PE investors in the Brics are going beyond their borders for new investments and new offices, despite having relatively high growth at home. Chinese funds are looking to south-east Asia, Africa and South America for new opportunities and in Latin America, the perspective is widening beyond Brazil. Strong growth in Peru and Colombia is drawing investors as local businesses need funding to expand. One Peruvian survey respondent commented: “Brazil is overheating, so I would say Colombia, Mexico and perhaps certain parts of Central America are of interest.”

Another surprising finding is that funds in emerging markets seem to be more pessimistic than their developed market peers as far as fundraising is concerned. In Asia Pacific and the Brics, more than half the executives interviewed categorised the fundraising environment as “very negative” and another 30 per cent as “negative. In contrast:

Practitioners in North America have an increased confidence about their ability to invest, raise debt and generate returns, whilst MENA stands out as a region where optimism is at its highest and where we expect to see a marked increase in PE activity in the short to medium term.

In terms of deal activity too the tables have turned. In North America, no respondents forecast a decline in activity and 59 per cent are expecting an increase. In contrast, among respondents in the Brics, 32 per cent forecast a decline in activity, 22 per cent a plateau, and 46 per cent increasing deal activity.