A few years ago, private equity (PE) funds were eagerly investing in the BRICs, banking on faster growth than they could find in developed markets. But more recently, the economies have cooled in these countries — Brazil, Russia, India and China — and in many other emerging markets as well.

“There is just not all that much money chasing deals [in Brazil] anymore,” said Thomaz Malavazzi, investment officer for Tarpon Investimentos, describing a problem expressed by most speakers on an emerging markets panel at the recent Wharton Private Equity & Venture Capital Conference 2014. Many Brazilian companies are cutting headcount, and consumers are strapped for cash.

Yet despite the slower consumer spending, owners of firms that might be good PE investments are holding out for high values that are now out of date. That makes the market challenging, Malvazzi said.

Industry surveys show that PE firms are having a tough time finding buyers for portfolio firms in emerging markets, and that those firms take longer to prepare for sale than holdings in developed markets. Emerging market returns have trailed those in developed markets, the opposite of what many PE firms have hoped for.

So what does a fund dedicated to emerging markets in general do now? Stand back and wait for better times? Or plunge in?

“Now is the time to buy things,” Malvazzi said, citing cheap prices for prospective portfolio acquisitions. Many PE funds, even if based in an emerging market, have plenty of cash to invest, as they don’t necessarily rely on funding from the emerging markets themselves. Many limited partners are from the developed world, and there is money from sovereign wealth funds from Asia and the Middle East.

“There is no availability of debt, so it’s all equity.” –Dennis Kalenja

For now, added Ivan Amaral, investment professional at Victoria Capital Partners, another firm active in Brazil, PE firms are finding it easier to raise funds in Asia than in Latin American and other emerging markets.

But the slowdown in emerging markets has been painful. It has made borrowing difficult, minimizing the role of leverage, several panelists reported. Some PE firms that had bought targets in Brazil at prices of five or six times EBITDA are in real trouble, while ones that held to two or three times are doing better, Amaral said.

“There is no availability of debt, so it’s all equity,” said Denis Kalenja, managing partner of Montague Capital LP, a venture capital and private equity firm with many emerging market interests. Some large international PE firms, he noted, turn to debt markets in developed countries to raise money for emerging market ventures.

Outside Looking In

Still, as a rule, debt has not, does not and will not play as big a role in emerging-market PE as it does in developed markets, added Amaral.

Unable to supercharge returns through leverage, PE firms in emerging markets must focus on improving operations and enhancing revenues in portfolio firms, noted Sumeet Narang, founder and managing director of Samara Capital, which focuses on India.

And, in fact, emerging markets often provide types of opportunities not found as easily in developed ones, said Amaral. An astute PE fund may find firms with unsophisticated managers, poorly organized compensation systems and a spotty record in rewarding merit, he explained. An outside owner can remedy those shortcomings pretty easily. “It’s very hard to find that kind of asset in mature markets, but it’s easier to find in emerging markets.”

“You have to be very patient, Malavazzi added. He recalled investing in a large retail firm that had virtually no books. Over time, the firm’s financial history was reconstructed, and that alone increased its value because prospective buyers like international corporations could see what they would be getting.

In many emerging markets, PE firms end up in partnership with the original owners and managers rather than taking complete control. In these deals, 30% to 50% of the investment’s ultimate success derives from the quality of that partner, Malvazzi said. Choosing carefully is critical.

“In a low-growth environment … you need to be with the number one player.”  –Thomaz Malavazzi

Emerging markets also tend to be more politically volatile than developed ones, sometimes causing regulations to whipsaw unexpectedly. “Suddenly they just change the entire tax structure,” said Kalenja, describing his experience in China. Confidentiality can also be a problem, he added, noting that exits through strategic sales are often preferable to initial public offerings, which require unwanted disclosure.

Even within a single country, regulations and tax codes can vary from state to state, Malvazzi pointed out. But although regional variation and unexpected changes can pose hazards, they sometimes present opportunities. Narang noted that his firm found promising investments in large mining firms after new, tougher environmental rules drove many small companies under.

Room to Grow

While a growing economy is generally preferable to a sluggish one, a slowdown is not a death knell for PE. A firm that executes its plan well can overcome slow growth, said Narang. India, for instance, has a significant middle class that spends about $15 billion a year eating out, but only about $2 billion of that is spent at brand-name restaurants, he noted. So even though the restaurant industry may not grow fast overall, a branded chain would have lots of room to grow market share.

Still, without the rising tide of growth, prospective acquisitions that are relatively large have better prospects than ones that are small, said Malvazzi: “In a low-growth environment … you need to be with the number one player.”

It’s a mistake, of course, to assume all emerging markets have the same features, the panelists noted. Amaral pointed out that Asian economies are generally growing faster than those in Latin America, at least for the moment, but that incomes are higher in Latin America. In Asia, an appealing acquisition may therefore be serving people’s basic needs – for things like food — while a hot Latin American prospect could be meeting middle class demand for products like cars.

Are the big international PE players making life hard for the smaller regional firms? Not necessarily. Malvazzi pointed out that big firms can have trouble fine-tuning to local conditions. And they may not have the “in” with local business people and politicians that can be valuable for PE plays in emerging markets.

And, typically, a big international and a regional firm, even if operating on the same turf, will go after different targets, he said. Big PE firms need to acquire big companies; small firms can do fine with smaller deals. “We can coexist really well.”