How Do PEFs Evaluate Equity Investments in State-Owned Enterprises of Emerging Markets? Key factors that might affect exit from investments in state-owned enterprises (SOEs) of emerging markets are cash-flow illiquidity and governmental regulatory uncertainty. Thus, when private equity funds (PEFs) allocate to emerging markets, we typically do so through broad-based market cap-weighted exposure. More recently, PEFs have shown interest in specific cuts or subsets of the broader emerging markets, such as country rotation, high-dividend-yield strategies, small caps, low volatility and other investment strategies. PEFs have seen growing interest in the degree of exposure to SOEs in various investment strategies. State-owned enterprises are typically defined as companies that are either wholly or partially owned or operated by a government. Indeed, government ownership could negatively impact the operational aspects of a company because government-owned companies might be influenced by a broader set of interests, beyond generating profits for shareholders. State ownership levels can vary significantly among sectors and countries, depending both on a sector’s significance for providing public goods or fostering economic growth and on the governmental structure. CECG has identified 424 companies out of an initial 3,000 companies in emerging markets as SOEs, with government owning more than 20% of shares. The SOEs had market cap of over $1.31 trillion, about 26% of the original universe’s market cap of approximately $5.07 trillion. There are two major characteristics for SOEs in emerging markets: (1) Ownership Concentrated among Public Good Sectors: Given that the Financials, Energy, Telecom and Utilities sectors are among the most systemically important sectors to economic development, we are not surprised that governments tend to play a more active role in these sectors. (2) Less Ownership among Private Good Sectors: Currently, governments are less involved in the Consumer Discretionary and Consumer Staples, Information Technology and Health Care sectors. Companies in many consumer-focused sectors tend to be less vital to the strategic economic development and welfare of emerging market governments. These sectors also are often the focus for growth investors who see a burgeoning opportunity as emerging market consumers develop and increase their income and standard of living. Private equity investments in emerging markets are generally less liquid and less efficient than investments in developed markets and are subject to additional risks, such as risks of adverse governmental regulation and intervention or political developments. There are risks involved with investing, including possible loss of principal. Foreign investing involves currency, political and economic risk. PEFs focusing on a single country, sector and/or funds that emphasize investments in smaller companies may experience greater price volatility. Private equity investments in emerging markets, currency, fixed income and alternative investments include additional risks.
Posted on: Sat, 06 Dec 2014 15:27:22 +0000
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