Gej 2016 0048

DE GRUYTER Global Economy Journal.
2017; 20160048
Hernán Herrera-Echeverri1 / Jerry Haar2 / Juan Guillermo Salazar-Duque1
Private Equity and Devaluation in Emerging

Countries
1
Economics and Finance School, EAFIT University, Carrera 49 N° 7 Sur – 50, Medellin Colombia, E-mail: hherrer2@eafit.edu.co,
jsalaz29@eafit.edu.co
2
Management & International Business, College of Business, Florida International University, 11200 SW 8th Street, MANGO
436, Miami, Florida 33199, E-mail: haarj@fiu.edu
Abstract:
Using a comprehensive database with 51 emerging countries studied over a 13 year period, we find that deval-
uation increases the PE investment. More years of annual devaluation have a higher impact in promoting PE
investment. Conclusions are confirmed for total and high technology PE investments, but not for early stage PE
investments. Devaluation does not benefit PE investment in firms in the early stages of development. Devalua-
tion itself is not sufficient to encourage the appetite of investors; however, some country-level competitiveness
variables are indispensable for making a country more fertile for PE investment when a devaluation occurs –
the high relevance of competiveness increasing in the long term.
Keywords: private equity, devaluation, country competitiveness, high technology investments, start-ups
JEL classification: F21, F31, G24, G28
DOI: 10.1515/gej-2016-0048
1. Introduction
Private equity investments in emerging markets continue unabated despite the 2008–2009 global recession and
an aggregate decline in recent years due to China’s economic slowdown (Reuters, 2016). Emerging markets-
based fund managers have raised over $322 billion for private equity vehicles over the last decade, with South-
east Asia and India the most attractive prospects. (Preqin 2016). One of the most attractive sectors for PE invest-
ment in emerging markets has been high technology, as established players simultaneously strive to innovate
to increase profitability and market share in an environment of intense competition (Haar and Ernst 2016).
There is consensus in the literature about the importance of Private Equity (PE) for economic progress. The
literature mentions several avenues whereby PE support creates sustainable growth and contributes to eco-
nomic development. For example, financing new business creation (Berger and Udell 1998; Hellmann and Puri
2000, 2002; Kortum and Lerner 2000; Popov and Roosenboom 2013); supporting and achieving more efficient
industrial innovation (Gambardella, Harhof, and Verspagen 2008; Lerner, Sørensen, and StroMberg 2011; Popov
and Roosenboom 2009); increasing the quality of management, the productivity of the firms and, in general,
the competitiveness of the markets (Kaplan and Stromberg 2009; Samila and Sorenson 2011)
Consequently, a considerable volume of research has been dedicated to guiding policy makers on taking
special measures to promote PE market development. However, a few studies have focused on the relationship
between devaluation and its effects on PE markets. The study of this phenomenon is particularly important for
emerging countries where exchange rate movements are frequent and a result of conscious public policies.1 For
example, in the wake of the Russian debt crisis in 1998, the ruble lost almost 80 % of its value, or recently during
several months of 2015 Colombia and Brazil experienced an annual devaluation of over 30 % against the U.S.
dollar.
So, how does currency volatility impact PE Firms? How relevant is the impact of currency volatility on PE
fund activity in emerging markets? What is the real value of an economic policy oriented to devaluing currency
to encourage PE investment? As the long-term nature of private equity fund investments makes changes in a
currency’s value more difficult to manage, and knowing that active PE markets benefit the economic develop-
ment in emerging countries, it is crucial to answer these questions to guide policy makers in the appropriate
way.
Theoretical studies regarding the relation between devaluation and investment suggest different positions
and conclusions, sometimes contradictory. Empirical work is scarce (moreover in the specific case of PE in-
vestment) and reflects a lack of theoretical clarity. Therefore, the interest of this work is to shed light on the
Jerry Haar is the corresponding author.
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Herrera-Echeverri et al. DE GRUYTER
effect of devaluation on PE activity and to determine what economic conditions could affect this relationship in
emerging economies. For this purpose, besides testing the significance and direction of the relationship between
devaluation and PE, attention is focused on how some underlying country competitiveness factors impact the
effects of devaluation on PE investment: credit availability to the private sector, availability of skilled labor, the
level of infrastructure, and the institutional quality observed in the country. It is clear that policy makers in this
area of growing long-term importance call for more specific empirical support and guidance.
To accomplish these objectives, a panel data with information about private equity investment of 51 emerg-
ing countries from 2001 to 2003 was taken from the Thomson ONE private equity database. Emerging countries
were selected taking into account the Financial Times and the London Stock Exchange – the FTSE Index refer-
ence. Thus far, some researchers have identified factors affecting the real exchange rate and private investment
simultaneously (Edwards 1988; Elbadawi 1994; and, Montiel 1999). We introduce a difference and system GMM
dynamic panel estimator model with a collapsed instrument matrix and two lags to control for endogeneity
problems, thereby obtaining more robust conclusions.
Our results indicate that devaluation increases PE investment. Results are confirmed when PE total amount
or deal average is used as dependent variables, controlling by time, country characteristics, and the endogeneity
issues emerging in the relationship, implying that PE is higher in countries that experience devaluation. More
years of annual devaluation have a higher impact in promoting PE investment. Coefficients increase their value
and significance when annual devaluation persists for more time. However, for the sample used only an annual
devaluation above 6.12 % has significant effects in fostering PE investment during the period of time studied.
All above conclusions are confirmed for high technology PE investments, but not for early stage PE investments.
Devaluation does not benefit the PE investment in firms in early stages of development in emerging countries.
Country competitiveness characteristics influence the effect of devaluation over total and high technology
PE investments. Devaluation itself is not sufficient to encourage the appetite of the investors; however, some
country-level competitiveness variables are indispensable for making a country more welcoming for PE invest-
ment when a devaluation occurs. This high relevance of competiveness increases in the long term. In relation
to early stage PE investments, coefficients associated with competitiveness variables do not show substantial
variation on their magnitude and significance when interacting with high or low devaluation. Competitiveness
country conditions are imperative for improving early stage PE investments and the devaluation level does not
influence meaningfully the investor’s decision for these kind of investments.
This article continues as follows: Section 2 provides a rationale for the research and a relevant literature
review; Section 3 depicts the variables used; Section 4 describes the data and its sources; Section 5 presents the
empirical methodology; Section 6 explains the results obtained; and Section 7 provides the conclusions, as well
as research and study limitations.
2. PE Investment, Devaluation and Economic Policy

The effects of changes in the real exchange rate on the volume, timing, and composition of PE investment are
especially important in developing economies where country risk increases the expected return for foreign
investors. Currency risk plays a growing role for both limited and general partners because exchange rates
tend to move, especially over the longer holding periods typical of a private equity investment. Therefore,
devaluation could impact several stages of the PE investment process: raising capital from limited partners
(LP), selecting and investing in a target, value-adding and exiting.
An LP committing to a foreign-currency denominated PE fund2 that faces an exchange rate depreciation
of the LP’s home currency against the fund’s currency – amid the time of his or her commitment and the
drawdowns – could face a liquidity problem. Equally, an appreciation of the LP’s home currency relative to the
PE fund’s currency may lead to underexposure relative to an LP’s target allocation.
Additionally, currency exposure emerges for an LP when participants in a fund raised in a foreign currency
that subsequently, subject to the limits of the limited partnership agreement, investing in assets denominated
in currencies that differ from the fund’s currency. As a result, an LP is doubly exposed to currency risk – both at
the individual portfolio level as well as at the level of the fund’s overall returns. Unfortunately, a currency risk
as described above, is difficult to hedge, as cash flows are highly unpredictable in terms of their exact timing
and size, thereby making traditional instruments unsuitable.
At the fund level, currency movements, by means of their implications in the surrounding economic vari-
ables, could also affect the attractiveness of PE fund investment opportunities and profitability of the firms
in the PE fund portfolio. In the following paragraphs, a discussion is presented regarding how these relevant
economic variables could be vehicles through which devaluation increases or decreases aggregate PE invest-
ments in a country. The analysis includes both paths: first, before an investment decision – that is to say, the

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DE GRUYTER Herrera-Echeverri et al.
implications regarding a fund’s decision to increase or reduce its investment commitments; and second, after
an investment decision, when PE funds have made the investment and are near to closing their positions. We
conclude this section identifying some existing literature gaps and how this work contributes to filling them.
2..1 Profitability
Devaluation affects PE investment profitability in a several ways. One of them is the impact of devaluation over
the relative price of capital goods. When a firm leveraged with PE resources requires foreign components to
operate (machinery and equipment), a currency depreciation raises its real cost and acts as an adverse supply
shock in the production, reduding profitability for local PE investments. Buffie (1986) and Branson (1986) have
found that devaluation increases the real cost of external capital goods and reduces investment in non-tradable
goods production. But, in tradable goods, because the production process has a local component cost, the net
cost relative to the price of output could fall, and profitability for PE investment could rise.
Aguilar (2005) found in a firm-level study performed in Mexico that exporting firms outperform non export-
ing firms in both sales and profits in the year following the devaluation, confirming the traditional prediction
about the tradable sector benefits from a real devaluation, documented in Krueger and Tornell (1999). How-
ever, counter-intuitively, these authors mention that exporters do not show a greater tendency to invest in new
capital relative to non-exporters.
In general, PE investment could be decreased in sectors with low exports and a high dependence on both
imported capital and intermediate goods. Lizondo and Montiel (1989) distinguish between investment in traded
and non-traded goods in a model in which capital is sector-specific. The results show that the net effect of a
real depreciation is ambiguous – investment in tradable goods increases while investment in domestic goods
declines. However, when a local market is growing, PE investors could obtain profitable opportunities even in
non-traded goods sectors investing in underperforming companies with improvement possibilities.
The exchange rate increases the PE investment risk due to the timing differences between investment and
profits; additionally, exchange rate volatility introduces further cost to PE funds, especially when they obtain
resources abroad. Early theoretical works on foreign investment and devaluation (Kohlhagen 1977; Itagaki 1981;
Cushman 1985; and Goldberg and Kolstad 1995) argue that a risk adjusted expected real exchange rate depre-
ciation increases the foreign cost of capital, discouraging foreign investment. However, recent contributions
(Ross 2007, Kleinert 2006, Lin et al. 2006, and Xing and Zhao 2008) show ambiguous predictions. The predicted
relationship between exchange rates and foreign investment varies depending on factors such as configuration
of revenues and costs or source of exchange rate shock.
A large difference in profitability between funds denominated in local currency versus foreign currency
could occur for PE funds that have an imminent exit. A foreign-currency denominated fund that converts cur-
rency to invest when the local currency is stronger will need a higher multiple at exit to compensate for the effect
on profitability of a weaker local currency. Firms’ valuations in emerging countries normally are calculated us-
ing a future cash flow forecast, as a weaker local currency could force a write-down in the value of portfolio of
PE funds. On the other hand, if foreign currency-denominated PE funds enter a country, they could be bought
cheaper and require a lower multiple at exit to offer the expected profitability to investors at time of departure.
In conclusion, the net results of devaluation over aggregating PE investment profitability are uncertain. The
implication of ambiguity at the theoretical level is that it remains the task of empirical work to determine the
nature of the relationship.
2..2 Interest Rate

