In the context of private equity fund investments, limited partners contribute capital to funds that diversify globally, rather than confine themselves to local investments. Allocating capital internationally involves investing in both emerging markets and developed markets. The way a fund’s capital is allocated determines its cost, risk, and return. Investing in emerging markets can be carried out in a number of ways including purchasing financial assets directly from the domestic stock market, gaining access by means of “country funds” which have their financial assets held by deposit institutions (American depository receipt and global depository receipt), or buying financial assets of a specific emerging country directly from international markets.

In general, emerging markets are less institutionalized than developed markets; a fact that must be accounted for by funds considering global diversification of investments. And the merits of investing in emerging markets for a fund usually depend on the return/risk tradeoff. Determining this tradeoff requires that funds contemplate the specific characteristics of emerging markets, the risks associated with investing in these markets, and the peculiar structure and regulation of these markets.

Private equity funds sometimes overinvest in specific regions across the world and underinvest in others. This pattern is especially observed while investing in emerging economies, as some regions or countries receive the lion’s share of private equity investments.