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Emerging Markets Titans

This panel session, which featured giants of the emerging market space, explored what factors held back the flow of capital in emerging markets, and how its volatility could be harnessed.

Half an hour was no time at all for such an interesting topic and phenomenal panel, began Mounir Guen, CEO at MVision and the session's moderator at SuperReturn Berlin.

So he dove straight in, asking Greg Bowes, Co-Founder & Managing Principal at Albright Capital Management for his views on the current state of emerging markets.

Current state of the market

Greg, who invests in opportunistic, special situation value orientation, said that, while it wasn't a secret that emerging markets had been out of favour, he wanted to highlight "it's not a single line item. There are lots of strategies that the timing might be right for."

What about India? Guen asked Akhil Awasthi, Managing Partner at Tata Capital Growth Fund. In local currency terms, what kind of returns were there?

"On an aggregate portfolio basis across the entire last fund that we had, which was 2011 vintage, you're getting about 28-29% IRR, about 2.5+ X," answered Akhil.

"If we adjust it for dollar – because our strategy is to have companies that are dollar revenue generating, so depreciation works in their favour – overall we have only a 10-15% hit on currency. Even a dollar IRR would be 23-24%.

"We have been able to get access to transactions in India which are really growth-orientated," he went on to explain. "We can buy practically any business, except real estate and infrastructure which have their own dynamics, all others are well represented in the portfolio," he added.

Seymur Tari, CEO at Turkven Private Equity, has been investing in Turkish equity for 17 years, and has, in lira terms, been generating top and bottom line growth of around 35%. This equates to mid 20s in hard currency. That is, until two years ago when the lira started sliding.

"In our first two funds we had mid 20s return, but the last fund in dollars suffered as the two currencies went their separate ways. But we still see," he said, "in the portfolio, our companies have grown 30-35% in local currency, if you take an average of the last 16 years.

"Depending on what the currency did, we've had some great years and some less interesting years," he said.

Heiko von Dewitz, Managing Director at AGIC, explained how their strategy straddles two worlds.

"We deploy our capital in the safe and well established eco-system of Europe, and we seek to combine that with growth opportunities in Asian markets.

"When we say Asia we often mean China, but not exclusively," he clarified.

"The sectors we invest in are advanced industrial technologies and healthcare, which enjoy strong circular growth rates, especially in the Asian markets.

He explained that the strategy: "was a way to get around currency exposure, while still being able to harness the growth trends."

How to entice investors

How do you entice US investors into your market, Mounir asked Seymur.

"We have the opportunity to buy very cheap on the equity side," he answered.  "We are seeing lower multiples. It will not be the best time to sell or fundraise but it could be an interesting time to invest," he answered.

What was Akhil's view?

"More important for us is understanding what the structural reasons for growth are in a certain industry," he said. "I think, for emerging markets, it's the expertise that the fund manager brings to the table – identifying trends from fads.

"You have to look at the manager and his or her understanding of the market and understand whether that return is repeatable."

What are investors fearful of?

"I think they are worried that inflation is always going to be higher in emerging markets than it is in developed markets, and because of that you're always going to fearful of periodic devaluations," said Greg.

But there was room for optimism, he added. "I think the asset class has evolved significantly. It is no longer a single line item where there isn't a wide variety of approaches, and approaches that can do well in all environments.

"We have been at it for ten years, we have a value orientation, we have 0% loss ratio across every deal we have done. We look across geographies for pockets of capital shortage and value opportunities.

"The LP community is accustomed to thinking about different strategies, value versus growth in private markets in the developed arena, there's a similar opportunity in emerging markets," he added.

Currency volatility

How did they manage volatility?

"Our construct is that there is a certain amount of volatility adjustment when one invests across a period of 5 years," said Akhil.

"External factors are trickier to manage on currency - we know that our LPs like to see returns in US$ – so we try to ensure about 1/3 of the portfolio is dollar denominated in some way, and therefore aligned with dollar volatility."

Heiko agreed, saying that volatility would equal out across the life cycle of the fund.

"If we look at the revenue base of our portfolio companies, we expect to be quite diversified, which provides some sort of hedge. Overall we think the exposure is manageable."

Future trends?

Seymur has spent the last few years building a significant international business for many of his portfolio companies.

"The region has been affected by lower oil prices, but many of our portfolio companies have a quarter or more of sales coming from exports, so we see Turkey as a regional power in that sense," he explained.

"The other big trend is that many industries are changing rapidly with the advent of online tools. We want to play that as well. We have concentrated on the rising consumer, which is the classic emerging market theme, and we have made good money there for our investors, so that's where we feel at home."

Akhil said that India continued to be under-leveraged in comparison with other large economies, and that growth in the financial services sector would continue.

"Export orientated sectors like healthcare and IT services are good, although specialist areas are becoming more difficult to do now, but one can still find good returns," he argued.

There were two reasons to invest in emerging markets, concluded Greg. "Excess returns and diversification."

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