Emerging markets: Tapping into lucrative revenue streams

Gail Mwamba
30 July 2010

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Emerging markets are increasingly becoming a source of high returns for private equity investors. With some not able to invest in companies domiciled in these regions because of their fund structure, some are looking to back companies in the developed world whose incomes are solely generated from these regions.

With floundering developed market returns, private equity investors are looking to high-growth geographies to tap potential revenue streams. This is also with research suggesting that limited partners are continuing to show increasing appetite for emerging markets assets. According to a recent survey by the Emerging Markets Private Equity Association (EMPEA), about 57% of global LPs are currently invested in emerging market focused funds, with commitments set to increase from the current average of 8% to 13% over the next five years.

But not all GPs are able to invest directly in companies located in emerging and frontier economies, with some constrained by original fund covenants which limit them to investing in developed countries. To overcome this, some have sought to access the regions through backing developed country domiciled companies that generate revenues in these highly sought after regions.

A case in point is Oxford Capital Partners, which has backed a number of companies following this model, including UK-based supply chain intelligence software company Helveta. The company, which has also been backed by Close Ventures, Carbon Trust, Success Europe and BeCapital, has seen revenues grow by about 200% per year, offering timber tracking services in South America and frontier economies in Africa.

Oxford Capital has also invested in UK pest control company Oxitec and bio-fuels producer Green Biologics, which both target the Asian and African economies. Both companies have received backing from additional private equity investors.

"Emerging market economies are growing faster than the West, particularly Europe at the moment, which makes it compelling to grow businesses in the these economies,"
says David Mott, director at Oxford Capital Partners. "In these fast growing economies, sales cycles can be shorter and decisions made faster as businesses are often run by families."

Healthcare has also been providing lucrative opportunities, with Albion Ventures this year backing UK pharmaceutical distributor Masters Pharmaceuticals, a supplier of drugs to emerging markets. The company targets countries where pharmaceutical companies do not have a license to market medications.

In addition to high growth revenues, strong exit options have also been luring investors to the developing world, with emerging market trade buyers showing very good buying prospects. This comes as large emerging market companies flex their muscles to acquire developed world companies, as can be seen by Indian technology company Infosys revealing plans to acquire French and German companies. As such, buying developed-country companies that are already generating revenues in their home regions would provide strong alignment opportunities for them.

"Venture capitalists traditionally look to sell their companies to a US technology company, but in our portfolio there is growing interest from acquirers from the emerging markets, especially in Asia," concludes Mott. "This adds another dimension to our exit strategy."