Devaluation may affect the profitability of PE funds investment through its possible impact over the real inter-
est rate. As mentioned, devaluation increases the price of imported commodities and intermediate inputs. If
monetary authorities do not adjust their policies to respond to the increase in prices, real money balances will
fall, pushing up the real interest rate for a given rate of (expected) inflation. Through this channel, devaluation
could increase the weighed average cost of capital, diminishing the present value of future cash flows. Corre-
spondingly, firms’ market values in the PE portfolio will fall and lead to an adverse effect on PE investment.
With a different argument, Gompers and Lerner (1998) came to a similar conclusion. In an empirical model,
they include the short-term interest rate as an independent variable and show a negative relationship between
the interest rate and the venture capital. Their intuition behind these results is that U.S. treasury bill investments
are considered alternative investments to PE and conclude that an increase in the short-term interest rate will
determine a decrease in PE investments.
Another point of view is supported by Romain and De La Potterie (2004) and Felix, Gulamhussen, and Pires
(2013). These authors use an equilibrium model to claim that the interest rate is a key factor in the evolution of

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the private equity market. Although they predict a positive relationship between the interest rates and the PE
demand and a negative relationship between the interest rates and the PE supply, they found that short-term
and long-term interest rates have a positive impact over PE activity (specifically venture capital activity) and
consequently, overall they conclude that the demand side impact of the interest rate overwhelms the supply
side effect.
2..3 Indebtedness
A complex relationship exists between the foreign debt overhang and the volume of private investment. For
a firm with foreign debt, devaluation increases the share of debt in cash flow and reduces the equity value
of firms. In emerging countries, domestic credit markets are imperfect; therefore, firms face credit constraints
and higher financing costs due to creditors elevating interest rates to compensate for a higher risk of default.
Investment could be reduced because of these financial pressures. For example, Aguilar (2005) finds that firms
with large exposure to short-term foreign debt before a crisis show a marked drop in investment after the
devaluation.
The increase in firms’ value of foreign debt also could affect the PE investment indirectly. Local banks and
financial intermediaries with greater exposition in their credit portfolios will be forced to reduce the risk by
cutting their loans, exercising pressure over interest rates in credit markets and reducing the supply of credit.
This means that even firms without foreign currency liabilities could be affected, and investment will be low as
financing becomes limited and costly. However, although traditional investors reduce investment in indebted
firms because of this perceived higher risk, PE funds could find profitable investment opportunities, releasing
operationally healthy firms from these financial pressures and taking them to safe harbor.
A deep devaluation, which increases the cost of external debt, may require government action to bail out
firms or financial intermediaries. Financing the bailout, however, may lead either to inflation or to a domestic
debt overhang, because the government needs to issue some kind of security to cover the foreign exchange
losses. Depending on the ensuing magnitude, an upward pressure on interest rates could be enacted, gener-
ating a crowding out effect over the PE fundraising process. This, in turn, could result in lower PE investment
availability and higher profitability requirements for PE funds.
Based on the imperfect capital markets approach of Froot and Stein (1991), it could be argued that exchange
rates either diminish the attractiveness for a firm to obtain foreign PE resources or raise inbound PE invest-
ment profitability. External sources of financing are more expensive than a firm’s internal cost of capital and
the propensity for local entrepreneurs to look for foreign PE funding decreases. However, host currency depre-
ciation is predicted to have a positive effect on inbound foreign PE investments, as it automatically allows them
to make better bids for assets. This second conclusion is supported also in Blonigen (1997).
Empirical studies in this sense are scarce and contradictory. Bleakley and Cowan (2008) mention that firms
with above average exposure to foreign debt tend to increase relative investment during a contemporaneous
real depreciation. However, Aguilar (2005) shows that investment of exposed firms declines the year after a
real devaluation. For Easterly (1990) devaluation produces a decline in gross domestic product and in private
investment. The main cutback in investment comes from corporations due to an increase in real foreign indebt-
edness.
2..4 Output and Trade
Output contraction is another channel through which devaluation could affect PE fund portfolio. Specifically
for developing countries, various authors have mentioned that devaluation could lead to a contraction in output
and a worsening of the trade balance (Krugman and Taylor 1978; Gylfason and Schmid 1983; Edwards 1986; and,
Nielsen 1987). The substitution effects arising from devaluation show dominant adverse effects over income in
the short run operating through a deficit in trade balance (and consequently an external value transfer), and a
negative effect on consumption as real income is weakened by the relative high prices of imported intermediate
and finished goods. (Edwards 1988; Lizondo and Montiel 1989; Solimano 1986; Van Wijnbergen 1982).
In emerging countries where the industry does not have a high value added level in its output, the Mar-
shall–Lerner condition3 cannot be met; and devaluation is likely to worsen the trade balance. Emerging country
characteristics could imply a higher income coming from commodities exports, but the trade balance will be
affected by the higher prices of intermediate and finished goods. In the long term, if the country has a reduced
volume of potential exports, it will take a while to develop them and create the conditions required to exploit
comparative lower prices – again worsening the deficit on the export side. Similarly, the increased real price of
imported inputs for domestic goods leads to a rise in the cost of working capital, reducimg the attractiveness

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of potential PE investments and decreasing the cash flow of the firms in the PE funds portfolio. This nega-
tive effect of devaluation could subside as fast as the substitution effects gradually come into play, increasing
exports, expanding GDP, raising real income and stimulating PE investment as business opportunities increase.
Particularly, Aguilar (2005) found that in Mexico many firms experienced an increase in the volatility of sales
growth after the floating of the peso in 1994 (mainly firms with heavy export shares). This volatility increases
the uncertainty and diminishes PE investment. In short, increasing output and sustainability raise PE portfolio
profitability and generate PE investment opportunities. Several channels through which devaluation might
affect domestic output in emerging countries have been exposed, some of them could have a favorable impact
mainly because of possible positive shocks in internal demand; others could increase the risk perceived and
reduce the expected profitability of the PE investments.
2..5 Infrastructure
Several authors have mentioned that infrastructure favors profitability and the volume of investment (Justman
1995; Kohei and Tabata 2013; Morrison and Schwartz 1996). Infrastructure creates the conditions for other pri-
vate equity initiatives to flourish. Additionally, some authors have established a complementary relationship
between public and private investment in infrastructure (Blejer and Khan 1984). As such, many emerging coun-
tries have boosted policies oriented to promoting public-private partnerships, and project finance opportunities
have been increased for private equity investments. Time series studies such as Musalem (1989) and multicoun-
try panel data studies like Greene and Villanueva (1991) show evidence regarding complementary hypotheses,
specifically for emerging countries.
Infrastructure availability could increase the profitability and reduce the time to exit for PE investments,
chiefly for local PE funds. However, the risk of devaluation of a local currency could be a particular problem
for foreign PE investors, where the local currency is not pegged to another harder currency. This is because
the benefits of cost reduction and access to new markets provided by higher infrastructure availability could
not make up for the decline in real currency value. For example, in a public-private partnership initiative, the
return on investment comes from income derived from concessions. Local currency depreciation decreases the
real revenue for foreign investors, thereby increasing the investment break even point and the recovery time of
investment.
For PE investors a significant devaluation changes the financial projects equilibrium because local authori-
ties will be tempted to keep from updating rates, even if prices are indexed to the exchange rate contractually.
2..6 Empirical Research
Empirical studies regarding the impact of devaluation on investment are scarce (moreover in the specific case of
PE investment) and reflect the theoretical ambiguity mentioned above. Solimano (1989), using an empirical si-
multaneous equation model for Chile, concludes that devaluation reduces investment in the shor-run, although
it recovers in the medium term. Musalem (1989) finds that devaluation has an adverse effect on investment in
Mexico, and Faini and De Melo (1990) arrive at similar results using data for 24 developing countries. On the
other hand, Cardoso (1993) uses a quadrennial panel data for the period 1970–1985 to study the influence of
devaluation on private investment for a number of Latin-American developing countries (Argentina, Brazil,
Chile, Colombia, Mexico and Venezuela) without finding a statistically significant effect.
More recently, Minardy (2015)4 analyzes how currency risk and other macroeconomic variables have
affected performance of the Brazilian PE/VC investments in the last 20 years. The main findings of the study
indicate that currency risk does not affect the long term performance of LP and PE funds, but the devaluation
impact for a single deal may be substantial; and although there is diversification across deals, some funds may
not be able to diversify across cycles, and foreign exchange risk may affect funds’ performance. Devaluation
may transform exceptional performance in local currency into mediocre returns in foreign currency.
Our aim in this research is to make a contribution by identifying more precisely the characteristics and the
circumstances in which devaluation can affect PE activity. After reviewing the literature, it can be inferred that
other surrounding variables in the economy could affect this relationship. Specifically, it is necessary to explore
how this relationship is affected when devaluation interacts with economic variables concomitant with the
profitability of PE fund portfolio and the dynamic of PE funds investment opportunities. Our interest is focusing
on some underlying country competitiveness factors: credit availability for the private sector, labor skill level,
infrastructure status and the institutional quality observed in the country. It is clear that policy makers in this
area of growing long-term importance could benefit from more specific empirical support and guidance.

