Private-Equity Cash Going Abroad

After a half-decade of betting their capital in domestic deals, U.S. private-equity funds have turned their attention overseas. Emerging markets such as China and India present tantalizing opportunities to achieve better pricing, returns, and growth rates compared to deals in mature U.S. market sectors.

What’s driving the dollars overseas? The protracted credit crunch has squeezed financing, at a time when markets in emerging economies are growing. Given intense competition for the best deals in America, U.S. privateequity firms have their crosshairs sighted beyond the United States and Western Europe, where they can still hit bull’s-eyes.

 

Private-Equity Assets Under Management

$1.1 Trillion

Total worldwide

 

$716 Billion

U.S.

 

$264 Billion

Europe

 

$125 Trillion

Asia

 

SOURCE: McKinsey & Co.

“Until credit disappeared, private equity could borrow cheaply and leverage off of that to maximize returns,” explains Richard Addelstone, a partner in the private- equity group at Cayman Islands-based law firm The Walkers Group. “Now that this has gone away, funds are looking to fast-growing markets in China, India, Russia, the Middle East, and even Africa. Growth rates are 7 percent to 10 percent in these regions, compared with less than 2 percent in the mature markets of the U.S. and Western Europe. Emerging markets also are less affected by the credit crunch; you can still find relatively cheap financing in these countries, such as from local regional banks.”

Private-equity funds’ strict objectives concerning pricing, returns, and structure (the ability to influence the business contracted), added to much less competition overseas, make this year’s flurry of deals the tip of the iceberg.

Through August, more than half the takeovers announced by U.S. private-equity firms were foreign targets, up from 35 percent in 2007, according to Thomson Reuters.

“This is a function of competition and opportunity,” says Dory Wiley, CEO of Commerce Street Capital, a Dallas-based merchant bank. “Private equity is branching out where the pricing is better, the growth rates are higher, and the economic dynamics fare well, and that is no longer the United States.”