By Francesco Pittatore, Ali Necat Hepkon, and Ines Alem
Introduction
The BRICS alliance, a coalition of Brazil, Russia, India, China, and South Africa, stands as a burgeoning powerhouse in the global economy, profoundly influencing the global economic landscape, including the Private Equity sector. This article explores the strategic economic manoeuvres of the BRICS nations, in order to understand their collective and individual impacts on investment trends and infrastructural developments as BRICS will increasingly continue reshaping investment opportunities and economic dynamics within the Private Equity sector.
An Overview of BRICS
The BRICS alliance, consisting at its core of Brazil, Russia, India, China, and South Africa, has risen as a potent force in the global economic realm. Initially united by common economic goals, these nations have forged a cooperative and collaborative environment aimed at a common goal: enhancing its members’ influence on a global level. As this alliance continues to strengthen, its impact on various sectors, including Private Equity, is growing increasingly significant.
Originally denoted as “BRIC” before South Africa’s inclusion in 2010, the BRICS alliance can be traced back to the visionary thinking of economist Jim O’Neill in 2001, whose concept was grounded in the recognition that these nations were undergoing rapid economic growth and were meant to play pivotal roles in shaping the global economy. Over time, the alliance transcended its initial economic focus, expanding to political and strategic dimensions. This formation marked a significant start from the prevailing global economic order, challenging the dominance of Western powers. These nations, characterized by substantial populations, abundant resources, and diverse economies, aimed to assert their influence on the world stage. Collaborating on issues such as financial governance reform, trade, and development, the alliance steadily gained momentum, impacting global economic dynamics.
Discussions are now surfacing about new countries joining the group (Argentina, Egypt, Ethiopia, Iran, Saudi Arabia, and UAE), which would link together countries representing about a third of global GDP, 43% of global oil production and a production on a global level higher that of the G7. With this much influence, one may wonder what the group’s impact might be on an international level and how it could influence current economic systems?
The BRICS Economic Influence: The EV Example
In recent years, the Chinese automotive industry has been actively working to increase its market share in Europe. Chinese automakers have pursued various strategies, including acquisitions, partnerships, and the introduction of competitively priced vehicles. They have made notable investments in European automakers, aiming to leverage established brands, technology, and distribution networks.
In particular, Chinese companies have immensely grown in the electric vehicle (EV) market, aligning with the increasing demand for environmentally friendly transportation in Europe. By focusing on cost-effective alternatives and emphasizing global expansion, they aim to diversify their markets and reduce reliance on the domestic market. For instance, BYD, a brand that represents a real threat to Tesla and traditional automakers also dealing with renewable energy, is one of the realities that is now standing out. BYD controls 37% of China’s domestic EV market and produced four of the world’s top ten EVs last year. This is increasingly closely followed by the other Chinese brands, taking advantage of the European, American, and Japanese houses’ slowness.
In order to compete effectively in Europe, Chinese automakers have prioritized research and development, aiming to enhance the quality, safety, and technological features of their vehicles. However, they face challenges in meeting stringent European safety and emission standards besides risks from anti-subsidy investigations, all of which hinders their ability to gain wider acceptance in the European market. Still, a recent report by Allianz Trade found that European carmakers could collectively lose more than €7bn in annual net profit by 2030, mainly because Chinese manufacturers keep increasing their market shares both in Europe and domestically. In China, this could lead to sales by European car brands falling drastically as homegrown rivals push ahead with new models catered to the local taste.
Therefore, this example highlights that the BRICS alliance holds the potential to alter the global economic order and, consequently, exert influence on the Private Equity landscape. It offers more investment opportunities as the collective economic strength of BRICS nations forms a vast market offering diverse investment opportunities and Private Equity firms can find appeal in infrastructure development projects, technological advancements, and burgeoning consumer markets.
BRICS and Private Equity
When the topic of investing in the countries within the BRICS alliance, especially in the private sector, is discussed, possibly one of the most intriguing and rapidly developing industries is infrastructure. During a recent BRICS symposium, the South African Minister of Finance stated that “the development and delivery of infrastructure ought not to be dependent on the availability of public resources”. Countries that made up the BRICS alliance for the longest time have had many issues when it comes to infrastructure. In the cases of China, Brazil, and Russia the vast territory and the harsh environmental conditions of these territories has made the development of infrastructure even harder. In the case of South Africa and India not only the harshness of the environmental conditions and the vastness of their territories (especially in the case of India), but also years of colonialism, poor management, and little to no development has taken infrastructural issues to a critical level. Therefore, it can be clearly analysed that infrastructure issues have been at the forefront of the agenda of the BRICS summits for a very long time.
