LPs ramp up emerging markets due diligence efforts - survey

Nearly half of respondents in EMPEA’s latest global limited partners survey said they have requested additional information from prospective GPs over the past two years, while approximately one-third have updated their due diligence policies and guidelines. There is also a tendency to perform more of these functions in-house, with one-third allocating additional internal resources to due diligence. By comparison, only 13% are hiring outside consultant to assist with these functions.

“We are always adding to the questions we ask and adding to the intensity of the questions we ask,” said Stephen O’Neil, a managing director with fund-of-funds 57 Stars. “We spend a lot of time talking with GPs about their systems and processes. It doesn’t just relate to the front end in terms of investments and interactions with portfolio companies. We also dig deep into internal mid-office and back-office operations, financial controls, signatory controls, and oversight by and interaction with third parties that are layering on additional operational structures.”

Abraaj, which is headquartered in the Middle East and has interests across emerging markets, imploded over concerns about its internal governance and several executives have since been arrested on fraud charges. They stand accused of lying to investors about the fund performance, inflating valuations, and misappropriating funds to disguise liquidity shortfalls or for personal benefit. Last June, parent company Abraaj Holdings declared voluntary bankruptcy and entered liquidation proceedings.

The growing importance of ESG is reflected in how it has risen among the various manager selection criteria. Approximately one-third of LPs consider active management and reporting on ESG to be very important, up from one-quarter six years ago. More than two-thirds of respondents expect GPs to report on ESG initiatives and outcomes on at least an annual basis, while half require ESG provisions to be included in limited partnership agreements (LPAs).

There is also strong support for the development of uniform industry standards on due diligence and reporting in this area. Anne Fossemalle, a director in the private equity division at the European Bank for Reconstruction & Development (EBRD), endorsed the adoption of global standards, but noted they should be simple enough to facilitate measurement of ESG impact. She favors “fewer indicators that have real content than many that are difficult to measure.”

The survey found that more than half of LPs plan to increase the US dollar value of their commitments to emerging markets private equity funds over the next two years. A similar proportion want to increase the percentage allocation to emerging markets within their overall PE portfolios. Family offices appear to be the most bullish, with 64% expressing a desire to ramp up exposure to emerging markets PE in US dollar terms. Endowments and foundations are the only institutional category in which more respondents plan on decreasing rather than increasing allocations.

Southeast Asia retains its position as the most attractive market, with China taking second place from India. Southeast Asia has ranked either first of second for the past five years, but investors also point to the limited number of established managers, the scale of the opportunity, and currency risk as key deterrents to investment. In China and India, an oversupply of funds and high entry valuations are among the major concerns. India also ranks poorly for historical performance and currency risk.

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• Topics
• Greater China
• Southeast Asia
• South Asia
• LPs
• Advisory
• Fundraising
• Emerging Markets Private Equity Association (EMPEA)
• China
• India
• professional services