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3. Variables Description
This section describes the variables used. We start by explaining the dependent variables, followed by the in-
dependent variables’ description, and finally we present the control variables’ justification. The dependent
variable (PE activity) is measured by four proxies: the natural log of one plus the ratio of private equity invest-
ments to economically active population, the natural log of one plus the ratio of average private equity amount
to economically active population, the natural log of one plus the ratio of a 3-year moving average ratio of
private equity investments to economically active population, and the log of sum of one plus ratio of the total
private equity investments to economically active population in for each country from 2001 to 2013.
The source of data is the Thomson ONE Database. This database contains information for all PE deals per-
formed in 51 emerging countries studied. To meet other study concerns, PE activity at year i by country j is
calculated using two additional criteria regarding the company where the VC investment is made: company
development stage and company technological level. For the first criterion, the Thomson One’s Private Eq-
uity/Venture Capital database classifies investments in the following categories: seed, start-up, expansion, re-
placement capital, and buyouts. PE investments are defined as the sum of the first four categories. Early stage PE
investments are the sum of the first two categories. The second criterion identifies PE investments in high-tech
companies and it includes the following sectors and related areas: communications, computing, biotechnology,
electronics, and pharmaceuticals.
The explanatory variable is a proxy with change in the Real Effective Exchange Rate (CREER). This variable
indicates the evolution of change in the real value of a currency against a currency basket of its trading partners.
The data source is the Bruegel organization (Darvas 2012), an institution specialized in economic studies and
founded in 2004 through the initiative of twelve governments of the European Union (EU). Its databases have
also been used in recent research (Darvas 2013; and Herrera-Echeverri et al. 2015).
Seven control and country competitiveness variables are included to ensure that the relationship between
explanatory variables and dependent variables can be authenticated. “Instquality” is the quality of institutions
determined according to the most recent version of “Worldwide Governance Indicators (WGI)” (Kaufmann,
Kraay, and Mastruzzi 2010). “Instquality” is calculated as the average of the six dimensions of WGI and indi-
cates the institutional quality in a country, addressed along six dimensions: voice and accountability, political
stability and absence of violence, government effectiveness, regulatory quality, rule of law and control of cor-
ruption. Other researchers also use averages to explore the effect of institutional quality on venture capital and
other phenomena (Herrera-Echeverri, Haar, and Benavides 2014; Li and Zahra 2012; McMullen, Bagby, and
Palich 2008; Van Stel, Storey, and Thurik 2007; Wennekers et al. 2005). It is expected that the relationship will
be positive.
“Trade” is the volume of imports and exports and “Domcre” is the amount of domestic credit available to the
private sector, both represented as a percentage of GDP. These variables are considered as factors affecting the
PE investment because they increase the development of local industry and hence PE investment opportunities
(Blanchflower and Oswald 1998; Di Patti and Dell’Ariccia 2004; Herrera-Echeverri, Haar, and Benavides 2014;
Holtz-Eakin, Joulfaian, and Rosen 1994; Sobel, Clark, and Lee 2007). Literature regarding increasing “GDP”
(gross domestic product) establishes a positive effect on PE (Jeng and Wells 2000; Popov and Roosenboom 2013;
Schertler and Tykvová 2011), and per capita GDP is used as a control variable. The total road network reported
in thousands of kilometers, which includes motorways, highways and other national or regional roads in a
country (Roads Paved), is used to proxy the infrastructure development level of a country in a year. Data for
the last four variables comes from the World Bank (World Development Indicators).
Freedom to do businesses (“Busfree”) is a quantitative measurement of the ability to begin, operate and
close a business. The score goes from 0 to 100 – 100 is equivalent to a country with a business environment
of maximum attractiveness. That measure is included in the Index of Economic Freedom (IEF) of the Heritage
Foundation (Beach and Kane 2007). Other studies have employed this variable for similar objectives (Aidis, Es-
trin, and Mickiewicz 2010; Claessens and Laeven 2003; Haan and Sturm 2000; Klapper, Laeven, and Rajan 2006;
and, McMullen, Bagby, and Palich 2008). Finally, “Spending on Education” is the government expenditure on
education as a percentage of GDP. Data derived from the UNESCO Institute for Statistics Database. Additional
details of each variable mentioned above can be found in Appendix I.
4. Data Description and Sources

Information about private equity investment is sourced from the Thomson ONE private equity database. The
Thomson ONE database contains information for private equity deals performed in 51 emerging countries
studied over a 13-year period, from 2001 to 2013. The data is available in millions of U.S dollars. Emerging

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economies were selected taking into account the Financial Times and the London Stock Exchange – the FTSE
Index reference.
Table 1 provides summary statistics for the variables used in all models. A detailed description of variables
and source of data are available in A. Private Equity, Early Stage and High Technology indicate total, early stage
and high technology private equity investment in millions of current U.S dollars, respectively. Devaluation
indicates the percentage change in the real effective exchange rate. Instquality is the Worldwide Governance
Indicators measure for institutional quality. GDP is the real GDP per capita in millions of current U.S. dollars.
Trade is the total sum of exports and imports as a share of GDP. Labor force is the economically active population
in millions of people. Busfree, which is an index score for each country is a number between 0 and 100, with
100 equaling the freest business environment. Domestic credit denotes domestic credit to the private sector as a
share of GDP. Road denotes paved roads as a share of total roads in a country. Spending on Education indicates
public expenditure on education as a share of GDP.
Table 1: Summary statistics: descriptive analysis.

Variable Mean Std. Dev. Min Max Observations Kind of
variable
Private equity 575,99 1.846,26 0,00 22.014,61 663 Dependent
(PE)
High 187,18 725,28 0 8,579,06 663 Dependent
technology
(HT)
Early stage 116,55 499,31 0 6,307,23 663 Dependent
(ES)
CREER 0,01 0,09 –0,72 0,96 663 Explanatory
Instquality 0,06 0,71 –1,62 1,58 562 Control
GDP (109 ) 253.14 458.71 5.49 4.567.45 609 Control
Trade 97,14 71,74 21,72 448.31 586 Control
Busfree 67,92 12,95 35,50 100,00 652 Control
Domcre 56,38 37,65 2,27 219,49 690 Control
Roads paved 63,85 29,57 6,00 100,00 325 Control
Spending on 4,36 12,67 1,01 7,77 414 Control
education
Note: Table 1 provides summary statistics for the variables used in all models. A detailed variables description and source of data are available in A. Private
Equity, Early Stage and High Technology indicate total, early stage and high technology private equity investment in million of current U.S dollars, respectively.
CREER indicates the change in the real e昀fective exchange rate. Instquality is the Worldwide Governance Indicators measure for institutional quality. GDP is the
real GDP per capita in 109 of current U.S. dollars. Trade is the total sum of exports and imports as a share of GDP. Busfree is an index score for each country is a
number between 0 and 100, with 100 equaling the freest business environment. Domcre denotes the domestic credit to the private sector as a share of GPD.
Roads Paved denotes paved roads as a share of total roads in a country. Spending on Education indicates de public expenditure on education as a share of GDP.
Table 2 summarizes the data on private equity investment aggregated over the period 1999–2013 by country.
Columns 3, 4 and 5 contain the average investment private equity, early stage and high technology respectively
over the period in millions of U.S dollars. Column 6 contains the number of years in the period studied in which
the geometrically-weighted average of bilateral real effective exchange rate between the countries under study
and its trading partners has shown devaluation. Data comes from Bruegel Report Database.
Table 2: Private equity investment and devaluation by country.

Country Total deals Private equity annual average investments (2001–2013) Years with an-
(2001–2013) Total Hightech Early stage nual average
devaluation
Argentina 112 289,58 56,80 87,59 6
Brazil 787 3.103,92 230,77 326,08 5
Bulgaria 68 392,85 262,47 117,33 2
Chile 63 453,81 19,44 19,27 5
China 5,783 8.744,57 2.718,10 2.788,08 5
Colombia 39 139,33 8,59 6,21 6
Czech Republic 191 280,75 30,67 17,56 3
Egypt 100 233,64 18,13 17,60 5
Estonia 60 17,13 2,17 4,24 3
Hong Kong 415 1.857,80 1.109,86 255,91 10
Hungary 224 459,71 230,94 28,61 4
India 2,985 4.458,15 1.771,40 856,18 6

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Indonesia 57 298,71 60,76 7,97 7

Israel 1,442 1.074,43 769,82 346,02 8
Jordan 34 13,34 1,25 5,02 6
Kuwait 23 37,73 1,54 6,51 3
Latvia 70 6,27 0,25 1,19 5
Lithuania 57 68,09 48,71 2,19 2
Malaysia 177 581,50 301,01 321,83 3
Mauritius 30 42,80 1,99 39,79 7
Mexico 152 151,82 8,98 8,22 6
Morocco 51 51,29 0,19 5,95 8
Pakistan 24 11,33 1,20 0,17 6
Peru 35 27,30 - 1,91 4
Poland 534 440,99 162,20 42,60 6
Qatar 8 11,80 - 0,25 6
Romania 155 110,74 31,51 18,35 4
Russia 508 699,52 107,68 238,03 1
Saudi Arabia 36 80,80 - 5,27 9
Singapore 513 1.309,99 266,22 232,41 4
Slovakia 63 5,89 3,19 3,15 2
Slovenia 24 18,69 17,61 - 5
South Africa 253 1.298,18 54,04 200,65 8
South Korea 3,878 2.800,21 767,86 374,98 3
Sri Lanka 18 6,26 3,11 - 5
Taiwan 311 592,05 319,43 71,19 7
Thailand 129 70,52 12,03 9,81 6
The Philippines 39 57,80 11,78 4,70 5
Tunisia 34 19,19 0,06 0,01 13
Turkey 164 617,51 23,96 5,73 4
Ukraine 77 66,05 18,85 18,26 4
Vietnam 121 78,92 5,85 6,81 6
Note: Table 2 summarizes the data on private equity aggregated over the period 2001–2013 by country. Column 2 contains total dials signed from 2001 to 2013
by country. Columns 3, 4 and 5 contain the annual average investment private equity, early stage and high technology respectively by country over the period in
million U.S dollars. Column 6 contains the number of years in the period studied in which the geometrically weighted average of bilateral real e昀fective
exchange rate between the countries under study and its trading partners have shown devaluation, data come from Bruegel Report Database.
The top five countries with the most deals are China, India, Korea, Israel and Brazil. Some countries show
no or very low private equity deals signed during the period of time analyzed. These countries were excluded
from the sample. Countries with high year-average private equity investment are China, India, Korea, Hong
Kong and South Africa. The previous ones, plus Israel and Malaysia, are the countries with higher technology
and early stage private equity investments. All of these countries except Malaysia show 4 or more years with
annual devaluation average over the period studied.
Table 3 provides yearly cumulative information on the number of venture capital deals and private equity
investment (total, early stage and high technology) for the period 2001–2013. Clearly, the private equity deals in
emerging countries peaked around 2008–2009 and 2011–2012, in tandem with the financial crisis in the United
States and Europe. It is possible that in these years investors from those markets have sought alternative invest-
ment opportunities in emerging markets. This observation implies the use of time control variables, at least for
these years. The last column of Table 3 shows the number of emerging countries with devaluation each year.
Around 29 % in 2008–2009 and 38 %, countries in the sample had devaluation in 2008–2009 and 2011–2012,
respectively.
Table 3: Private equity and devaluation by year, all countries in the sample.
Year Total deals All countries cumulative private equity investment Countries with
(2001–2013) Total HighTech Early stage devaluation
investment average
2001 2,349 14.178,41 7.474,84 6.094,79 12
2002 1,179 7.612,84 4.829,04 3.993,81 17
2003 851 4.624,39 2.196,18 1.509,20 23
2004 925 9.406,19 2.496,06 1.842,24 31
2005 999 9.874,97 6.132,46 2.729,11 25
2006 1,152 17.017,06 3.423,77 5.197,51 12
2007 1,471 31.226,08 8.933,76 9.836,56 12
2008 1,983 64.943,10 19.446,22 9.990,31 12

