David Bonderman, co-founder of private equity firm TPG Capital and long regarded by other buy-out experts as one of the savviest investors in the sector, has warned of an emerging markets “crisis of expectation”.
“There will be dislocations. Emerging markets are volatile,” Mr. Bonderman said at a conference in Hong Kong. “At some point there will be despair just as there is euphoria now.”
His remarks come amid increased investor optimism about the prospects for growth in emerging markets rather than in developed ones and as liquidity from loose monetary policies in the west finds its way into Asia and Latin America.
Mr Bonderman’s warning embraced the public markets – where he thinks shares could fall 15 per cent – and private ones. “The good news is that these markets are volatile and the bad news is that the chance for success is bad.”
The warning is likely to serve as a reminder to investors in private equity funds to reduce their expectations.
Surveys show that investors in large private equity firms expect emerging market investments to have higher returns than those in developed markets. Most are allocating less money to developed markets and more to emerging markets, particularly in Asia and most notably in China, according to data from the Asian Venture Capital Journal.
Mr Bonderman said 100 private equity firms were operating in China and “not all of them will find talent or value”.
TPG has a reputation among the large international private equity firms for venturing into risky markets, such as Russia, well before its peers.
But Mr. Bonderman said his firm, which has about $50 billion under management, adopts a different investment approach for higher-risk markets.
In light of the volatility, TPG tended not to borrow extensively to fund investments in emerging markets while in the US “you take levered risk”, he said.
He said his firm would look for opportunities in sectors that were going through changes, such as media, financial services and energy, where new technologies have reduced costs.
Mr. Bonderman emphasised the extent to which investors could find themselves at the mercy of governments in many emerging markets.
“Every deal is a regulated deal,” he said. “Regulators will tell you how to take your money home.”
Some of TPG’s best deals, such as Korea First Bank and Shenzhen Development Bank, came in spite of heavy regulatory interference.
However, such involvement is not limited to emerging markets. US regulators took over Washington Mutual six months after TPG invested in the ailing bank in September 2008. TPG and its investors lost all their money.