Where To Invest? Ranking 120 Countries On Their Private Equity Attractiveness

Which countries offer the most promising markets, strongest institutions, most entrepreneurial support, best protections and strongest corporate governance practices that make investing attractive for venture capital and private equity (VC/PE) professionals?

At the very top of the charts sit the United States, the United Kingdom, Canada, Singapore and Japan. They take positions one through five, respectively, in the 2015 Venture Capital and Private Equity (VC/PE) Country Attractiveness Index, now in its sixth edition.

Analyzing 120 countries, based on thousands of data points, and ranking them according to their overall attractiveness to VC/PE investors based on six key drivers, the index is a useful tool for spotting emerging market winners and for assessing risk/reward profiles around the globe. It may also help regulators set or revise policies in order to better attract VC/PE money down the road.

Emerging countries: attractive or a trend?

The authors note that private equity investors will often set their sights on emerging regions, in search of new transactions with satisfying risk/reward ratios. Among the BRICS (Brazil, Russia, India, China and South Africa), China – ranked 21st this year – stands out for its attractiveness due to its economic growth, capital markets development and favorable taxation practices for entrepreneurs. That said, China has remained relatively stable in the rankings, climbing just one spot in five years.

However, despite the economic soundness of the BRICS and other emerging markets (e.g. Mexico, Indonesia, the Philippines, Nigeria and Turkey who all have large populations and strong economic catch-up potential), corporate governance indicators (with the exception of South Africa) and investor protection still remain obstacles.

The authors caution that investors tend to be too optimistic about emerging markets, probably related to the issue that they “do not want to miss the train” and that it can be difficult to assess the real deal-making opportunities across the globe. Therefore, they strongly advise investors to interpret the data in this index or follow similar approaches to estimate fundamental values of VC/PE country attractiveness prior to making long-term capital commitments.

Five year trends (2011 – 2015)

The index creators prefer to highlight five-year shifts to see the most important trends. They caution against reading too much into year-to-year changes, which may stem from short-term volatility.

In the uppermost echelon of the rankings, relative stability reigns. The United Kingdom climbed two spots to second place, due to a strong increase in expected GDP and improved entrepreneurial opportunities stemming from growing innovation capacity. This climb reflects the UK getting back to where it was for VC/PE attractiveness before the financial crisis. The opposite is the case for Singapore, which dropped two spots to land in fourth place due to the country experiencing a strong decrease in expected GDP growth. However, this is partly offset by improved debt and credit markets.

Meanwhile, the biggest gains within the top 20 over the past five years belong to New Zealand – climbing from 15^th to 9^th place – and Malaysia – climbing from 18^th to 12^th. Further down the list, the Philippines jumped an impressive 22 spots, from 64^th in 2011 to 42^nd in 2015. The Philippines scores particularly well on the economic indicators, with impressive growth projections for the future.

On the other end of the scale, Cyprus is notable for its 28-spot drop in the index over the past five years. Now ranked 65^th overall, the crisis-hit Mediterranean island is ranked at the bottom of the pile (120th) for its ratio of non-performing bank loans to total gross loans. Growth prospects also look bleak.

Heat Map

To help track region trends, the index is accompanied by a heat map. On the map, North America and Europe appear largely green, reflecting their PE attractiveness, while Africa appears largely red, indicating its markets are still developing. On the continent, South Africa and Morocco score highest, coming in at 37th and 50th, respectively. South Africa slipped five spots over five years while Morocco has gained six, with particular strides seen in Morocco’s quality of corporate governance and security of property rights.

For the 2015 index, Malta and Panama were added to the mix, bringing the total up from 118 to 120 countries. The two debuted around the middle of the pack, with Panama ranked 51st and Malta 66th.

The 120 countries are analyzed according to six key drivers measured by 65 individual indicators. The six key drivers are:

Economic activity, including GDP and expected GDP growth

Depth of capital markets, including IPO activity and financial market sophistication

Taxation, including incentives for entrepreneurs and the ease of filing

Investor protections and corporate governance, including legal protections

Human and social environment, including education, labor regulations and corruption measures

Entrepreneurial opportunities, including indicators of innovation, corporate R&D, and the ease of starting, running and closing a business.

To achieve a high ranking on the VC/PE Country Attractiveness Index, a country must score well on all six key drivers.

The index was designed by IESE‘s Center for International Finance, working in conjunction with EMLYON Business School. The team includes IESE’s Heinrich Liechtenstein, EMLYON’s Alexander Groh, Karsten Lieser and Markus Biesinger.

Original