Authenticated
2009 2,032 54.879,60 13.202,07 12.095,42 11

2010 1,398 30.313,32 8.800,15 7.291,06 22
2011 1,799 57.122,62 10.081,46 10.286,12 13
2012 1,965 51.952,84 16.404,92 7.244,98 16
2013 1,742 50.901,01 19.564,25 6.435,79 19
Note: Column 2 summarizes the data on private equity investment aggregated for all countries by year over the period 2001–2013. Columns 3, 4 and 5 contain
the cumulative private equity investment (total, early stage and high technology respectively) over the period in million U.S dollars. Column 6 contains the
number of countries with devaluation for each year, data come from Bruegel Report Database.
5. Empirical Methodology
This research measures how devaluation influences activity in private equity in emerging countries. The anal-
ysis is extended to assess the effects of devaluation over early stage and high technology private equity invest-
ments. A panel data technique is used, where the main unit of observation is the private equity investment in
a country-year:
𝑌u�u� = 𝛽0 + 𝛽1 𝑋u�u� + 𝛽2 𝑍u�u� + 𝛽3 𝐷u� + 𝛽4 𝐷u� + 𝜀u�u� [1]
Equation 1 describes the model. Where 𝑌u�u� denotes the PE investment (sensibility issues are established for total,
early stage and high technology PE investment). 𝑋u�u� and 𝑍u�u� indicate the associated variables to devaluation and
control variables respectively to each country in a year. 𝐷u� is a matrix of year dummies to control PE industry
effects, which is common to all countries. 𝐷u� is a matrix of dummies to control country effects, taking into
account the convergence phenomena (Barro and Sala-i-Martin 1992). Finally, 𝜀u�u� is the idiosyncratic error.
A Hausman Specification Test indicates fixed effects. A Pesaran CD (cross-sectional dependence) Test detects
correlation of residuals across entities. A modified Wald Test and Wooldridge Test detect heteroskedasticity and
autocorrelation respectively. Panel Corrected Standard Errors, PCSE (Beck and Katz 1995) estimators are used
to solve contemporaneous correlation, autocorrelation and heteroskedasticity problems. Correction through
PCSE models applies for sample and period of time available (Beck 2001).
6. Analysis of Results
6..1 Devaluation and Private Equity Investments
Table 4, column 1 shows the estimates from the basic panel data regression. The dependent variable is the nat-
ural logarithm of one plus PE investment scaled by economically active population, and the main explanatory
variable is the change in the real effective exchange rate (CREER). CREER is calculated as the change in the
real effective exchange rate (REER) of the country under study against a basket of currencies of trading part-
ners. CREER will be positive when the currency of country examined experiments an appreciation against the
currency of trading partners and CREER will be negative when the local currency is depreciated. Therefore, a
significant and negative coefficient associated to this variable means that devaluation increases PE investment.
The result is confirmed when PE deal average is used as a dependent variable (column 4), implying that PE is
higher in countries that experienced devaluation.
Table 4: Private equity and devaluation in emerging countries.

(1) (2) (3) (4) (5) (6) (7)
PE investment PE deal PE invest- PE invest- PE Invest-
Variables average ment three ment ment cu-
years aver- mulative
Devalua- –0.312**
age
tion
(0.134)
Revaluation 0.0141 0.0335
(0.129) (0.139)
GDP 0.0294* 0.0292* 0.0293* 0.606* 0.0296* 0.0238**
(0.00917) (0.00910) (0.00919) (0.0515) (0.00622) (0.0107)
Authenticated
Busfree 0.119* 0.121* 0.121* 0.108* –0.152**

(0.0433) (0.0437) (0.0434) (0.0329) (0.0677)
Instquality 0.0360* 0.0369* 0.0370* 0.506* 0.0396* 0.131* 1.087**
(0.0124) (0.0124) (0.0124) (0.112) (0.0114) (0.0364) (0.431)
Trade 0.0904* 0.0922* 0.0925* 0.0933* 0.0993**
(0.0322) (0.0324) (0.0326) (0.0224) (0.0481)
CREER –0.150*** –2.319** –0.529***
(0.0826) (1.056) (0.311)
Devalua- –0.309**
tion_q1
(0.132)
Devalua- –0.485
tion_q234
(0.711)
Persisting 0.365
devaluation
last 3 years
(0.250)
Persisting 0.489***
devaluation
last 4 to 6
years
(0.244)
Persisting 1.206**
devaluation
last 7 to 13
years
(0.711) (0.516)
Three years –0.257**
average
CREER
(0.124)
Lagged –0.554**
private
equity
investment
(0.252)
Constant –1.193* –1.216* –1.219* –5.179* –1.160*
(0.392) (0.396) (0.398) (0.608) (0.272)
Dummies Yes Yes Yes Yes Yes Yes No
time
Observa- 426 426 426 469 340 414 50
tions
R-squared 0.185 0.187 0.187 0.190 0.336 0.435
Number of 46 46 46 46 46 46 46
country
Test p-value
Wald 0.0000 0.0000 0.0000 0.0000 0.0000 0.005
chi2 (11)
Hausman 0.0166 0.0117 0.0003 0.1938 0.0026
Breusch- 0.0000 0.0000 0.0000 0.0000 0.0000
Pagan
Modified 0.0000 0.0000 0.0000 0.0000 0.0000
Wald het.
Pesaran 0.0357 0.0919 0.1841 0.0000 0.0282
CSD
LM Serial 0.1893 0.1901 0.1713 0.9764 0.1245
Corr
Model PCSE xtabond2 reg

Authenticated
Note: This table reports estimates from panel data regressions. The dependent variables are: models 1–3 and 6, the natural log of one plus ratio private equity
investments to economically active population in each country-year; model 4, the natural log of one plus ratio of average private equity amount to
economically active population in each country-year; model 5, the natural log of one plus ratio of 3 year moving average ratio of private equity investments to
economically active population in each country-year; model 7, the log of sum of one plus ratio of the total private equity investments to economically active
population in for each country from 2001 to 2013. Devaluation is a variable with Real E昀fective Exchange Rate change (CREER) when this change indicates
devaluation. Revaluation is a variable with CREER when this change indicates a revaluation. GDP is the log of real gross domestic product. Bussfree is a
quantitative measure of the facility of starting, operating a closing a business. Instquality is the average of the six dimensions of “Worldwide Governance
Indicators (WGI). Trade is the log of the trade of goods as a share of GDP. CREER is the change in Real E昀fective Exchange Rate. Devaluation_q1 is a variable with
negative CREER when it is in the bottom quartile of the sample or cero otherwise. Devaluation_q234 is a variable with negative CREER when it is above of the
bottom quartile of the sample or cero otherwise. Persisting devaluation last 3, 4 to 6 and 7 to 13, are variables equal to one if a country had a persistent
devaluation in the last 3, 4 to 6 and 7 to 13 respectively or zero otherwise. Three years average CREER is the mobile average of the CREER. Lagged Private equity
investment, indicates the lag of natural log of one plus ratio of private equity investments to economically active population. All regressions include a constant
and various combinations of country dummies and year dummies, not reported. Heteroskedasticity adjusted standard errors are reported in parentheses.
Data sources can be seen in A.
∗
p<0.01
∗∗
p<0.05
∗∗∗
p<0.1
Next we test the depth of the devaluation required to foster PE investment. In column 2, CREER is split into:
devaluation (negative CREER) and revaluation (positive CREER). Control variables show behavior in which
the coefficient of devaluation is negative and significant, while coefficient of revaluation is positive and not sig-
nificant. Again, the conclusion is that devaluation increases PE investment in emerging countries. In Column 3
the analysis goes deeper. Negative CREER was divided by quartiles: Devalution_q1 (high quartile devaluation)
and Devaluation_q234 (lower quartiles devaluation). Even though both coefficients remain negative, only the
first one is significant. The inference here is that PE investment has only been encouraged by devaluation in
a significant way in countries inside quartile one of higher devaluations. Annual devaluation at the edge of
our sample quartile one is 6.12 %. This means that only a devaluation above that value has significant effects in
fostering PE investment in the sample of emerging countries during period of time studied.
Because devaluation can take more than a year to show results in improving PE investment levels, models
in columns 5 and 7 are constructed to check this fact. In column 5, the 3-year PE investment and CREER mobile
average are used as alternative dependent and independent variables respectively. In this case the resulting
coefficient is again negative and significant, and its greater magnitude (more than 3 times than column 1) im-
plies a continued effect of devaluation on PE investment average in emerging countries. Column 7 depicts a
different model specification using as dependent variable the cumulative PE investment for all years studied.
The independent variables in this case are dummies that indicate if devaluation has persisted during the period
of time studied in the last 3, 4 to 6, or 7 to 13 years (“Persisting dev. lasts 3 years”, “Persisting dev. lasts 4 to 6
years” and “Persisting dev. lasts 7 to 13 years” respectively). Results show how more years of annual devalua-
tion have a higher impact in promoting PE investment (coefficients increase their value and significance when
annual devaluation persists for more time). In fact, only when devaluation persists over 3 years does it have a
significant effect on PE investments.
Until this point we have found a positive and significant relationship of devaluation in increasing both the
amount of investments and the number of PE deals. These results endure after using different model specifica-
tions and control by country-specific developments that vary over time. However, before addressing endogene-
ity concerns, the above results should be seen with caution. The next section advances in treating that possible
endogenity problem.
6..2 Endogeneity and Selection
As mentioned, the relationship checked between PE investment and Devaluation in emerging countries in the
last section may be exposed to endogeneity problems. Positive coefficients in the models do not imply necessar-
ily causality between Devaluation and PE investments. PE investment and CREER could respond together to
market expectations, and this may result in endogeneity bias in the relationship. For example, PE commitments
and CREER could be affected by changes to sovereign credit conditions or country risk expectation.
In this sense, Edwards (1988), Elbadawi (1994), and Montiel (1999) have identified factors affecting the real
exchange rate and private investment simultaneously. To cite them: financial resources availability, institutional
quality, government policies, technological transfer and trade openness, government consumption expenditure
and capital inflows all form part of the factors called “economic fundamentals” in which behavior may generate
both revaluation or devaluation and affect private investment decisions.
In general, strict exogeneity would imply that changes in economic fundamentals do not affect simultane-
ously CREER and PE investment. Obviously, this assumption is difficult to hold, and this implies a possible
existence of an endogenous relationship. One strategy to avoid possible endogeneity of CREER and PE invest-
ment is to use lagged or average lagged CREER. Lagged or average lagged CREER should be less correlated

