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Private Capital
Emerging Markets

Emerging markets private equity post-COVID-19: what does the road to recovery look like?

Posted by on 09 June 2021
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As the world slowly starts to recover from the pandemic, we can begin to make more concrete predictions and investment decisions based on how the markets have reacted to the significant disruptions caused by COVID-19. Svetlana Fathers, Producer of SuperReturn Emerging Markets 2021, takes a deep dive into four emerging markets regions and what their paths to recovery look like.

Ongoing economic uncertainties and geopolitical risks associated with emerging markets have long become something of a ‘standard’ consideration for investors, and regional dealmakers have been notorious for successfully turning challenges into opportunities. However, unlike any financial recession, the global pandemic of 2020 has become a drastic event that brought on some unpredictable challenges to developing markets, putting them under yet more pressure and little foresight as to how these markets would recuperate and return to a ‘new normal’.

We take a closer look at four different regions: Asia Pacific, Middle East and Africa, Latin America, and Emerging Europe.


Emerging Markets - ChinaCompared to other regions, APAC investors appear to be the most optimistic, anticipating a positive outlook amidst the ongoing COVID-19 developments. Since China and East Asia were the first ones affected by the virus, they were also the first ones out of the pandemic. Their regional economies are further along the recovery path and have already seen an increase in investment activities, most of which concentrate in Asia - specifically in China. According to Bain & Company, Asia-Pacific private equity deal value had hit a record high. High valuations, together with the lack of exits and a decline in fundraising, became the main market constraints for the region.

Due to travel restrictions, deal-making in Southeast Asia has reduced significantly. Fundraising has been hit hard by COVID-19, with many private equity firms sitting on a record amount of unspent capital. The hottest assets have been technology and healthcare firms, as well as the next generation of the region’s start-ups.

We have all been following the recent COVID-related distress and instability in India, putting the economy to a stand-still. Having said that, in retrospect, some Indian business owners have become more open to private equity capital during the pandemic, with the Indian private equity space being more active than it has ever been in the last decade. In India, the pandemic has also caused a seemingly unlikely combination where high-quality assets are going cheap while the investors are cash rich. The funds that can find the right investment opportunities in this difficult time will not only emerge stronger but also generate significant returns in the coming years.

Middle East and Africa

Emerging Markets - Middle EastMost investors in the Middle East & Africa (MEA) region anticipate a substantial slowdown in deal-making activity, as many international LPs remain reluctant to do business due to uncertainty in the market. Fund managers and venture capital firms, on the other hand, remain overwhelmingly optimistic and are focused on making new investments. Most expect fundraising conditions to improve, and nearly a third say their firms will focus on raising new funds. ESG continues to gain traction in the region, but the concept of ESG remains relatively low on the priority list for the majority of the institutional investors and fund managers.

Alternative debt funds will be crucial to supporting funding gaps in Middle East markets, particularly for the SMEs, which represent a significant part of the region’s non-oil economy. Looking back at 2020, the level of deal flow has been similar to pre-COVID times. However, the types of transactions and the reasons for them have changed from a more strategic, proactive approach of trying to find synergies and cost saving measures to more non-traditional models. Overall, international investors are still interested in Middle East markets, but they are now more selective of the types of assets to invest in, focusing on strong and resilient businesses that are able to survive in the current climate.

On the other hand, the pandemic had been devastating to Africa’s economy and currencies at the start of the pandemic (a decline in local currencies often translates to a decline in portfolio performance). With deals put on hold and due diligence much harder to execute under travel restrictions and remote operations, certain adaptations to standard processes had to be made.

However, most dealmakers believed these were only short-term implications and remained optimistic. The key considerations at the start of this healthcare turmoil had been assessing the impact of the pandemic on their existing portfolio companies and taking steps to stabilise those companies, making sure that they had sufficient liquidity to survive the short to medium term impacts. The most exposed funds have been those with portfolio companies focused on non-essential retail, hospitality, leisure, and travel. As for medium and long-term outlook, private equity investors in Africa have been looking to diversify their investment targets in search of businesses that will be more resilient to the post-COVID economy.

Like most of the key emerging markets, technology-driven and technology-enabled businesses, such as those focused on financial payments and processing, data centres and telecoms infrastructure, are most likely to attract investors’ appetite. Other sectors that are predicted to entice investments are transport and delivery logistics businesses, agriculture and health infrastructure, financial services, and insurance. Another sector that is gradually moving into the spotlight is media, entertainment, and culture, due to the rise in internet penetration.

We can also expect a rise in the number of permanent capital vehicles investing in African private equity. Another medium-term development that is likely to have a positive effect is the implementation of the African Continental Free Trade Agreement, which aims to create a single economic market for goods and services across the entire African continent, similar to that seen in the European Union.

Latin America

Emerging Markets - LatamPrivate equity and venture capital firms in Latin America (LatAm) continue to be optimistic for the future of the market, as the region is becoming a highly favourable fundraising destination for alternative fund managers.

