In the ever-evolving landscape of global trade and geopolitics, private equity (PE) firms are navigating a ‘new normal’ characterised by heightened uncertainties, shifting power dynamics, and an evolving geopolitical landscape, where the traditional norms of trade and investment are being reshaped.
As part of this new reality, emerging markets are becoming ever more important, particularly the countries in the BRICS group (Brazil, Russia, India, China and South Africa).
This ‘new normal’ has introduced opportunities, but also new risks when undertaking investments or managing a global investment portfolio. This means that private equity investors need to keep abreast of issues such as trade wars, sanctions, and regulatory changes that could impact the flow of capital and the stability of their investments.
Through recent analysis, we identified several ways in which recent geopolitical events are affecting the investment landscape; most notably:
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Portfolio risk exposure: Among the 20 largest private equity (PE) fund portfolios, an average of 20% of assets are exposed to geopolitical and trade risk. Some funds have even higher exposure.
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Due diligence: Individual investment decisions are increasingly subject to geopolitical, as well as economic, considerations.
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Areas of risk: Companies face risk exposure in three main areas: cross-border value chains, strategic sectors, and climate regulation and policies.
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Consequently, PE firms should adapt by integrating geopolitical risk analysis into their due diligence processes and portfolio investment strategies. This involves a thorough analysis of risk exposure, taking into account specific issues of the geographies, trade flows and sectors concerned.
The BRICS nations have been pivotal in giving the Global South a greater voice in world affairs and challenging the domination of existing institutions. With the potential expansion of the BRICS+ to include emerging economies like Egypt, Ethiopia, Iran, Saudi Arabia, and the UAE, the bloc’s influence on global trade and investment strategies is set to increase. While it is too early to tell how this group might develop, this expansion has the potential to establish global institutions parallel to Western-led ones, and to create new opportunities for economic cooperation.
Moreover, this expansion of the BRICS group is part of a wider shift towards a multipolar world, where emerging markets gain a stronger voice and the ability to shape international policies and institu-tions. This shift necessitates a strategic response from PE firms to capture the opportunities and mitigate the risks associated with a more fragmented and volatile global landscape.
With a changing world order, PE firms need to be agile and innovative. They need to build strong local networks, invest in on-the-ground expertise, and foster relationships with local partners. Additionally, they must embrace environmental, social and governance (ESG) criteria, which are becoming increasingly important to investors and can provide a competitive edge in these markets.
There are three key actions that PE firms can take to mitigate geopolitical risks:
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Review overall fund strategy: PE firms should assess their portfolio for geopolitical and trade risk exposure. They need to identify companies that require attention, screen for at-risk industries, and evaluate potential changes in geopolitics, trade and regulations.
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Create new portfolio value: While assessing high-risk companies, PE firms should estimate the impact by analysing revenue, cost drivers, value chains and sector exposure. This helps identify value creation levers.
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Incorporate geopolitical perspective in due diligence: During due diligence for acquisitions, PE companies should actively apply geopolitical perspectives to assess target attractiveness and market outlook.
While the ‘new normal’ in geopolitics poses significant challenges for private equity firms, it also opens new avenues for growth. By understanding and adapting to the political risks and embracing the opportunities presented by emerging markets – including the expanded BRICS group – private equity firms can position themselves to thrive in this changing landscape.
It is a delicate balance if risk and reward, requiring a strategic approach that is both globally informed and locally attuned.
Ivers is Managing Director and Senior Partner; Head of Africa, and Figures is a Partner and Associate Director, EU & Global Trade and Investment | Boston Consulting Group.