Authenticated
with current PE investment and hence should partially address the concern that PE and CREER have reacted
at the same time to current movements in economic fundamentals. A similar argument can be wielded to deal
with the correlation that can emerge because of the omitted variables in the aggregated models. This technique
was used in the above models.
However, lagged variables are not a perfect solution to the endogeneity problem since PE investment oppor-
tunities and CREER dynamics are likely to be correlated through longer periods. To address the econometric
challenge that this fact represents and obtain unbiased estimators in the models, we use a difference and system
GMM dynamic panel estimator model with a collapsed instrument matrix and two lags5 (Roodman 2009).
In Table 4, the estimates from the 2SLS procedure are reported in column (6) where PE is regressed against
the CREER and the Lagged PE investment. CREER remains being negative and significant at 10 %, implying
that the relevance condition is satisfied and the relationship between CREER and PE continues strongly and the
negative coefficient means again that devaluation increases the PE investment. As previous models tested in
this paper, the behavior of all control variables after 2SLS procedure remains consistent. The p-value associated
with the Hansen J-test required for the difference and system GMM dynamic panel estimator model rejects
the null hypothesis, indicating the validity of the instruments and the over-identifying restriction condition
fulfillment. The robustness of the above results is confirmed by the Difference-in-Hansen test (excluding group
and difference).
6..3 Sensibility to Level of Technology and Stage of Investment
We proceed testing the relation between devaluation and PE activity, specifically for two different kinds of
investments: high technology (HT, Table 5) and early stage (ES, Table 6). Coefficients associated with CREER
are negative, but only significant in HT. Results indicate that devaluation fosters HT PE investments (Table
5, column 1); however, it is not relevant to increase ES PE investments (Table 6, column 1). This outcome is
confirmed using HT PE and ES PE investment deal averages like a dependent variable (column 4, Table 5 and
Table 6 respectively). Models show that the amount of HT PE deals is higher in countries that experienced
devaluation, but the last one is not significant to increase the average amount of ES PE deals in the emerging
countries.
Table 5: Private equity High Technology investment and devaluation in emerging countries.
(1) (2) (3) (4) (5) (6)
Variables High Tech PE Investment High Tech PE High Tech PE High Tech PE
Investment Investment Investment
deal average three years cumulative
average
Devaluation –0.222**
(0.113)
Revaluation –0.0166 –0.0721
(0.0779) (0.0857)
GDP –2.37e-05 0.00879 0.00837 0.484* 0.0133*
(0.00195) (0.00695) (0.00709) (0.0439) (0.00467)
Instquality 0.0327** 0.0229* 0.0228* 0.556* 0.0267* 0.210*
(0.0136) (0.00684) (0.00688) (0.0875) (0.00658) (0.0773)
Trade 0.00445 0.0309 0.0302 0.0414**
(0.00594) (0.0283) (0.0285) (0.0184)
CREER –0.121*** –1.765**
(0.0641) (0.843)
Devalua- –0.230**
tion_q1
(0.114)
Devalua- 0.271
tion_q234
(0.555)
Persisting 0.0881
devaluation
last 3 years
(0.0590)

Authenticated
Persisting 0.0760
devaluation
last 4 to 6
years
(0.0477)
Persisting 0.368**
devaluation
last 7 to 13
years
(0.141)
Three years –0.246**
average
CREER
(0.101)
Constant –0.225 –0.211 –4.580* –0.316**
(0.200) (0.205) (0.508) (0.130)
Dummies Yes Yes Yes Yes Yes No
time
Observations 426 426 426 469 340 46
R-squared 0.061 0.049 0.051 0.198 0.162 0.431
Number of 46 46 46 46 46 46
country
Test p-value
Wald chi2 (11) 0.0000 0.0000 0.0000 0.0000 0.0000
Hausman 0.0048 0.0147 0.0014 0.1362 0.0090
Breusch- 0.0000 0.0000 0.0000 0.0000 0.0000
Pagan
Modified 0.0000 0.0000 0.0000 0.0000 0.0000
Wald het.
Pesaran CSD 0.0408 0.1578 0.0684 0.1115 0.3979
LM Serial 0.1536 0.1506 0.2450 0.5248 0.0000
Corr
Model PCSE reg
Note: This table reports estimates from panel data regressions. The dependent variables are: models 1–3, the natural log of one plus ratio private equity
investments to economically active population in each country-year; model 4, the natural log of one plus ratio of average private equity amount to
economically active population in each country-year; model 5, the natural log of one plus ratio of 3 year moving average ratio of private equity investments to
economically active population in each country-year; model 6, the log of sum of one plus ratio of the total private equity investments to economically active
population for each country from 2001 to 2013. Devaluation is a variable with Real E昀fective Exchange Rate Change (CREER) when this change indicates
devaluation. Revaluation is a variable with CREER when this change indicates a revaluation. GDP is the log of real gross domestic product. Instquality is the
average of the six dimensions of “Worldwide Governance Indicators (WGI). Trade is the log of the trade of goods as a share of GDP. CREER is change in Real
E昀fective Exchange Rate. Devaluation_q1 is a variable with negative CREER when it is in the bottom quartile of the sample or cero otherwise. Devaluation_q234
is a variable with negative CREER when it is above of the bottom quartile of the sample or zero otherwise. Persisting devaluation last 3, 4 to 6 and 7 to 13, are
variables equal to one if a country had a persistent devaluation in the last 3, 4 to 6 and 7 to 13 respectively or zero otherwise. Three years average CREER is the
mobile average of the CREER. All regressions include a constant and various combinations of country dummies and year dummies, not reported.
Heteroskedasticity adjusted standard errors are reported in parentheses. Data sources can be seen in A.
∗
p<0.01
∗∗
p<0.05
∗∗∗
p<0.1
Table 6: Private equity Early stage investment and devaluation in emerging countries.
(1) (2) (3) (4) (5)
Variables Early stage PE investment Early stage PE Early stage PE
investment deal investment
average amount three years
average
Devaluation –0.00895
(0.0354)
Revaluation –0.00951 0.0409
(0.0489) (0.0522)
Instquality 0.00894** 0.00894** 0.00913** 0.348* 0.00570**
(0.00405) (0.00409) (0.00410) (0.0906) (0.00274)
Trade 0.00625 0.00625 0.00652 0.0102**
(0.00620) (0.00625) (0.00629) (0.00405)
Domcre 0.000222* 0.000222* 0.000224* 0.00766* 0.000207*
Authenticated
(8.05e-05) (8.04e-05) (8.13e-05) (0.00200) (4.96e-05)

CREER –0.00923 –0.538
(0.0275) (0.926)
Devaluation_q1 –0.00173
(0.0348)
Devalua- –0.474
tion_q234
(0.292)
GDP 0.407*
(0.0490)
Three years –0.00369
average CREER
(0.0316)
Constant –0.0308 –0.0308 –0.0373 –4.290* –4.290*
(0.0285) (0.0290) (0.0295) (0.534) (0.534)
Dummies time Yes Yes Yes Yes Yes
Observations 413 413 413 454 330
R-squared 0.061 0.061 0.072 0.235 0.153
Number of 45 45 45 46 45
country
Test p-value
Wald chi2 (11) 0.0000 0.0000 0.0000 0.0000 0.0000
Hausman 0.5020 0.6440 0.6474 0.7504 0.1924
Breusch-Pagan 0.0000 0.0000 0.0000 0.0000 0.0000
Modified Wald 0.0000 0.0000 0.0000 0.0000 0.0000
het.
Pesaran CSD 0.0000 0.0000 0.0000 0.0000 0.0000
LM Serial Corr 0.7716 0.7736 0.7457 0.5449 0.7322
Model PCSE
Note: This table reports estimates from panel data regressions. The dependent variables are: models 1–3, the natural log of one plus ratio early stage private
equity investments to economically active population in each country-year; model 4, the natural log of one plus ratio of average early stage private equity
amount to economically active population in each country-year; model 5, the natural log of one plus ratio of 3 year moving average ratio of early stage private
equity investments to economically active population in each country-year. Devaluation is a variable with Real E昀fective Exchange Rate Change (CREER) when
this change indicates devaluation. Revaluation is a variable with CREER when this change indicates a revaluation. GDP is the log of real gross domestic product.
Instquality is the average of the six dimensions of “Worldwide Governance Indicators (WGI). Trade is the log of the trade of goods as a share of GDP. Domcre is
Domestic credit to private sector as share of GDP. CREER is Real E昀fective Exchange Rate Change. Devaluation_q1 is a variable with negative CREER when it is in
the bottom quartile of the sample or zero otherwise. Devaluation_q234 is a variable with negative CREER when it is above the bottom quartile of the sample or
zero otherwise. Three years average CREER is the mobile average of the CREER. All regressions include a constant and various combinations of country
dummies and year dummies, not reported. Heteroskedasticity adjusted standard errors are reported in parentheses. Data sources can be seen in A.
∗
p<0.01
∗∗
p<0.05
∗∗∗
p<0.1
Results are checked in column 2 (Table 5 and Table 6). Again, CREER is split it into devaluation (nega-
tive CREER) and revaluation (positive CREER). Control variables show the correct behavior. The coefficient of
devaluation is negative for both HT and ES but only significant for HT. Once more, the conclusion is that deval-
uation increases HT PE investment but does not show significance to encourage ES PE investments in emerging
countries.
A final robustness check can be found in Table 5 and Table 6, column 3. As in our first analysis, negative
CREER was divided by quartiles: Devaluation_q1 (high quartile devaluation) and Devaluation_q234 (lower
quartiles devaluation). Even though both coefficients remain negative for HT and ES, only the coefficient asso-
ciated with high quartile devaluation is found significant for HT PE investments.
The arising inference is that HT PE investments only have been encouraged by devaluation in a significant
way in countries inside of quartile one of higher devaluations. ES PE investments have not been stimulated by
devaluation. In essence, it does not matter if the emerging countries have had levels of devaluation in the top
quartile.
The long time effect of devaluation on HT and ES PE investments can be see in Table 5 and Table 6, too
(columns 5 and 6). In column 5, the 3-year HT and ES PE investment mobile averages are used as alternative
dependent variables (Table 5 and Table 6 respectively) and the 3-year CREER mobile average is used as an
independent variable. In both cases the resulting coefficients are again negative but only significant for HT.
An interesting fact is that when we consider the 3-year average, the magnitude of coefficient is increased more
than two times. This means that continuous devaluation increases its positive effect over HT PE investment
dynamics.
Having only significant effects on HT, next we employ the model specification previously used to test per-
sisting effects of devaluation on HT PE investments. The dependent variable is the cumulative HT (Table 5,

