Written by Simone Corradino, Alessandro Farfalletta, Mercedes Lladó, Anni Näivö | Editor: Hiba Moumni
Emerging markets have long held out the promise of superior growth and opportunities, yet private equity (PE) exposure has lagged their expanding share of global output. The gradual maturation of local capital markets and regulatory frameworks suggests this may be changing. Historically concentrated in developed markets, PE has remained significantly underexposed to emerging economies, despite these regions accounting for a large and growing share of global GDP. Emerging markets are broadly defined as developing economies in transition toward higher levels of growth, industrialisation and global integration. Marked by rising investment, expanding trade and structural reforms, these regions, from India and China to Chile and Malaysia, are steadily gaining weight in the global financial system.
The appeal is clear. Emerging markets are forecast to grow at an average annual rate of 4.0% over the next five years, compared with just 1.7% for developed economies (East Capital, 2025). Expanding middle classes, rapid digital adoption, and demographic momentum underpin opportunities in consumer, financial, and infrastructure sectors. Valuations are generally lower and growth prospects higher than in advanced economies, offering long-term investors an attractive risk-return asymmetry. Moreover, structural shifts such as innovation in China, India’s demographic tailwinds, and improved macroeconomic management have made these economies more resilient and investable than a decade ago.
Yet the challenges remain substantial. Many emerging markets are more exposed to macroeconomic volatility, governance and transparency gaps, and regulatory unpredictability. The pandemic and subsequent inflationary crisis hit returns, delayed exits, and reduced the pool of reinvestable capital, just as higher bond yields and surging returns from listed technology stocks diverted new funds away from PE. Exit routes have often been limited, with trade sales and secondary buyouts remaining the primary means of exit.
This duality frames the core question of this article: is private equity in emerging markets an engine of sustainable value creation or a mirage shaped by the global search for yield? In the following sections, we explore both perspectives: the opportunity, grounded in structural growth and attractive entry points, and the mirage, shaped by persistent macroeconomic, governance, and exit challenges. We then outline strategies that may tilt outcomes towards durable value creation.
Private equity has gained growing attention in emerging markets in recent years as these economies develop and diversify in ways that open new spaces for investment. While the focus of private equity has long been on North America and Europe, shifts in demographics, technology, and policy have pulled attention toward emerging markets as the next growth horizon. These regions now offer a combination of fast GDP growth, expanding consumer bases, and sectors that are still catching up to demand.
The IMF’s World Economic Outlook (Oct 2025) notes that emerging economies have shown more resilience than in the past, supported by stronger policy frameworks and healthier reserves. This has made them less vulnerable to external shocks, which matters for investors who once saw them as too volatile. With faster economic expansion, a rising middle class, and growing urban centers, the demand for modern housing, healthcare, and technology services continues to rise. Added to that, digital transformation has created an entirely new layer of opportunity. As internet access and smartphone use spread, more people can access e-commerce, fintech, and online education. These changes are not just trends but signs that many parts of these economies are moving into a new phase of development, one where private capital can help sustain the momentum.
What makes these markets particularly interesting is the number of sectors that remain underdeveloped. According to Forbes (2025), infrastructure, healthcare, technology, energy, transportation, and housing are all areas where private capital can play a larger role. Public funding in many of these countries is limited, and local capital markets are often too shallow to meet the scale of demand. This means there is room for long-term investors to step in and fill those gaps. Infrastructure is still a major need in Latin America, Southeast Asia, and parts of Africa. Healthcare systems are under strain from population growth and changing health patterns, which have created demand for private investment in diagnostics, pharmaceuticals, and digital health. At the same time, renewable energy and fintech are expanding rapidly, supported by both policy incentives and consumer adoption. These are the kinds of sectors that private equity can help modernise while still earning competitive returns.
