Rubenstein Sees Emerging Markets Yielding ‘The Greatest Reward’ in the Coming Years

Many emerging market economies might not have the same magnetic appeal they once had for investors, tarnished by economic volatility and concerns about stability, but for David Rubenstein – co-founder and co-executive chairman of The Carlyle Group – now is the perfect time to plow money into ventures in the countries that make up this group.

“Right now I am putting a lot of my own personal money into emerging markets because I think that’s where the greatest reward is likely to be in the next couple of years as the cycle turns,” he said during a keynote address at a global private equity conference in Washington, D.C. “If everybody was rushing into the emerging markets now, I would be nervous – but they are not, therefore I think there is greater opportunity,” he said.

Rubenstein invests through his family office, which he set up after stepping down as chief executive officer of Carlyle, at the end of 2017.

“There’s no doubt that the emerging markets are recognized as having greater growth prospects, Rubenstein said, “However, right now the bloom is off the rose because the emerging markets have not done as well in the last couple of years – money is pulling away from the emerging markets, and people are nervous about investing in emerging markets.”

“That is the best time to invest in emerging markets,” he declared.

Rubenstein argued the worst has passed when it comes to issues negatively affecting the appeal of emerging market economies – such as commodity price declines, corruption and a lack of transparency, as well as the dearth of viable deals.

Speaking during an exclusive interview on the sidelines of the same event, Kamran Anwar – SS&C GlobeOp’s Managing Director of Private Equity Services – agreed that the biggest issue the private equity industry faces when it comes to investing in emerging market economies is around governance, such as board independence, compliance, and the quality of internal risk controls, good recordkeeping, to name a few issues. A good example is the Abraaj Group, a Dubai-based private equity group that at its height had $14 billion in assets under management, before collapsing in 2018 under a $1.1 billion debt load and accusations of misappropriating investor funds.

Anwar believes such major economic and governance crises create a “jumpstart mechanism” for industry reforms, and can serve as catalysts for change. He said emerging market companies are better governed today than they were a few years ago. “As they compete for global capital, they are better able to respond to global demands around transparency.

Anwar echoed Rubenstein’s bullish view on the outlook for emerging market investments, noting that “uncertainty has been synonymous with emerging market economies,” as exemplified by crises in the nineties in Argentina and Brazil, oil price volatility in the Middle East and, the continued tensions between India and Pakistan. ‎This, in turn, has led to a better understanding of identifying, analyzing and quantifying risk.

“That is the best time to invest in emerging markets,”–David Rubenstein, Carlyle Group co-founder.

The ability of investors to navigate constantly-changing political dynamics and events in these countries is “time-tested,” he said, and private equity firms now have more experience today when it comes to allocating capital.

“Uncertainty in emerging market counties leads to the greatest amount of opportunity,” such as below-market valuations, Anwar said, adding that those who are experienced enough can navigate these challenges “at the right risk premium.”

“Uncertainty in any environment leads to opportunities, and the advantage goes to managers who are able to identify hidden gems at attractive valuations,” Anwar said. High growth dynamics in emerging markets, large and young populations, as well as several instances of path-breaking innovation all create an attractive investment opportunity set. He cited at Safari Telecom in Kenya as an example of “disintermediating banks” in the money transfer processes.

Anwar added that “given growth patterns and latent demand from young, consumer-oriented populations, emerging markets are well positioned to become larger economically than many OECD (Organization for Economic Cooperation and Development) countries within our lifetime.”

Rubenstein delivered his remarks at the Emerging Market Private Equity Association’s (EMPEA) Global Private Equity Conference this month. EMPEA highlighted the central role being played by family offices in particular, who are increasingly attracted to emerging markets. This is fueled by a greater willingness to take risks, he said, as they do not have the same level of fiduciary responsibilities placed on managers of entities such as pension and sovereign wealth funds.

Looking ahead, while historically the rates of return on investing in emerging market economies have not exceeded the yields on investments in developed countries, Rubenstein said he believes that in time the return on capital allocated to emerging market ventures will outpace developed markets. This will be due to less competition, better access to financing, improved accounting standards and the countries themselves will become more sophisticated.

Rubenstein noted that only 17 percent of the money invested in private equity funds is allocated to emerging market ventures, even though their home countries are responsible for 55 percent of global economic activity (including China and India). Eventually, their large contribution to global economic growth will translate to a more representative share of private capital being invested.

So he expects to see a lot more money flowing to countries in Africa, Latin America, the Middle East, and Southeast Asia “relative to what it is today.”

One area that is unlikely to witness a major influx of investment is the Middle East, SS&C’s Anwar said, noting countries in the region are not usually major magnets for private equity funds. For example, in the Arab Gulf countries that make up the Gulf Cooperation Council, the dominant role of oil production (a largescale, machine-intensive industry) has left their SMEs sector too small and informal to be an attractive proposition for outside investors.

On the other hand, there are some regional champions in logistics, retail, food processing, and packaging which have received interest from private equity firms. Anwar believes impact investing in this region may be an alternative track. “We are also seeing some governments provide attractive incentives to attract impact investing tools, expertise and capital,” he said.

And while the enormous pools of capital held by endowments, family offices, and sovereign wealth funds, etc. mean there are many limited partners to be found in the region, the health of most economies in the region remains closely tied to the oil market. A drop in the price means reduced revenues and governments dipping into their reserves to maintain high levels of domestic spending – reducing the amount available for investment.

The response of countries like Saudi Arabia to the Arab Spring underlined how much GCC economies rely on social welfare largesse to keep their citizenry happy. It remains to be seen what effect the ongoing war in Yemen and potential military conflict – which could suck in Gulf Arab nations – would have on the availability of surplus capital from these countries for investing,  Anwar said.