Authenticated
column 6) PE investment. Independent variables are dummies that indicate if devaluation has persisted during
the period of time studied in last 3, 4 to 6, or 7 to 13 years (“Persisting dev. last 3 years”, “Persisting dev. last 4 to
6 years” and “Persisting dev. last 7 to 13 years” respectively). Results for HT show a different behavior for total
PE investment. Coefficients associated with persisting devaluation last 3 years and last 4 to 6 years have a sim-
ilar value and are not significant. Only when devaluation persists over 6 years, does an increase in coefficient
value show a significant effect on PE investments.
In all the above mentioned models, the explicative variables’ coefficients are estimated using all control
variables and outcomes associated with all of them, following consistently the expected behavior according to
the theory. The emerging conclusion is that devaluation is important to encourage PE commitments in high
technology, but it does not benefit in the same for way PE investments in firms in early stages of development.
Intuition around outcomes above indicates first that PE funds invest intensively in high-technology sec-
tors, such as biotechnology and pharmaceutical industries. Countries with higher R&D activity have more PE
investments (Da Rin, Nicodano, and Sembenelli 2006; Gompers and Lerner 1998; Hirukawa and Ueda 2011;
Schertler 2007). Therefore, devaluation may affect PE investments positively because funds could buy lucrative
HT investments cheaply.
Second, for ES PE investments the situation is different. PE funds are financial intermediaries that pool their
investors’ capital and make investments in portfolio companies. The goal of PE investing is to exit the portfolio
company after increasing its equity value. In developed countries financing ES investment is associated with
lower macroeconomic risk and lower time to exit compared with emerging countries. In emerging economies,
the time to exit and systematic risk for a ES PE investment could be high, especially because of the absence
of stable economic rules and liquid capital markets (Aizenman and Kendall 2008; Guler and Guillén 2010a ,
2010b). Therefore, although devaluation could become more profitable ES PE investments, the challenge for
emerging market governments is to encourage capital market development, ensuring competitive conditions
and stable rules of the game.
6..4 Sensibility to Country Competitiveness Characteristics
Our analysis now turns to study how the characteristics of country competitiveness can influence the effect of
devaluation over total HE and ES PE investments. We start by examining the interaction of the CREER with
institutional quality. Below or above the institutional quality level media, countries are split in high (CREER*Up-
per Instquality, column) and low (CREER*Upper Instquality) respectively, for total (Table 7, columns 1 and 2)
and HT (Table 8, columns 1 and 2) PE investments. We find that the effect of devaluation on total and HT PE
investments depends on institutional quality. The coefficient’s drop is significant when the institutional quality
is low. Additionally, it does not matter how profitable devaluation can make the PE investment for fund interest
in a emerging economy; for without acceptable institutional quality levels, PE investments will be not encour-
aged. As can be seen, the coefficient is lower for HT PE investments, indicating that the institutional quality
condition is more critical for these investments.
Table 7: Private equity (PE) investment, devaluation and country competitiveness.

Variables (1) (2) (3) (4) (5) (6) (7) (8)
PE invest- PE Invest- PE invest- PE invest- PE invest- PE invest- PE invest- PE invest-
ment ment ment ment ment ment ment ment
three three three three
years years years years
average average average average
CREER*Up- –0.412***
per
instqual-
ity
(0.241)
CREER*Lower–0.0255
instqual-
ity
(0.0397)

Authenticated
CREER –0.493**
aver-
age*Up-
per
instqual-
ity
average
(0.213)
CREER 0.0363
aver-
age*Lower
instqual-
ity
average
(0.0921)
CREER*Up- –0.240***
per
Domcre
(0.153)
CREER*Lower –0.0609
Domcre
(0.0578)
CREER –0.407***
aver-
age*Up-
per
Domcre
average
(0.238)
CREER –0.137
aver-
age*Lower
Domcre
average
(0.0985)
CREER*Up- –0.185***
per
spending
on
education
(0.0986)
spending
on
education
(0.143)
CREER –0.296**
aver-
age*Up-
per SE
average
(0.137)
CREER –0.150
aver-
age*Lower
SE
average
(0.241)
CREER*Up- –0.166***
per roads
paved
(0.0956)
roads
paved

Authenticated
(0.109)
CREER –0.261***
aver-
age*Up-
per roads
paved
average
(0.136)
CREER –0.224
aver-
age*Lower
roads
paved
average
(0.202)
GDP 0.0289* 0.0294* 0.0294* 0.0298* 0.0294* 0.0295* 0.0292* 0.0296*
(0.00908) (0.00614) (0.00915) (0.00624) (0.00920) (0.00623) (0.00914) (0.00620)
Busfree 0.114* 0.101* 0.120* 0.111* 0.119* 0.109* 0.121* 0.108*
(0.0427) (0.0321) (0.0432) (0.0331) (0.0429) (0.0328) (0.0439) (0.0338)
Instqual- 0.0405* 0.0439* 0.0367* 0.0403* 0.0362* 0.0391* 0.0353* 0.0395*
ity
(0.0129) (0.0118) (0.0124) (0.0115) (0.0124) (0.0115) (0.0125) (0.0115)
Trade 0.0884* 0.0939* 0.0898* 0.0915* 0.0904* 0.0928* 0.0910* 0.0933*
(0.0319) (0.0223) (0.0321) (0.0223) (0.0322) (0.0225) (0.0324) (0.0224)
Constant –1.158* –1.132* –1.194* –1.167* –1.192* –1.164* –1.201* –1.163*
(0.388) (0.266) (0.392) (0.272) (0.390) (0.271) (0.395) (0.276)
Dummies Yes Yes Yes Yes Yes Yes Yes Yes
time
Observa- 426 340 426 340 425 340 426 340
tions
R-squared 0.190 0.343 0.186 0.338 0.186 0.337 0.185 0.336
Number 46 46 46 46 46 46 46 46
of country
Test p-value
Wald 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000
chi2 (11)
Hausman 0.5020 0.6440 0.6474 0.7504 0.1924 0.1717 0.1825 0.2051
Breusch- 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000
Pagan
Modified 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000
Wald het.
Pesaran 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000
CSD
LM Serial 0.7716 0.7736 0.7457 0.5449 0.7322 0.7433 0.7891 0.7423
Corr
Model PCSE
Note: This table reports estimates from panel data regressions. The dependent variables are: models 1,3,5 and 7 is natural log of one plus ratio private equity
investments to economically active population in each country-year; model 2,4,6 and 8 is natural log of one plus a 3 year moving average ratio private equity
investments to economically active population in each country-year. “CREER*Upper Instquality” and “CREER*Lower Instquality” denotes the change in real
e昀fective exchange rate (CREER) if the institutional quality is in the upper or in the lower half of its distribution, respectively. “CREER average*Upper Instquality
Average” and “CREER average*Lower Instquality Average” denotes the 3 years CREER moving average if the institutional quality moving average is in the
upper or in the bottom half of its distribution, respectively. “CREER*Upper Domcre” and “CREER*Lower Domcre” denotes the CREER if the domestic credit is
in the upper or in the bottom half of its distribution, respectively. “CREER average*Upper Domcre Average” and “CREER average*Lower Domcre Average”
denotes the 3 years CREER moving average if the 3-year domestic credit moving average is in the upper or lower half of its distribution, respectively-
“CREER*Upper Spending on Education” and “CREER*Lower Spending on Education” denotes the CREER if the public expenditure on education is in the upper
or in the lower half of its distribution, respectively. “CREER Average*Upper SE Average” and “CREER Average*Lower SE Average” denotes the 3 years CREER
moving average if the 3 years public expenditure on education moving average is in the upper or in the bottom half of its distribution, respectively.
“CREER*Upper Roads Paved” and “CREER*Lower Roads Paved” denotes the CREER if the paved roads as a share of total roads in a country are in the upper or
in the bottom half of its distribution. “CREER Average*Upper Roads Paved Average” and “CREER Average*Lower Roads Paved Average” denotes the 3 years
CREER moving average if the 3 years roads paved moving average is in the upper or in the bottom half of its distribution, respectively. All regressions include a
constant and various combinations of country dummies and year dummies, not reported. Heteroskedasticity adjusted standard errors are reported in
parentheses. Data sources can be seen in A.
∗
p<0.01
∗∗
p<0.05
∗∗∗
p<0.1

