Emerging Markets Investors are Scared. Siguler Guff Isn’t.

A recent survey from EMPEA shows a cooling interest in emerging markets. But Siguler Guff expects their relative outperformance to continue.

This was supposed to be the year when emerging markets emerged from their slump. It hasn’t happened yet. Indeed, some analysts say the era of impressive growth in developing economies is over. A recently published survey bolsters that outlook.

Yet Siguler Guff, a prominent emerging markets investor, sees resilience where others are seeing weakness.

“We’re planning to increase our exposure to emerging markets,” says Ralph Jaeger, a managing director. “The performance we have seen over the last five-year period in emerging markets has eclipsed the performance of U.S. and European private equity.”

Such enthusiasm contrasts that of your average limited partner, as shown in the 12th-annual Global Limited Partners Survey from EMPEA—the Emerging Markets Private Equity Association—which assesses the views of more than 100 limited partners involved in the emerging markets private equity (EMPE) asset class. Just 40 percent of LPs say they plan to increase commitments to EMPE funds over the next two years, a six point decrease from 2015. Meanwhile, 22 percent of LPs say they expect to decrease their EMPE commitments in 2016, up from 16 percent last year.

But even if the emerging markets story is no longer a blockbuster, these markets still attract strong interest from firms, like Siguler Guff, with an established presence.

“Strong performance in the emerging markets in recent years was achieved despite some serious headwinds,” he says. “And this suggests that a more benign environment will make the coming years conducive to even stronger returns. That is why we are encouraged by the current environment in many of the emerging markets in which we operate.”

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Jaeger says Siguler Guff is bullish on China, despite the challenges presented by a weaker yuan and stagnant growth. Changes underway in the country show that leaders there are alert to the necessity for economic transformation, he says, and present opportunities in the healthcare, consumer, and media sectors.

“Investors now have the ability to invest in sectors in China that, by law, were not accessible to investors five or 10 years ago—such as healthcare,” he says. “Healthcare offers huge opportunities as a result of pent-up demand in the country.” Other areas of interest are energy efficiency and pollution remediation.

The EMPEA survey shows the three most attractive markets for investment during the next year, as ranked by LPs, are Southeast Asia, India, and Sub-Saharan Africa. Latin America (not including Brazil) fell sharply, from first place in EMPEA’s 2015 survey to fourth place this year.

Here again, Siguler Guff bucks the trend.

“We really like Latin America right now,” Jaeger says. “We are seeing attractively priced deals, we like the currency, and there is capital scarcity, which is always a good environment to invest in, because that is what generates high returns.” Sectors that appeal to Siguler Guff in Latin America include consumer-driven industries, agricultural services, and healthcare, as well as distressed investments—deals that are more accessible and reasonably priced today than they were four or five years ago.

Siguler Guff is also pursuing investment in Southeast Asia but taking a cautious approach to Africa for now. “When you look at emerging markets, there are several things that should make you pause before investing,” Jaeger says. “One is when you don’t find enough investment talent or operational talent to develop companies to a certain scale. Another is when you encounter a highly priced investment environment where you are unable to capture value from growing companies.” The firm is noticing all of these issues across Africa.

Another red flag for Siguler Guff is geopolitical risk, as exists in Turkey and the Middle East. There are good companies, quality talent and attractive deals in the regions, Jaeger allows, but he thinks the current political environment is too unstable. Likewise in Russia. Though Siguler Guff has been a leader in Russian investment, Jaeger says the firm will wait on the sideline until the environment improves, especially in light of international sanctions on Russia due to the country’s military actions in Ukraine.

“Overall, we are seeing an increase in operational talent that makes investing in emerging markets easier these days,” he concludes. “Today, there is greater transparency in how business is conducted in these markets, which demonstrates a much deeper understanding of what it means to interact with investors. That level of transparency and dialog has improved across all the markets in which we operate.”