Chapter 2 Part 2: Private Equity in Europe and Emerging Markets
In part 1 we talked about how the US basically invented private equity. Now the question is: can everyone else just copy the homework? Demaria’s answer is basically “it’s complicated.” Europe tried to adapt the American model. Emerging markets are still figuring things out. And the results are… mixed.
Europe: Copy-Paste Didn’t Work
Every European country at some point dreamed of building its own Silicon Valley. The UK, France, Germany, Scandinavia, they all tried. None of them pulled it off. And the reason is actually pretty simple: culture.
Americans and Israelis are risk-takers. Europeans, generally speaking, are more risk-averse. That is not a judgement call. It just means the same playbook produces different results. European entrepreneurs tend to build slower, more carefully, and often want to pass the company to the next generation rather than flip it fast. Only 15% of European startup founders are serial entrepreneurs, compared to 35% in the US.
Demaria lays out four features that make Europe different. Risk aversion means startups are more resilient but innovate incrementally. Fewer immigrant entrepreneurs (in the US, immigrants founded 52% of startups in 2009). A fragmented market where different languages, laws, and cultures make pan-European sales hard. And scattered industrial policy with no unified push like America’s military-industrial complex.
What Europe Did Right (And Wrong)
Europe did adopt the limited partnership structure. The UK, France, Luxembourg, Switzerland, Spain all created their own legal versions. Countries set up tax breaks for capital gains. The UK listed venture capital vehicles on the stock exchange (3i in 1994). France created retail investment vehicles so regular people could invest in startups and get tax rebates.
London became the natural HQ for pan-European PE thanks to its financial center, language proximity to the US, and early mover advantage. Though Demaria notes Brexit puts this role into question.
But here is the catch. Europe still doesn’t have a proper tech stock exchange like NASDAQ. Without that exit path, European startups can’t dream as big. Most exits happen through trade sales, being bought by bigger companies. That limits how much venture capital makes sense to deploy. You can’t pour $100 million into a startup if the likely exit is a $200 million acquisition.
National laws remain barriers too. The patent system across the EU is expensive and messy. Corporate law differs country by country. And the biggest challenge? Expanding sales into neighboring countries where people speak different languages and have different habits.
Big Corporations Run the Show
Here is something that surprised me. In Europe, innovation is driven mostly by large corporations, not scrappy startups. Companies with 250+ employees introduce innovations 95% of the time. Small companies with 1-9 employees do it 70% of the time. Still high, but the big guys clearly dominate.
Corporate venturing became a thing because of this. Big companies spin off innovative units or invest in startups at arm’s length. For European startups, partnering with a large corporation is almost essential. These giants have offices in every EU market and can open doors to government contracts that would take a small company years to access.
The result? European innovation is mostly incremental and business-to-business. Think SAP, Nokia, Ericsson. Not flashy consumer apps. There are exceptions like Spotify and Skype, but the pattern is clear.
Emerging Markets: Still Under Construction
Now for the rest of the world. Demaria is pretty blunt here. Private equity in emerging markets is a work in progress, and will be for at least another generation.
The numbers tell the story. In 2018, North America collected 56% of global PE funds. Europe got 21%. Asia got 19%. The rest of the world split 4%. That’s it. Four percent for Latin America, Africa, the Middle East, and emerging Europe combined.
It took the US 40 years to build a professional PE industry. Europe needed 30 years to catch up. Demaria thinks emerging markets will need at least two decades more for even the basic strategies, let alone complex ones like LBOs and distressed debt.
Asia: The China Show
Emerging Asia raised on average $65.8 billion per year between 2008 and 2017. But it’s really two stories: China and everyone else.
China gets the most attention. It’s ranked 18th on the IESE PE attractiveness index. But the problems are real. A PricewaterhouseCoopers study found that corruption, government interference, and lack of transparent financial data cost investors an average of 50% of deal value. Regulations are a maze. Courts are unreliable. Many local startups just copy foreign innovations. The Chinese government itself started tightening rules on PE, essentially admitting the sector had become a bubble.
India ranks 28th. Democracy with nepotism, red tape, and corruption. One PE founder called it “possibly the least attractive of the emerging private equity markets.” India attracts about $2.3 billion per year on average. Not nothing, but not impressive for a country of that size.
Latin America: Boom and Bust
Brazil looked like the star for a while. Fundraising peaked at $7.3 billion in 2011, then fell back to earth. The country ranks 54th on the IESE index. High valuations, lacking infrastructure, complex regulations, and 70% of startups just replicating foreign ideas.
Mexico is second in the region. David Rubenstein of Carlyle Group said Mexico “has a great economy, but there are very few things to buy there.” Local business culture and entrepreneur attitudes toward control and governance are the main sticking points.
Colombia is the surprise. It became the third most dynamic market thanks to political stability and structural reforms. Small but growing, and viewed by survey respondents as the most attractive country in the region.
Emerging Europe, Africa, and the Middle East
Central Europe benefits from EU legal convergence and connections to Western economies. Poland leads the pack. But growth is slow, and fundraising averages only about 0.7 billion euros per year.
Russia? As Rubenstein put it, it “may be attractive to visit as a tourist, but it’s very difficult to make a lot of money there.” Western sanctions and the arrest of an American running one of Russia’s biggest PE firms sent chilling signals to the whole community.
Africa and the Middle East struggle the most. Forty-nine percent of survey respondents find Sub-Saharan Africa unattractive for PE. Only 15% find it attractive. Political instability, ownership restrictions, limited deal flow, and tough exit conditions all contribute.
The Bottom Line
Europe found its own path. Not a copy of America, but something that works within its cultural constraints. Incremental innovation, corporate partnerships, and business-to-business focus. It’s not sexy, but it functions.
Emerging markets are a different story. International investors chase returns, pile into hot markets, then leave when things get rough. That boom-bust cycle doesn’t help local PE ecosystems build lasting structures. The smart countries (like Colombia and parts of Central Europe) are using their own pension funds and sovereign wealth to create a stable base of local capital. That seems like the right play.
As Demaria keeps showing throughout this book, you can’t just export know-how. Each market has to grow its own PE industry through its own most active economic agents. There are no shortcuts.
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