Authenticated
The above results are confirmed when CREER 3-year average interacts with high and low institutional qual-
ity 3-year average for both kinds of PE investment (columns 3 and 4 in Table 7 and Table 8). Again only when
institutional quality is high, does devaluation show a significant and positive effect promoting total and HT
PE investments. It can be noted that when the 3-year average is used, the value of the coefficients increase but
they are only significant for high institutional quality conditions. This means that in the long term the com-
plementary interaction between both variables only works if a high institutional quality level is preserved. In
essence, devaluation does not work to foster PE without institutional quality. Conclusions are in line with other
academic studies that have discussed how PE contracts and investment amounts depend on several aspects
of institutional quality (Lerner and Schoar 2005; Kaplan, Martel, and Strömberg 2007; Bottazzi, Da Rin, and
Hellmann 2009; and, Herrera-Echeverri, Haar, and Benavides 2014)
Second, the competitiveness country characteristic tested is the domestic credit availability. Devaluation
interacts with high and low domestic credit accessibility to the private sector as a share of GPD in a country
(CREER*Upper Domcre and CREER*Lower Domcre). Devaluation is positive and significant to increase total
and HT PE investment (column 3, Table 7 and Table 8) when Domcre is high and it loses its significance when
is low. The same behavior shows coefficients when 3-year average is used for dependent and independent
variables. Again the significance and magnitude of independent variables coefficients increase in both cases
(for total and HT PE investments) but they are only significant for high credit availability conditions.
Credit availability has been cited as a fundamental condition to develop PE markets, specifically in transac-
tions related to leveraged buyouts. For example Axelson et al. (2013) and De Maeseneire and Brinkhuis (2012)
show that the cost of borrowing in an economy is the main driver of the leveraged buyout. Good credit market
conditions also have a strong effect on prices paid and the return in buyouts. Kaplan and Stein (1993) and Met-
rick and Yasuda (2010) suggest that when cheap debt is available fund managers can pocket large fees upfront.
The emerging conclusion is, as the last case, that credit accessibility is a competiveness variable required for
devaluation increasing PE investment.
Next, the same econometric strategy is used to test interaction between Total (Table 7) and HT (Table 8) PE
investment with two additional country competiveness variables. The first one is a proxy of education at the
country level, the public expenditure on education (CREER*Upper Spending on Education and CREER*Lower
Spending on Education, column 5 both tables). And the second one is a proxy of country infrastructure level,
paved roads as a share of total roads in a country (CREER*Upper Roads Paved and CREER*Lower Roads Paved,
column 7, both tables). Resulting coefficients conserve the same behavior of previous competitiveness variables
studied. Devaluation is only significant when a country is placed in the top half of spending for education and
roads paved level.
Table 8: High tech private equity (HT PE) investment, devaluation and country competitiveness.
Variables (1) (2) (3) (4) (5) (6) (7) (8)
HT PE in- HT PE in- HT PE in- HT PE in- HT PE in- HT PE in- HT PE in- HT PE in-
vestment vestment vestment vestment vestment vestment vestment vestment
three three three three
years years years years
average average average average
CREER*Up- –0.366***
per
instqual-
ity
(0.199)
CREER*Lower–0.00331
instqual-
ity
(0.0128)
CREER –0.458**
aver-
age*Up-
per
instqual-
ity
average
(0.181)

Authenticated
CREER 0.0204
aver-
age*Lower
instqual-
ity
average
(0.0498)
CREER*Up- –0.224***
per
Domcre
(0.123)
Domcre
(0.0276)
CREER –0.508**
aver-
age*Up-
per
Domcre
average
(0.208)
CREER –0.0383
aver-
age*Lower
Domcre
average
(0.0565)
CREER*Up- –0.157**
per
spending
on
education
(0.0775)
spending
on
education
(0.0993)
CREER –0.228**
Aver-
age*Up-
per SE
average
(0.115)
CREER –0.291
Aver-
age*Lower
SE
average
(0.182)
CREER*Up- –0.132***
per roads
paved
(0.0737)
roads
paved
(0.0566)
CREER –0.264**
aver-
age*Up-
per roads
paved
average
(0.114)

Authenticated
CREER –0.109
aver-
age*Lower
roads
paved
average
(0.134)
GDP 0.000189 0.0132* 9.49e-05 0.000905 –5.55e-05 0.000246 –0.000156 0.000177
(0.00195) (0.00456) (0.00194) (0.00156) (0.00194) (0.00155) (0.00197) (0.00156)
Instqual- 0.0355** 0.0296* 0.0334** 0.0438* 0.0325** 0.0423* 0.0324** 0.0422*
ity
(0.0144) (0.00717) (0.0138) (0.0106) (0.0138) (0.0104) (0.0136) (0.0103)
Trade 0.00397 0.0418** 0.00411 0.00221 0.00452 0.00415 0.00478 0.00427
(0.00592) (0.0182) (0.00590) (0.00428) (0.00592) (0.00438) (0.00602) (0.00440)
Dummies Yes Yes Yes Yes Yes Yes Yes Yes
time
Observa- 426 340 426 340 425 340 426 340
tions
R-squared 0.070 0.175 0.064 0.184 0.062 0.172 0.061 0.172
Number 46 46 46 46 46 46 46 46
of country
Test p-value
Wald 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000
chi2 (11)
Hausman 0.5020 0.6440 0.6474 0.7504 0.1924 0.1717 0.1825 0.2051
Breusch- 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000
Pagan
Modified 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000
Wald het.
Pesaran 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000
CSD
LM Serial 0.7716 0.7736 0.7457 0.5449 0.7322 0.7433 0.7891 0.7423
Corr
Model PCSE
Note: This table reports estimates from panel data regressions. The dependent variables are: models 1,3,5 and 7 is natural log of one plus ratio high technology
private equity investments to economically active population in each country-year; model 2,4,6 and 8 is natural log of one plus a 3 year moving average ratio
high technology private equity investments to economically active population in each country-year. “CREER*Upper Instquality” and “CREER*Lower
Instquality” denotes the change in real e昀fective exchange rate (CREER) if the institutional quality is in the upper or in the lower half of its distribution,
respectively. “CREER average*Upper Instquality Average” and “CREER average*Lower Instquality Average” denotes the 3 years CREER moving average if the
institutional quality moving average is in the upper or in the bottom half of its distribution, respectively. “CREER*Upper Domcre” and “CREER*Lower
Domcre” denotes the CREER if the domestic credit is in the upper or in the bottom half of its distribution, respectively. “CREER average*Upper Domcre
Average” and “CREER average*Lower Domcre Average” denotes the 3 years CREER moving average if the 3 years domestic credit moving average is in the
upper or lower half of its distribution, respectively. “CREER*Upper Spending on Education” and “CREER*Lower Spending on Education” denotes the CREER if
the public expenditure on education is in the upper or in the lower half of its distribution, respectively. “CREER Average*Upper SE Average” and “CREER
Average*Lower SE Average” denotes the 3 years CREER moving average if the 3 years public expenditure on education moving average is in the upper or in the
bottom half of its distribution, respectively. “CREER*Upper Roads Paved” and “CREER*Lower Roads Paved” denotes the CREER if the paved roads as a share of
total roads in a country are in the upper or in the bottom half of its distribution. “CREER Average*Upper Roads Paved Average” and “CREER Average*Lower
Roads Paved Average” denotes the 3 years CREER moving average if the 3 years roads paved moving average is in the upper or in the bottom half of its
distribution, respectively. All regressions include a constant and various combinations of country dummies and year dummies, not reported.
Heteroskedasticity adjusted standard errors are reported in parentheses. Data sources can be seen in A.
∗
p<0.01
∗∗
p<0.05
∗∗∗
* p<0.1
These results corroborate a recent stream of research recommending that policy makers promote PE invest-
ments, including special measures such as maintaining a high enrollment rate in a county’s educational system
(Belke, Fehn, and Foster 2005; Jeng and Wells 2000; Megginson 2004) and invest in infrastructure (Justman 1995;
Kohei and Tabata 2013; Morrison and Schwartz 1996). The pattern founded in the relation between Total (Ta-
ble 7) and HT (Table 8) investments and devaluation interacting with spending on education and roads paved
is confirmed when the a 3-year mobile average is used to test the relationship (columns 6 and 8, both tables).
Again, coefficients increase in magnitude, supporting the fact of the high relevance of competiveness increasing
in the long term.
Country characteristics in the relationship between devaluation with total PE and HT PE investments indi-
cate that at least four relevant country-level variables are indispensable to making a country more attractive for
investment when a devaluation occurs: institutional quality, credit availability, spending on education, and in-
frastructure. Devaluation itself is not sufficient to encourage the appetite of investors in both cases. In relation to

Authenticated
ES PE investment, the preceding section concludes that devaluation does not demonstrate positive effects pro-
moting investments of this kind. In the next paragraph, analysis goes deeper regarding this conclusion taking
into account the country competitiveness characteristics.
Table 9: Early stage private equity (ES PE) investment, devaluation and country competitiveness.
Variables (1) (2) (3) (4) (5) (6) (7)
ES PE ES PE ES PE ES PE ES PE ES PE ES PE
investment investment investment investment investment investment investment
Instqual- 0.0121*
ity*CREER
Upper
(0.00398)
Instqual- 0.0122**
ity*CREER
Lower
(0.00519)
Dom- 0.000311*
cre*CREER
Upper
(7.59e-05)
Dom- 0.000243*
cre*CREER
Lower
(6.73e-05)
Roads 0.000352*
paved*CREER
Upper
(9.69e-05)
Roads 0.000375*
paved*CREER
Lower
(9.88e-05)
Instquality 0.0122* 0.00738***
(0.00299) (0.00399)
Domcre 0.000269* 0.000212**
(5.98e-05) (0.000105)
Roads 0.000366* 0.000289*
paved
(8.68e-05) (9.74e-05)
Busfree 0.0224* 0.0224** 0.0323* 0.0330* 0.0523* 0.0520* 0.0253***
(0.00861) (0.00888) (0.00843) (0.00853) (0.0146) (0.0143) (0.0133)
GDP 0.000218 0.000218 –0.00199 –0.00214 0.00485* 0.00495* 0.00366**
(0.00203) (0.00203) (0.00221) (0.00220) (0.00164) (0.00172) (0.00163)
Constant –0.0878*** –0.0877*** –0.118** –0.119** –0.287* –0.287* –0.169*
(0.0487) (0.0499) (0.0497) (0.0497) (0.0757) (0.0755) (0.0636)
Observa- 347 347 335 335 172 172 150
tions
R-squared 0.096 0.096 0.143 0.147 0.188 0.188 0.259
Number of 46 46 45 45 35 35 34
country
Test p-value
Wald 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000
chi2 (11)
Hausman 0.5020 0.6440 0.6474 0.7504 0.1924 0.1877 0.1711
Breusch- 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000
Pagan
Modified 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000
Wald het.
Pesaran 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000
CSD
LM Serial 0.7716 0.7736 0.7457 0.5449 0.7322 0.7433 0.5349
Corr
Model PCSE

