Never Enough Affordable Homes in Emerging Markets

Published on May 22, 2010

Private equity investment in emerging markets is yielding “great returns” for Chicago-based Equity International, according to Jay Harron, ’98, senior vice president of the firm, co-founded by real estate entrepreneurs Sam Zell and Gary Garrabrant. Sam Zell.

Harron spoke to students about his company and emerging market investment during a presentation hosted by the student-led Private Equity, Entrepreneurial Ventures, and Venture Capital Club at Gleacher Center on May 22.

The 10-year-old firm has raised and invested a total of $1.5 billion in 19 portfolio companies around the world. EI’s first fund, Fund I, realized proceeds of nearly $1 billion, representing a 3.1 times return on capital, said Harron, who is responsible for new investments.

“We generally project 15 to 20 percent net returns for our limited partners,” he said. “Generating those types of returns puts us in the upper echelon of investment managers in the same sector.”

EI invests with a strategic focus on major trends such as growth of the middle class in emerging markets, monetization of corporate property, and broadening equity and debt securitization. The firm has invested in Mexico, Brazil, and China, each of which has a rapidly growing middle class eager to consume. Equity International specializes in investing in companies that build affordable homes on a large scale, and develop shopping centers and industrial properties that support retail and domestic consumption.

“There is never enough of a supply of quality affordable homes in emerging markets. That growth will not cease anytime soon,” said Harron, who travels to Brazil at least once a month.

To achieve its goal, the firm invests in a reputable holding company within a country rather than investing directly in a project. Equity International’s active involvement and expertise help develop that portfolio company into a “world-class” operation, he said.

Making investments in emerging countries causes “some sleepless nights” because there are fewer legal protections, said Harron. “We frequently trade rule of law for growth in emerging or frontier markets,” he said. “You trade that because the growth in those markets is so much higher than a developed economy. That’s a key component to our investment philosophy.”

Equity International continues to look at opportunities in their current markets as well as new ones. The firm has looked at opportunities in India, but trying to find high-quality partners there has been a challenge, according to Harron. Vietnam has a growing population, but the banking system doesn’t necessarily support a robust mortgage market at this time, he noted. Nigeria has a dramatic growth rate but Harron said investors find it too corrupt and politically unstable.

Equity International is currently looking at Morocco, Colombia, and Saudi Arabia as potential investment markets. “Colombia is probably the most interesting and attractive South American market outside of Brazil,” he said.

In today’s uncertain economy, only the most reputable private equity firms are attracting investors, Harron told students. “The key to successfully raising private equity capital in this market is a track record,” he said. Two or three years ago, when the economy was in better condition, you used to have guys who would peel off from an existing structure and start their own fund. That’s not happening anymore and won’t be happening in the foreseeable future. Limited partners want to know you have a track record of putting their funds or other funds to work and generating good returns with the capital.”J

avier Candial, a student in the Evening MBA Program, said Harron’s presentation gave him “a good overview of how the private equity industry works and the criteria that’s used when a private equity firm goes into a country.”

— Mary J. Paleologos