For most Australians the China miracle has swamped all other growth stories for our country’s economic well being, but China is just part of the story as the world turns on its axis – there are three more letters in ‘BRIC’.

According to Thomas McGowan, a managing director in the global private equity firm Siguler Guff, investing in the BRIC countries is like getting back to the roots of private equity investing. There is little or no leverage in the investee companies, and the markets in which they operate are “negotiated” rather than “auctioned”.

“The returns are coming from the companies’ earnings,” he says. “It’s like the old days in the States.”

Siguler Guff is the world’s largest PE investor in BRIC countries, investing both through managers, in a traditional fund-of-funds fashion, and through co-investments. Of the 17 co-investments the firm has done in the past five years, 13 are in China.

McGowan, who is in Australia this week with fellow managing director Patricia Dinneen, said yesterday that there was a stronger element of arbitrage in the BRICs which was not available elsewhere, particularly in the US. Prices are still low and growth prospects are strong.

While the BRIC grouping was made famous by Goldman Sachs in its 2003 paper on the growth prospects of Brazil, Russia, India and China, McGowan says that from an investor’s point of view this is more than an investment bank’s marketing story.

“The growth prospects are very real and, more importantly, it will translate into a massive new middle class, totalling about 800 million people,” he says.

Siguler Guff’s last BRIC fund, which is now fully committed, had a regional allocation of approximately 50 per cent China, 22 per cent India, 18 per cent Brazil and 10 per cent Russia. About half the fund went to ‘growth’ companies and 30 per cent to management buyouts.

The firm expects to increase the proportion of its funds which go to co-investments with its future raisings, made possible because of its geographical spread. It has established offices in each of the BRICs.

“Local knowledge is very important to us,” Dinneen says. “We have looked at more than 300 direct investments over the past five years. You have to have an understanding of the local markets to do that.”

According to Siguler Guff research, there are about 120 institutional quality PE firms operating in the four BRIC countries. There are many others which are either too small, not transparent or of insufficient quality to be of interest. In Russia, for instance, there are only two PE firms of institutional quality, in Siguler Guff’s view.

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