There are many reasons behind why the lack of infrastructure is such a big issue in the eyes of the BRICS countries. First and most importantly, infrastructure plays a key role in economic growth. When a country has good infrastructure, this not only directly attracts more investment but also boosts growth in related sectors. It also makes the country’s factors of production more efficient by increasing the speed and reliability of the supply chain. Infrastructure also increases the living standards and increases the prosperity of the region in which it’s present by increasing the accessibility of the region, thereby enhancing trade. One of the most apparent examples of this correlation can be seen in China:
China’s domestic railway infrastructure vs the measured level of prosperity by region
The graph on the left depicts the Chinese Railway System, while the one on the right depicts the average Chinese citizen’s income. It can clearly be observed that in the infrastructure-rich east coast of China, wages and hence prosperity are much higher. Whereas western China with its harsh environment and low infrastructure has some of the poorest provinces in all of China. Low infrastructure also harms growth rates and that is the precise reason why China, for the past 20 years, has built a railway system that is impressive both due to its immense size and high speed. However, just an impressive railway system cannot compensate for all the other aspects of the infrastructure industry. Other factors such as access to electricity, water or internet are as crucial as any other logistical aspect of a country’s infrastructure. Also, it must be accounted for that China is currently the most well-developed country when it comes to infrastructure within the BRICS alliance. Notably, Brazil, India, and South Africa lack critical infrastructure connecting the poverty-stricken rural parts of the country to the richer urban parts. In the end, however, it brings us to the following question: what part could Private Equity play in this market? The answer is simple: the opportunities are endless.
The aforementioned summit is probably the most important and recent green light for the private sector when it comes to the infrastructure industry in the BRICS countries. It must be noted that the phrasing of the South African Minister of Finance was quite ambiguous in how the country was planning to engage private capital. This support could come in the form of reduced bureaucracies for private enterprises or investments or in other forms of incentives. Perhaps a case similar to the UK, or more favourably to Japan, could be implemented where a certain public transit system is privatized. In the cases of Japan and the UK, this was the train system, and even though the transition from public to private for the UK’s train system is not considered to be a great success, today the Japanese train system is one of the world’s finest. Therefore, if implemented correctly, perhaps it can also be a success in the BRICS countries. Such an opportunity would be priceless for Private Equity companies, since the return on such a deal could be very attractive. The business model is incredibly lucrative as the use of public transport is essential for citizens, especially in a developing country where most people cannot afford private motor vehicles, which guarantees a constant stream of customers and with them, a constant stream of revenue. Note that in countries such as China, the government might not take that kind of approach due to obvious ideological conflicts. In a similar way, due to the political instability and war, Russia might not opt for introducing a private element to its public transit system for national security concerns among others. Once again, due to the ambiguous way in which the BRICS summit concluded with a lack of concrete outcomes, we can so far only theorize potential ways in which such measures could be implemented.
Other more generic forms in which private capital can help infrastructure is by directly investing into the construction of cities and roads of companies. This form of investing is focused on long-term cash yields and consistent returns. Most famously, the company Blackrock announced its very own and specialized infrastructure equity fund last year in June, with the additional goal of promoting sustainable infrastructure. This additional goal aligns with the South African Minister of Finance’s speech where he also stated that the core of all their actions regarding advancements of infrastructure and innovation from now on must have sustainability at its core. Therefore, taking into account the willingness of the governments, the long–term and consistent cash flows from such deals, and also the growth potential in developing economies, infrastructure in the BRICS countries appears to be an industry that will be quite lucrative in the future.
Moreover, as China and India, notably, lead in technological innovation, Private Equity firms can seize opportunities in sectors such as artificial intelligence, biotechnology, and renewable energy, where these nations are making significant advancements. Private Equity firms might contemplate diversifying their portfolios across BRICS nations to mitigate risks linked to economic downturns in any single member state. Because each country has distinct characteristics such as cultures, consumer preferences, and economic conditions, investors should avoid focusing solely on one sector or country, instead attempting to balance their portfolio in order to capitalize on the opportunities that emerge in each market. For instance, the development of the growing middle class in the BRICS countries represents a significant opportunity for the Private Equity sector. With increased purchasing power and consumer aspirations, sectors such as retail, food, entertainment, and consumer-oriented technology emerge as promising areas for investment. Investors should consider portfolio diversification, adapting to local preferences, and focusing on companies that capitalise on growing domestic demand. An in-depth understanding of the specific consumption dynamics of each BRICS country is thus essential for investment success.
Conclusion
As the BRICS alliance evolves and considers expanding, its impact on the global economy and Private Equity sector intensifies, challenging the Western-dominated economic system and creating new investment landscapes. This group, representing a significant global demographic and economic force, may further diversify investment opportunities by including new countries. Private Equity firms must navigate this dynamic environment, balancing the diverse economic and political landscapes of BRICS nations. Opportunities in infrastructure, technology, and consumer markets are promising but require strategic and nuanced approaches. The future of BRICS, with its uncertainties and varied member agendas, could reshape global investment trends. Effective management and adaptable investment strategies are crucial for Private Equity to capitalize on these changing dynamics in the global economy.
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