Another reason for renewed interest in emerging markets is valuation. Compared to developed economies, entry prices remain lower, and that gives investors an advantage if they can manage the added risk. McKinsey’s Global Private Markets Report 2025 points out that Asia, which represents the largest emerging market exposure, saw a slowdown in 2024 as assets under management fell by 5.5% to $2.7 trillion. Yet that downturn also created more reasonable valuations. For investors who can stay patient, this kind of correction presents an opening to buy good assets at a discount. Meanwhile, with the recent 25 bps cut in the US federal funds rate, the IMF expects borrowing costs for emerging markets to ease through better access to Eurobond financing. That shift could make it easier for firms to raise or deploy capital at a time when local financing options are still catching up.
Investing in these markets also brings strategic advantages that go beyond pricing. Success often depends on working closely with local partners who understand political and cultural dynamics, and on integrating environmental, social, and governance (ESG) priorities into investment decisions. The Forbes analysis stresses that responsible investment practices like improving labour conditions, community engagement, and resource management can reduce reputational and policy risks. They also align investors with government priorities, which can help attract co-investors and improve long-term project viability. Being an early entrant in a growing market or sector can help firms establish relationships, shape standards, and gain access to better deals over time.
All of this suggests that the opportunity case for private equity in emerging markets is built on three main ideas: steady economic and demographic growth, strong demand in sectors that are still developing, and valuations that reward long-term commitment. These factors make emerging markets increasingly strategic for private investors, even though they remain complex and sometimes unpredictable. For those who can combine local insight, patient capital, and responsible investment principles, these markets are not just a source of returns but a place to help shape the next phase of global growth.
Yet, for all its promise, the emerging market context is not without its shadows and challenges. The same forces that fuel opportunity and attraction in the investors, such as rapid growth, demographic change and institutional revolution, also introduce a great amount of complexity and risk but also of unpredictability. Beneath the first surface of optimism lies, in fact, a landscape characterised by uneven reform, high policy uncertainty and fragile governance; therefor,e for private equity investors, these conditions mean that the projected high returns are neither guaranteed nor easily achieved. What appears as a frontier of growth can fast become only a mirage.
A central concern regarding these situations remains, without a doub,t the political and regulatory instability. Many emerging markets continue to experience shifting policy agendas, confused legal frameworks and inconsistent enforcement, in addition to these conditions, sudden changes in taxation and foreign ownership rules or capital controls can quickly alter the investment landscape. According to McKinsey’s “Global Private Markets Report 2025”, geopolitical uncertainty ranks among the top three risk factors named by global PE executives, as conflicts and protectionist trends amplify exposure to unexpected shocks. Also, weak rule of law conditions heighten due diligence challenges and complicate contract enforcement, raising transaction costs and discouraging follow-on capital.
A second major challenge is represented by macroeconomic and currency volatility. Inflation spikes, depreciating currencies and fluctuating interest rates remain strongly endemic to several large emerging economies. The IMF notes that tighter global monetary policy and a strong US dollar have highly increased external debt pressures, in particular in frontier markets. For leveraged buyouts this kind of volatility can quickly erode returns: when local revenues are denominated in weak local currencies while debt obligations remain in stronger currencies investors can easily face a double squeeze, even where macro fundamentals have strongly improved compared with the last decade cyclical shocks can still test portfolio resilience.
The scarcity of credible exit routes is also an important obstacle when speaking of emerging markets. In fact, despite a decade of capital markets developments, IPO volumes in most emerging economies and countries remain highly limited and secondary market liquidity is practically absent. Therefore, trade sales and secondary buyouts dominate exits, but these routes often have lower multiples and depend on the timing. Evidence of this problem is reported by the Bain & Company reports (2025), which highlights the fact that the median holding periods for emerging market PE funds have risen up to nearly six years, compared with 4.5 years in developed markets, reflecting both regulatory bottlenecks and valuation gaps.
Governance and transparency risks are equally important to understand the challenges of the emerging markets. Limited disclosure standards, weak auditing systems and the persistence of informal business practices make an accurate valuation difficult to perform. Protiviti’s “Top Risks in Private Equity” (2025) survey shows well how corruption exposure and ESG non-compliance are key vulnerabilities not to underestimate. These governance gaps not only heighten reputational risks but can also strongly restrict access to international funding, especially as global players tighten ESG criteria.