Authenticated
Note: This table reports estimates from panel data regressions. The dependent variable is natural log of one plus ratio early stage private equity investments to
economically active population in each country-year. “GDP” is the log of real gross domestic product. “Busfree” is a quantitative measure of the facility of
starting, operating a closing a business. “Instquality” is the average of the six dimensions of “Worldwide Governance Indicators (WGI). “Domcre” is Domestic
credit to private sector as share of GDP. “Roads Paved” denotes paved roads as a share of total roads in a country. “Instquality*CREER Upper” and
“Instquality*CREER Lower” denotes “Instquality” if CREER is in the upper or in the lower half on its distribution, respectively. “Domcre*CREER Upper” and
“Domcre*CREER Lower” denotes “Domcre” if CREER is in the upper or in the lower half on its distribution, respectively. “Roads paved*CREER Upper” and
“Roads paved*CREER Lower” denotes “Roads Paved” if the CREER is in the upper or lower half on its distribution respectively. All regressions include a
constant and various combinations of country dummies and year dummies, not reported. Heteroskedasticity adjusted standard errors are reported in
parentheses. Data sources can be seen in A.
∗
p<0.01
∗∗
p<0.05
∗∗∗
p<0.1
In Table 9, devaluation is divided in two – above (CREER Upper) and below (CREER Lower). Interactions
between high and low CREER with competitiveness variables are manifest, denoting the value of the com-
petitiveness variable if CREER is in the upper or lower half of its distribution: institutional quality (Instqual-
ity*CREER Upper and Instquality*CREER Lower, column 2) credit availability (Domcre*CREER Upper and
Domcre*CREER Lower, column 4) and infrastructure (Roads paved*CREER Upper and Roads paved*CREER
Lower, column 6). Results indicate first that all competitiveness variables are positive and significant to stimu-
late ES PE investments (Columns 1, 3, 5 and 7); and second, coefficients associated with competitiveness vari-
ables do not show substantial variation in magnitude and significance when interacting with high or low de-
valuation. The fundamental conclusion is that competitiveness country conditions are imperative to improve
ES PE investments. The devaluation level does not influence significantly the investors’ decision for these kind
of investments.
The last results are congruent with ES PE investment characteristics. First, they are associated with high un-
certainty, more risk and greater monitoring difficulties. Therefore, the appearance of potential moral hazard,
adverse selection and opportunistic behavior problems suggest that stronger institutions that enforce deals are
required (Amit, Brander, and Zott 1998; Antonelli and Teubal 2008; Gompers 1995; Kaplan and Stromberg 2004).
Second, the literature has mentioned the relevance of credit availability to encourage new business formation
(Blanchflower and Oswald 1998; Di Patti and Dell’Ariccia 2004; Holtz-Eakin, Joulfaian, and Rosen 1994), thus
the more credit available to the private sector in a country, the more ES PE investment opportunities will mate-
rialize. And third, it is known that infrastructure favors profitability and volume of investment (Justman 1995;
Kohei and Tabata 2013; Morrison and Schwartz 1996).
7 Conclusions
In this work a large panel of 51 emerging countries over the 2001 to 2013 period is used to identify the impact of
devaluation on PE investment. We find that devaluation increases the PE investment. The result is confirmed
when PE total amount or deal average is used as a dependent variable, controlling for time, country charac-
teristics, and the endogeneity issues emerging in the relation – implying that the PE is higher in countries that
experienced devaluation. More years of annual devaluation have a higher impact in promoting PE investment:
coefficients increase their value and significance when annual devaluation persists for more time. However,
for the sample used, only an annual devaluation above 6.12 % has significant effects in fostering PE investment
during the period of time studied.
All the above conclusions are confirmed by the relationship between devaluation and high technology PE
investments, but not by early stage PE investments. Devaluation does not benefit the PE investment in firms in
the early stages of development in emerging countries. Intuition around outcomes above indicates, first, that PE
funds invest intensively in high-technology sectors, such as biotechnology and pharmaceutical industries and
devaluation. This may affect PE investments positively in emerging countries with higher R&D activity because
it could spur cheaper financing of HT investments. Second, although devaluation could become cheaper for ES
funding in emerging economies, the time to exit and systematic risk for a ES PE investment could be high,
especially because of the absence of stable economic rules and liquid capital markets.
The characteristics of country competitiveness influence the effect of devaluation over total and high tech-
nology PE investments. Devaluation does not work to foster PE without institutional quality, credit availability,
investment in education, and a minimal level of infrastructure development in a country. As devaluation it-
self is not sufficient to encourage the appetite of investors, these four country-level competitiveness variables
are indispensable for making a country more fertile for investment when a devaluation occurs and increasing
competitiveness in the long term.
In relation to early stage PE investments coefficients associated with competitiveness, variables do not show
substantial variation in their magnitude and significance when interacting with high or low devaluation. Com-

Authenticated
petitiveness country conditions are imperative to improving early stage PE investments, and devaluation level
does not influence meaningfully the investors’ decision for these kind of investments. Our results strongly sug-
gest that currency depreciation in emerging countries is not sufficienet to foster PE in and of itself. Devaluation
impact comes to an end when countries are not competitive. There are minimum levels in competitiveness
required so devaluation can have significant impact on PE. Although devaluation generates opportunities for
investors (for example to buy cheaper), it is necessary to create conditions so investments can operate smoothly
with the increased probability of success. Any positive effect that may be derived from devaluation can only be
maintained in the long term when governments are oriented to improve the competitiveness of their countries.
A number of important questions remain unanswered due to the nature of our data. How does devaluation
impact PE at an inter- and intra-sectorial level? How does devaluation affect PE investment patterns per regions
in the various countries depending on space or cultural factors? What is the devaluation impact on PE in the
presence of other variables such as the number of free trade agreements signed by countries or the determina-
tion of the threshold of competitiveness variables from which devaluation proves to be significant to promote
PE? Future research can greatly contribute to the compendium of knowledge by addressing those questions.
p<0.01
p<0.05
p<0.1
p<0.01
p<0.05
p<0.1
p<0.01
p<0.05
p<0.1
p<0.01
p<0.05
p<0.1
p<0.01
p<0.05
* p<0.1
p<0.01
p<0.05
p<0.1
Notes
1
The term “currency war” has been used with reference to monetary policies implemented mainly by China, Japan, Thailand, South
Korea, Colombia and other countries to generate an artificial devaluation (Herrera-Echeverri et al. 2015). Devaluation corresponds to price-
fixing, and depreciation corresponds to natural variation of currency. Both notions are used similarly in this work because the objective is
to examine the implications of changes in the exchange rate on PE investment regardless of its origins.
2
This does not need to involve a cross-border transaction, as local limited partners may decide to invest in a private equity fund, which
is raised in foreign currency to target local investments.
3
The Marshall–Lerner condition refers to the condition that an exchange rate devaluation or depreciation will only cause a balance of
trade improvement if the absolute sum of the long-term export and import demand elasticities is greater than unity.
4
The full study may be found at: http://www.insper.edu.br/wp-content/uploads/2015/04/White-paper-impacto-cambial-2015.pdf
5
GMM estimators are accomplished by an xtabond2 package in Stata (further information see Roodman 2009)

Authenticated
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A Variables and sources
Variable Acronym Definition Sources:

Private Equity PE Total Private Equity Thomson ONE private
investment made, at the equity /Venture Capital
year i by country j, in database
million of current U.S
dollars, normalized by
economically active
population.
Real effective exchange rate REER Evolution of the real value Bruegel Report Database
of a currency against a
currency basket of its
trading partners.
Public expenditure on Spending on education Government expenditure The UNESCO Institute for
education on education as % of GDP Statistics Database
(%)
Domestic credit to private Domcre Financial resources lent to World development
sector the private sector through indicators
loans, purchases of World Bank
non-equity securities, trade
credits and other accounts
receivable that establish a
claim for repayment. It is
expressed as a GDP
percentage.
GDP per capita GDP Gross domestic product World development
per capita converted to indicators
international dollars using World Bank
purchasing power parity
rates.

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Business Freedom Busfree Freedom to make The Heritage foundation,

businesses: it is a index of economic
quantitative measurement freedom.
of the ability to begin, to
operate and to close a
business, the score goes
from 0 to 100, 100 is
equivalent to a country
with a business
atmosphere of maximum
ability.
Institutional quality Instquality Indicates perceived World Wide Governance
institutional quality in a Indicators. World Bank
country and is the average
of the six dimensions of
“Worldwide Governance
Indicators (WGI)” the
previous year.
Total road network Roads Paved Total road network World development
reported in kilometers, indicators.
which include motorways, World Bank
highways and national,
regional and other roads in
a country.
Trade openness Trade It is the sum of exports and World development
imports of goods and indicators.
services as a share of GDP. World Bank

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DE GRUYTER Global Economy Journal.

Hernán Herrera-Echeverri1 / Jerry Haar2 / Juan Guillermo Salazar-Duque1

Private Equity and Devaluation in Emerging

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2. PE Investment, Devaluation and Economic Policy

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2..2 Interest Rate

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2..4 Output and Trade

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2..6 Empirical Research

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4. Data Description and Sources

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Table 1: Summary statistics: descriptive analysis.

Table 2: Private equity investment and devaluation by country.

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Indonesia 57 298,71 60,76 7,97 7

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2009 2,032 54.879,60 13.202,07 12.095,42 11

𝑌u�u� = 𝛽0 + 𝛽1 𝑋u�u� + 𝛽2 𝑍u�u� + 𝛽3 𝐷u� + 𝛽4 𝐷u� + 𝜀u�u� [1]

Table 4: Private equity and devaluation in emerging countries.

Busfree 0.119* 0.121* 0.121* 0.108* –0.152**

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6..2 Endogeneity and Selection

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6..3 Sensibility to Level of Technology and Stage of Investment

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(8.05e-05) (8.04e-05) (8.13e-05) (0.00200) (4.96e-05)

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6..4 Sensibility to Country Competitiveness Characteristics

Table 7: Private equity (PE) investment, devaluation and country competitiveness.

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A Variables and sources

Variable Acronym Deﬁnition Sources:

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Business Freedom Busfree Freedom to make The Heritage foundation,

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