This Article investigates the legal and economic environment for private equity investments in Brazil, Russia, India and China ("BRIC"). In contrast with disappointing returns in the 1990s, private equity investment has soared in developing countries over the past decade. To explain what has led to the recent success of private equity in the BRICs, this Article will first give an overview of the challenges faced generally when investing in portfolio companies in developing markets and then analyze the legal and economic framework for each of the four BRICs. This Article finds that Brazil and China offer the best opportunities for private equity because investors can rely on strong domestic capital markets for the exit. While India is not far behind, Russia still has room for improvement, particularly with regard to the reliability of its legal system and the attractiveness of its capital markets.
On November 30, 2001, Jim O'Neill, then Goldman Sachs' Head of Global Economic Research, coined the term "BRICs," referring to the growing economies of Brazil, Russia, India, and China.1 He predicted that, "over the next 10 years, the weight of the BRICs and especially China in world GDP will grow"2 and that "by 2011 China will actually be as big as Germany on a current GDP basis, and Brazil and India not far behind Italy."3 Another Goldman Sachs Economics paper later forecasted that "[t]he BRICs economies taken together could be larger than the G6 by 2039."4 In 2007, China already surpassed Germany in current gross domestic product ("GDP"), outrunning Jim O'Neill's prediction by four years.5 By 201 1, Brazil was the sixth largest economy, Russia ninth, and India tenth.6 The BRIC phenomenon has now taken a political dimension as well. In May 2008, Russia hosted the first BRIC summit, followed by Brazil in 20 10.7
As competition for attractive targets within the United States increases steadily, American private equity firms gradually look for more investments in the global markets.8 Europe would be a potential market as it provides the appropriate legal infrastructure, but it cannot compete with the high growth rates of the emerging markets.9 Additionally, low company valuations in markets with capital shortages provide more opportunity for high returns.10 Therefore, capital in the private equity industry is increasingly flowing from developed countries into developing markets. Over the past decade, fundraising for emerging markets private equity funds has grown exponentially from $3.2 billion in 2002 to a record high of $66.5 billion in 2008." During the same period, investments in emerging markets rose from $2 billion to $47.8 billion, with a record high of $53.1 billion in 2007.12 A record amount of $92.5 billion flowed into emerging market funds in 2010.13
In many regards, these emerging countries have even benefited from the recent financial crisis. The BRICs' contribution to global growth has risen to forty-five percent since the beginning of the financial crisis in 2007, up from twenty-four percent in the years 20002006.14 The stagnant U.S. economy contributed to the trend towards international diversification.15 The economic downturn in the U.S. has reduced the number of available private equity deals, thus requiring firms to look for targets globally in order to compete successfully and deliver expected returns.16
Private equity in emerging markets not only benefits investors from developed countries; it can also have substantial benefits for a developing market economy and the businesses operating therein. Often, private equity bridges the gap in corporate financing needed for growth, offering a mature business an alternative between costly debt financing and an Initial Public Offering ("IPO").17 Additionally, a private equity firm will often provide experienced management teams18, and in the event of an investment exit through an IPO on an international exchange, the private equity backing allows the target initial access to international capital markets. …