Private equity in emerging markets has quietly been offering large returns for investors—if you know where to look. Over the last decade, the number of firms that have received funding from private equity investors grew by about 150% between 2014-2024 in both EMDEs and the rest of the world. But while growth statistics like these sound impressive, detailed sectoral performance data are scarce, making it difficult for investors to compile diversified portfolios. Our recent research across six decades of IFC investments reveals an important dynamic: a small percentage of high-growth deals—so-called “home runs”—can boost the overall performance of an investment portfolio.
Outperforming the Public Benchmark
A key part of our analysis compares private equity investments against well-known public market indices, such as the MSCI Emerging Markets Index (available from 1990). We use the Public Market Equivalent (PME) metric to make apples-to-apples comparisons. IFC’s private equity investments outperformed the MSCI Emerging Markets Index by an average of 16 percent over the period 1990-2023 (Figure 1). Similarly, the PME results from Cole et al. (2020), measured against the S&P 500, indicate an overperformance of 15 percent. Together, these findings underscore IFC’s outperformance of public indices over long investment horizons.
Figure 1: Distribution of IFC Private Equity Returns vs. MSCI EM (1990–2023)
Note: Investments with a PME equal to or greater than 5 are given a PME of 5.PME is calculated as the ratio between distributions and contributions discounted by the return of the benchmark.
The Case for Diversification
Beyond just picking the “hottest” sector, savvy investors recognize that winners can emerge from unlikely places. IFC’s early-stage investments in microfinance in the 1990s were far from sure investments at that time, but they ended up producing multiple home runs that tipped overall returns significantly upward. Similarly, collective investment vehicles, such as funds, performed well in part because fund managers spread their bets across numerous opportunities, reducing risk without sacrificing the possibility of home run investments.
Firm-Specific Factors and Sectoral Performance
Crucially, our findings reinforce that firm-specific factors far outweigh sectoral factors or a country’s macroeconomic factors in explaining return variability (Figure 2). Size, duration of the investment, and other firm-specific characteristics remain the most decisive factors for success. This finding emphasizes the impact of firm-specific factors in private equity, estimated to be larger than those found in previous studies on public equity returns.
Note: Regional investments are excluded, resulting in a lower number of investments compared to the overall total of 2,727. Column (1) is based on the total sample of investments; column (2) estimates the probability of achieving a home run investment; column (3) includes only investments that are neither home runs nor the lowest performing. Sector names follow the IFC sector classification. Home runs are defined as investments with an annualized TVPI of 50% or higher. The ANOVA (Analysis of Variance) decomposition for home runs provides a linear approximation to evaluate the relative contributions of factors such as country, sector, year, size, and duration to investment outcomes. The residual (larger than 50 percent in all three cases) is attributed to firm-specific factors beyond size and duration. Due to the large number of categories within these factors, logistic or probit models could not be reliably estimated.
Sectoral Insights
Our research examined a wide range of industries, from finance and mining to textiles and construction. The technology, finance, and information technology sectors, driven by robust trends in digitalization and financial inclusion, stand out for their high median returns. Meanwhile, traditional sectors—such as textiles, accommodation, and tourism—tend to return lower yields, reflecting the mature and competitive nature of these industries.
The data also highlight certain sectors with exceptionally high annualized returns (Figure 3). Information technology registered annualized returns of 21 percent, while oil, gas, and mining came in at 13 percent, thanks in large part to “home runs” where annualized returns exceeded 50 percent. One takeaway is the power of innovation-driven sectors to catalyze growth in emerging markets. From fintech solutions reaching the unbanked to mobile infrastructure, technology has played an important role in driving returns and transforming local economies.
Note: Figure includes an annualized version of the Total Value to Paid-In (TVPI) as the performance metric. TVPI measures the overall return on investment, calculated as the sum of cumulative distributions and the residual value (the current value of the remaining investment) divided by the cumulative contributions (the total capital invested). A TVPI greater than 1 indicates that the investment has grown in nominal value, while a value less than 1 implies a nominal loss. To provide a time-adjusted perspective, the annualized TVPI adjusts the TVPI to reflect an average annualized growth rate over the life of the investment. It is computed by taking the TVPI ratio to the power of 1/years, where “years” is the duration of the investment in years, and then subtracting 1. This metric enables comparisons across investments of different durations by standardizing returns on an annual basis. Sector names are according to IFC sector classification.
Reading the macro
Even if firm dynamics dominate, investors should not ignore the broader economic environment. The study finds that GDP growth positively correlates with returns. A fast-growing economy is more likely to provide the fertile ground necessary for companies to expand. By contrast, real exchange rate depreciation can negatively affect returns, especially for dollar-denominated investments. This indicates that investors need to consider broader economic conditions when investing in emerging markets and developing economies.
Conclusion
Private equity investments in emerging markets have the potential to deliver strong returns, while also supporting economic growth. By identifying high-growth opportunities, diversifying investments, and focusing on firm-specific factors, investors can generate competitive financial returns while supporting the economic growth of emerging markets. These findings contribute to the debate on the viability and profitability of private equity in emerging markets by providing empirical evidence of high returns and the importance of diversification. By examining sectoral performance and the influence of firm-specific characteristics, our findings offer a clearer picture of what drives returns in private equity.
Source: blogs.worldbank
