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Sovereigns see potential in Indian private markets Despite tactical switching between developed markets, increasing investment into emerging markets remains a long-term strategic objective for many sovereigns (as stated in our 2016 report). Stock markets have relatively small coverage of emerging market economies, driving greater emphasis on illiquid real asset categories. In fact, many sovereigns use infrastructure deals to manage near-term macro and geopolitical risk, as outlined in our 2015 study. However, challenging placement dynamics and uncertainty over commodity prices mean sovereigns are being more selective in their emerging market investments, focusing on the identification of high- growth markets. While many emerging markets have struggled with slow commodity price recovery and political instability, India has experienced consistent growth in GDP (figure 11). However, India’s economic structure is complex and publicly listed investments have relatively low coverage of the wider economy (with stock market capitalisation 65% of GDP in India, relative to 146% in the US and 112% in the Uk). Indeed, many sovereigns are focusing on opportunities within Indian private equity (as seen in India’s increasing private sector attractiveness in figure 12), seeking returns from its rapid urbanisation. Typically, in emerging markets sovereigns have faced considerable regulatory and governance challenges to direct private equity investment, leading them to seek assistance from external managers. However, in 2016 India introduced reforms to foreign direct investment, loosening government restrictions on investment in certain sectors, with wider reform expected in 2017. This has enabled large investment and liability sovereigns to invest heavily in Indian private equity, and many funds are developing internal management expertise based in India to have greater access and control over private equity investments. Despite sovereign desire to invest directly in Indian private equity, the development of local management capability is often complex and deployment of assets to meet targets will be lengthy. While concerns remain over governance and liquidity of private equity investments in emerging markets, sovereigns note that local management teams are best equipped to deal with these concerns. 19 Fig 11. Gross domestic product of mM 2015 emerging markets (USS, trillions) @ 2016 @ 2017 India Brazil Russia South Africa O31 Source: World Bank Data - GDP (Current USS) data as at 17 April 2017. Fig 12. Opportunity of Indian private sector M@ 2015 and attractiveness of India to sovereign investors @ 2016 m 2017 Private sector opportunity Attractiveness to sovereigns Sample is based on sovereign investors and excludes central banks. Rating on a scale from 1 to 10 where 10 is the most opportunistic/attractive. Rating scored as of Q1 of the given years. Sample: 2015=26, 2016=44, 2017=58. HOUSE_OVERSIGHT_026699