# **1 Introduction**

Emerging markets and developing economies (EMDEs) increasingly attract interest from private equity investors seeking high returns. However, data on returns to these investments remain underexplored, especially sector-specific performance, owing to data limitations. Using data from the International Finance Corporation (IFC) over the past 60 years, our paper is the first to present sectoral equity returns across EMDEs, including finance, technology, and resource-intensive industries such as mining. Although previous research on EMDEs has predominantly focused on overall private equity performance, this study explores sectoral returns and examines key macroeconomic drivers, such as economic growth and the real exchange rate.

Since Kaplan and Schoar (2005), the private equity returns literature has commonly used the S&P 500 index as a benchmark against public markets, using metrics like the Public Market Equivalent (PME), for evaluating private equity performance. Building on Cole et al. (2024), this paper expands on that framework by exploring how private equity returns in EMDEs compare to public market indices. In this study, we apply the PME to compare performance against the MSCI Emerging Markets Index, which permits a comparison of returns on private equities versus publicly listed companies in the same country.<sup>1</sup> Our exploration of returns across different sectors finds that some industries, such as technology and finance, exhibited particularly strong performance during the sample period. These results add depth to our understanding of sectoral dynamics within EMDEs by providing a more granular view of private equity returns in these markets. Enhancing the transparency of private equity data in EMDEs also offers investors and policy makers a clearer understanding of equity returns across different sectors within these economies.

We also examine the relative importance of firm-specific, sector, and country factors. Firmspecific factors account for the largest share of variation of returns, far surpassing the influences of country and sectoral aspects. Indeed, the role of idiosyncratic firm factors is greater than in studies for publicly listed equities. Using data from 12 European countries, Heston and Rouwenhorst (1994) find that country and industry characteristics explain 24% and 5%, respectively, of the variance of returns.<sup>2</sup> Norges Bank (2019) built on the return decomposition framework by Heston and Rouwenhorst (1994) using an international dataset of firm-level public equity returns from developed and emerging markets, finding that country and industry factors explain about 30% of return variation, with firm-specific dynamics dominating. Using an ANOVA decomposition, our analysis extends this methodology to private equity in EMDEs. Our results reveal that sectoral effects account for 4.3% and country factors for 6.5%.

The importance of firm-specific factors is consistent with studies that have examined the underlying determinants of profitability and performance. For example, Esho and Verhoef (2021) 1Indeed, recent literature has emphasized the need for benchmarks with a closer risk profile to those in emerging markets (Jeffers et al., 2024).

> 2This observation aligns with the findings of the volatility decomposition of Campbell et al. (2001). The authors highlight that between 1962 and 1997, the proportion of firm-specific volatility in total common stock return volatility rose from 65% to 76%, while the contributions of market volatility and industry volatility declined from 20% to 14% and from 15% to 10%, respectively.

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