Since the 1990s the involvement of institutional investors in emerging markets has swept international business and finance. Institutional investors refer to any organization with a large sum of money that invests in securities, property or other investments. In the case of foreign direct investment (FDI) two types of institutional investor have arose as primary contenders, specifically private equity funds and hedge funds.
Private equity FDI, generally speaking, invest capital in businesses within the private sector, either by buying them outright or acquiring select assets. Both methods have the intention of seeking to improve the business prior to selling the company or pursuing an initial public offering. The investments duration usually opts for a longer engagement period.
On the other hand, hedge funds typically invest in tradable securities, such as equities, bonds and foreign exchange. Thus, hedge funds’ investments, known as Portfolio investments, tend only purchase stock of companies, are of a much shorter duration and generally lack the aim of altering the direction or the betterment of the day-to-day running of the companies. To this end, in the case of emerging markets, KITE Invest favors the methods of private equity FDI overall as the preferred source of capital. As an investment, the options provided by private equity firms are more tangible and not as easy to extract from a country than say the more liquid nature of a Portfolio investment.
However, irrespective of the type of institutional investor, private equity and hedge funds have both proven to be valuable sources of FDI over the past decade, despite fluctuations. For instance, between 2005 and 2008 the global FDI amount by this category of institutional investors accounted for an average of US$120 billion yearly, with 2007’s FDI peeking at $288 billion. While last
year’s value of cross-border investments reached only $51 billion in comparison, this sharp decline does come after the global economic downturn.
While the dollar value of private equity and hedge fund FDI combined fell by 34% in 2012, following a slight rise to $65 billion in 2010 and $77 billion in 2011, conversely, the number of deals made increased by 22%. This increase in divestment underscores the vibrancy and future potential as well as, a possible shift in modus operandi of cross-border investments.
It is to this point that KITE Invest aligns itself with the predictions that 2013 and 2014 will showcase modest improvements in private equity and hedge fund FDI transactions. As the anticipated upswing of the United States and BRICS economies begins over the course of the new two years, the climate of FDI will enhance, especially in the industries of finance, mining and petroleum.