For the sixth time in a row, the US tops the IESE VC/PE Country Attractiveness Index, which ranks 120 countries according to their attractiveness for venture capital and private equity. The country remains the most appealing region based on its risk/reward profile and, as the birthplace of venture capital/private equity, no other country will be able to challenge it for the foreseeable future, according to the authors. Also at the very top of the charts sit the United Kingdom, Canada, Singapore and Japan (taking positions two through five respectively.)
This is the 6th annual edition of the ranking, created by IESE’s Heinrich Liechtenstein, Karsten Lieser and Markus Biesinger, and EMLYON’s Alexander Groh, which analyzes which countries offer the most promising markets, strongest institutions, most entrepreneurial support, best protections and strongest corporate governance practices. This 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.
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. For example, China ranks 113.2 for economic activity, but only 59.1 for investor protection and corporate governance.
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 more 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 happens with 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 15th to 9th place – and Malaysia – climbing from 18th to 12th. Further down the list, the Philippines jumped an impressive 22 spots, from 64th in 2011 to 42nd 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 65th 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.
About the ranking
The VC/PE index was designed and expanded by IESE's Center for International Finance (CIF), in conjunction with EMLYON Business School. The team includes Heinrich Liechtenstein, Prof. of Financial Management at IESE, Karsten Lieser, research fellow (IESE), Markus Biesinger, project manager (IESE) and Alexander Groh, Prof. of Finance at EMYLON Business School.
The 120 countries are analyzed according to six key drivers measured by 65 individual indicators. The six key drivers are:
To achieve a high ranking on the VC/PE Country Attractiveness Index, a country must score well on all six key drivers. IESE and EMLYON plan to continue expanding the index’s scope, while maintaining comparability.
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.
Image: The 2015 Venture Capital & Private Equity Country Attractiveness Index heat map / Illustration: IESE
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