Finally, the competition for quality assets in these markets is rapidly becoming more intense, as more global and regional funds chase a finite number of credible targets. Entry valuations have risen, compressing risk premiums. This crowding effect, combined with slower capital recycling and rising local borrowing costs, may turn the concept of high growth at low prince in a much more uncertain situation.
Taken together, these dynamics remind investors that the promise of private equity in emerging markets can easily blur into illusion. Success requires not only optimism but also adaptive strategies to turn potential into sustainable performance rather than a mirage.
Looking across the evidence, private equity in emerging markets appears less like a binary choice between opportunity and mirage, and more like a conditional opportunity.
Structurally, these economies need sophisticated financial operators: in capital-intensive sectors such as infrastructure, energy, healthcare or transport, local savings and banking systems are often insufficient to fund the scale of investment required. In this sense, PE can play a genuinely developmental role, providing capital, governance discipline and strategic guidance where they are most needed.
However, this potential upside comes with a very specific and non-trivial risk profile. The classic attraction, higher future growth combined with lower entry valuations and therefore higher potential IRRs, can be quickly undermined by the financing side of the equation.
When free cash flows are generated in volatile local currencies while acquisition debt is contracted in dollars or euros with global lenders, the FX mismatch can trigger a “double squeeze”: currency depreciation erodes cash flows just as hard-currency debt and interest must still be serviced, often at a higher cost of capital than in developed markets. Illiquid local capital markets and fragile exit routes further amplify the importance of getting entry terms, leverage levels and timing right.
This makes rigorous upfront analysis non-negotiable. Beyond sector fundamentals, investors must assess the macro trend, the credibility of regulatory guarantees to shareholders, the openness of the country to foreign capital and, at an even higher level, the stability of the state apparatus itself. If improvements in governance and policy can be reversed overnight by a coup or abrupt political shift, downside risk becomes asymmetrically large.
A possible way forward lies in moving from a purely transactional approach to a more structured partnership with host states – a genuine quid pro quo. On one side, funds commit to multi-year investment plans that help “capitalise” the economy; on the other, governments provide credible assurances on macro, political and regulatory stability, protection of property rights and non-intrusive behaviour in corporate governance. In addition, over time, such relationships can create a form of informal “pre-emption right” on future, larger and more attractive projects, meaning investors are not only backing a single portfolio company but also a long-term strategic relationship with the country.
In conclusion, the market is undeniably compelling, but only for investors willing to accept potential illiquidity and hard-currency debt risk. Furthermore, for sustainable growth, the need for deep local engagement is not negotiable.
Hence, the open question is:
Can private equity evolve to unlock sustainable value in emerging economies, rather than simply chasing yield at the edge of fragility?
Bibliography
EQT Group, Emerging Markets: (Still) the Future of Private Equity?, https://eqtgroup.com/thinq/Insights/emerging-markets-still-the-future-of-private-equity
East Capital, The Return of Emerging Markets, https://www.eastcapital.com/insights/the-return-of-emerging-markets
Deloitte, Asia Pacific Private Equity Almanac 2025, https://www.deloitte.com/content/dam/assets-zone1/southeast-asia/en/docs/services/consulting/2025/sea-sg-dp-2025-asia-pacific-private-equity-almanac.pdf
Bain & Company, Global Private Equity Report 2025, https://www.bain.com/globalassets/noindex/2025/bain-report_global-private-equity-report-2025.pdf
EBSCO Research Starters, Emerging Economies: An Overview, https://www.ebsco.com/research-starters/politics-and-government/emerging-economies-overview
McKinsey & Company (2025) Global Private Markets Report 2025: Private Equity Emerging from the Fog.Available at: mckinsey.com
International Monetary Fund (2025) World Economic Outlook, October 2025. Available at: imf.org
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