Private equity managers are flocking to emerging markets in search of the returns they and their investors have come to expect from the asset class in the United States.
But U.S. private equity returns have been stagnating, and industry observers expect them to begin to drop.
U.S. private equity returned 19% for the year ended Sept. 30, down from 22.5% for the year ended June 30, according to the National Venture Capital Association, Washington, and Thomson Financial, Stamford, Conn. For three years, on the other hand, the compound annual returns were almost identical — 13.2% for the period ended Sept. 30 and 13.4% for the period ended June 30.
Meanwhile, returns for emerging markets private equity rose to 25% for the year ended June 30, from 24% a year earlier and -10% three years earlier, according to Boston-based Cambridge Associates LLC data provided to the Emerging Markets Private Equity Association, Washington.
But it's been a bumpy road for those already in emerging markets private equity.
Over a decade ago, private equity firms Hicks Muse Furst & Tate Inc., Dallas (now known as HM Capital Partners LLC), and Texas Pacific Group, Fort Worth, Texas, stumbled badly trying to invest in Mexican companies in separate deals, making what insiders called a $1 billion mistake between them.
"Over the years, emerging markets have disappointed as much as they have entranced," said Peter Yu, founder and principal of New York emerging markets private equity firm Cartesian Capital Group LLC. Until April 2005, Mr. Yu was president and chief executive officer of the AIG Global Emerging Markets funds.
"The siren song of higher intrinsic growth and lower competition is alluring, but these markets present challenges as well," Mr. Yu said. "In any time, in any given emerging market, one-third of the time the prudent decision is not to invest."