The key constraints for investors, apart from the challenges brought by COVID-19, are increased political and macroeconomic issues across the region. As always, the savviest dealmakers have found a way to turn these challenges into opportunities to expand their pool of available capital and diversify their investments. Like other regions, the top two sectors to invest in are Healthcare and IT. Similar to the MEA region, ESG factors are not considered to be of key importance to investors despite seeing an accelerated integration of ESG.

Growing opportunities in the region come with greater competition and more sophistication among prospective LPs. Pension funds and family offices have become much stricter when conducting due diligence, including ESG and other considerations such as succession planning, alignment of interest, and company culture. Amongst LatAm LPs, fund manager selection has become a top priority, putting additional pressure on GPs to differentiate and deliver alpha to ensure they receive capital commitments from institutional investors. As a result, we can see the emergence of more specialised fund managers.

Moreover, GPs are being kept on their toes when it comes to fundraising, as there is no single approach when it comes to Latin America. Regional LPs all have different needs and expectations depending on the country, investor type and regulatory framework. A Columbian LP is likely to have a totally different strategy and approach to a Mexican or Brazilian LP. This is something fund managers must consider when fundraising, and defining this GP/LP alignment from the onset is absolutely crucial. Due to a characteristically long sales cycle, GPs need to come in with a high level of involvement, a strong strategical commitment and a distinct set of predetermined long-term goals and objectives. Another important area of focus for GPs has to be overall performance and alignment to international best practices, guidelines and standards.

Looking at the year ahead, it is safe to say that capital allocations to alternatives will certainly continue to increase overall. However, it is inevitable that some countries will come out of the pandemic as winners, eager to deploy their excess dry powder, while those who have struggled the most will simply have to bear with. For LPs, the key areas of focus will have to be careful manager selection, flexibility, and opportunism.

Emerging Europe

Emerging Markets - EuropeThe level of confidence and optimism amongst private equity dealmakers in emerging Europe is in line with other key emerging markets. This is probably the only region where any concrete predictions for post-COVID recovery are the hardest to make. Since taking big a hit from the financial crisis in 2018, Central Europe been left with a unique know-how in navigating challenging market conditions and economic crises. Theoretically, this makes the region better equipped to bounce back and able to identify opportunities and capitalise on them.

According to a survey conducted by Deloitte, the slump in investor confidence caused by the pandemic is less drastic than that of the last global financial crisis, with almost half of the respondents expecting the deal sizes to increase. Overall, private equity funds have entered this crisis in a better shape than in 2008-2009. This time around, private equity firms have significant amounts of dry powder, and their portfolios are in a much better shape. We expect that the pandemic will create a buyer’s market, where vendors will lower their price expectations and create a trend of pricing reduction, thus generating more opportunities for private equity dealmakers.

In a nutshell, it seems that private equity investors have a strong intention to soldier on through any COVID-19 impact, focusing on new investments, critical operational aspects of their portfolios such as cutting costs, and managing cash. In the final stages of emerging from the pandemic, we expect private equity companies in emerging Europe to resume their hunt for new deals again and deploy some of their dry powder. The availability of bank financing will be key for larger deals, but we are still likely to see more activity in the SME space.

What’s next for emerging markets?

As with any crisis, new opportunities have already started to emerge for the industry to transform its business models and support companies and economies.

We can already observe noticeable shifts in global supply chains toward localisation and diversification as businesses expand their suppliers base to a broader range of countries. Strategic sectors like healthcare, personal protective equipment, food packaging, etc. are the ones focusing on bringing production back from overseas. Countries like Turkey, Mexico, Vietnam, Bangladesh and Morocco are most likely to be the first ones to benefit from this shift, which is also expected to intensify in the months to come.

Digital transformation is another post-COVID trend that is very rapidly spreading amongst emerging markets private equity players. With the global pandemic having significantly changed consumer behaviour and purchasing patterns, it is obvious that businesses are speeding up the adoption of digital solutions to meet the new needs. With an upsurge of online shopping, telehealth and remote working, this is a trend that simply cannot be overlooked by dealmakers. Internally, businesses have already started to integrate digital aspects and new technological solutions into certain parts of their operations to increase their competitiveness and ensure business continuity and resilience. New digital business models are also becoming crucial in bringing down prices, safeguarding supply chains, reducing costs, and improving transparency.

The companies that have welcomed most private equity investment throughout the emerging markets are those with digital business models and platforms that were boosted by the switch to virtual work, education, and retailing. These digitally accelerated sectors include e-commerce, e-learning, digital healthcare, online booking services, online entertainment, and digital payments and financial services.

Lastly, the appetite for impact-oriented investments has rocketed since the pandemic. Impact investors have been focusing on sectors such as healthcare and logistics to help combat the effects of COVID-19 in these areas. Investors are coming together to address environmental issues, especially climate change, to improve resilience as well as make a positive impact on job creation.

As the public government debt in emerging markets continues to increase, more private sector funding is required in SDG-related sectors, including education, gender, water and sanitation, etc. As ESG becomes a key tenet of the COVID-19 recovery and a driver for growth beyond, it will have a tangible impact on new and existing investments.

Interested in finding out more about the emerging markets? Join us at SuperReturn Emerging Markets 2021, 22-24 June. Head to the website and find out more!

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