Although the private sector in China now accounts for about 70 percent of economic output, many small and mid-size firms persistently underperform relative to their counterparts in developed countries. Drawing from his recently published book, “Private Equity Investing in Emerging Markets,” Roger Leeds (Johns Hopkins) at an IEMS & IPP – EY Emerging Market Insights presentation, draws focus to why private equity investors are uniquely qualified to address two of the main causes for this underperformance: (i) Limited or no access to medium and long term capital on affordable terms that companies require to grow, compete and generate sustained profitability; and (ii) a scarcity of specialized business expertise that small and mid-size businesses need as their growth accelerates, placing new, more complex demands on management. He explains why the case for this specialized investment mechanism is even more compelling in developing countries, where alternative sources of medium-and long- term capital and specialized business expertise are relatively scarce.
Private equity is endowed with a number of specific characteristics that sharply distinguish it from all other sources of capital available to private firms. In contrast to most Western countries, the companies targeted by most private equity investors in developing countries reside in the so-called “missing middle” - a vast universe of under-served, growth oriented small and mid-size businesses. Leeds outlines a number of reasons as to why private companies consistently underperform in Emerging Markets. Private equity in developing countries bears little resemblance to its counterparts in more advanced countries, where it benefits from a supporting ecosystem which includes: credible public policy environments; confidence inducing legal frameworks; enforcement of the rule of the law and efficient financial markets that offer firms affordable access to diverse sources of capital.
However, it is the absence of these success factors in emerging markets that allow private equity investors to capitalize on these opportunities whilst mitigating the risks. These sharp distinctions in private equity investing between emerging markets and developed countries not only create greater risks for developing countries, they also create greater opportunities for certain types of companies. These riskier environments have the potential to generate more private equity investment opportunities by capitalizing on inefficiencies and information asymmetries. It is for these reasons that private equity has been growing so rapidly and has seen success in many emerging markets.
Roger Leeds is a Professor at the Johns Hopkins School of Advanced International Studies (SAIS) and Director of the School’s Center for International Business and Public Policy. He also has taught at Wharton Business School, University of Pennsylvania and Columbia University’s Graduate Business School. He was the founding Chairman of the Emerging Markets Private Equity Association (EMPEA), a global industry association that conducts research and outreach on private equity investing in developing countries. Professor Leeds also is co-founder of the Leadership Academy for Development, an organization that designs and runs intensive training programs for government officials and business leaders in developing countries focused on public policy initiatives to strengthen private sector performance. Earlier in his career Dr. Leeds spent two years at Harvard’s Kennedy School of Government, teaching and heading a research project on privatization in developing countries.
Prior to joining the SAIS faculty, Dr. Leeds worked as an international finance practitioner for 25 years, including positions as an investment banker at Salomon Brothers, a senior staff member of the International Finance Corporation (World Bank), a partner at KPMG in charge of the firm’s global privatization practice and co-head of the emerging markets practice at a based private equity firm. His publications include Private Equity Investing in Emerging Markets, Opportunities for Value Creation (which in 2017 will be translated into Chinese), Financing Small Enterprises in Developing Countries, and more than 30 articles and book chapters. Dr. Leeds has been a guest commentator on various radio and television programs, including CNN, Bloomberg News, CBS News, CNBC, and National Public Radio, and is a member of the Council of Foreign Relations in New York, He received his undergraduate degree from Columbia University, and his M.A. and PhD from Johns Hopkins University (SAIS).
This talk is a part of the HKUST IEMS – EY Emerging Market Insights Series. It is presented by HKUST IEMS with support by EY. Check out the next event in this series at http://iems.ust.hk/insights.
Light refreshemnts and drinks will be served between 12:15pm to 12:25pm on a first come first serve basis.
Get updates from HKUST IEMS