Frontier Markets ETF


Too close to the frontier

Capital International's $US2.3 billion emerging market private equity fund joins some $US59 billion raised for the asset class in 2007. That may be too much. Emerging market initial public offerings totaled a robust $US140 billion last year, but these markets are cyclical only $US38 billion of IPOs came to light in 2005. If emerging stock markets dry up and private equity funds get locked into their investments, the sector may see another period of negative returns like it suffered in the 1990s.

The volume of emerging market private equity has grown rapidly since 2000, which is not surprising. The asset class recorded negative returns in the 1990s, even while most public stock markets were booming. But it has achieved returns of more than 20 per cent annually since 2000.

That has prompted a huge recent increase in fund raising, although this avalanche of capital does not seem to have had difficulty finding investments. With fewer public companies than in developed markets, emerging markets have a plethora of investments suitable for private equity, if governance and accounting problems can be straightened out. However, valuations have risen sharply, and funds have been forced further into difficult sectors and 'frontier' markets. More from businessspectator.





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