Emerging markets may promise growth and high returns, but a survey has found that as much as 98 per cent of UK private equity firms believe traditional due diligence falls short of uncovering risk. 

The report, by due diligence firm Kroll Advisory Solutions, found that 60 per cent of respondents see the political environment in countries such as China as a cause for concern, while 56 per cent feel that transparency is lacking. 

Bureaucracy, corruption and local infrastructure were also flagged up as areas that UK private equity firms are unsure about. 

Yet respondents admitted they often do not adapt their due diligence to meet the risks associated with frontier markets. 

“We continue to find that there is a strong overlap between business and government,” said Melvin Glapion, managing director of Kroll, in a statement. “Government, or representatives of government, are often found as entrepreneurs, shareholders, competitors, regulators, suppliers and market drivers – sometimes disclosed, but often not.”

The findings come amid a flight to countries such as Brazil and China, as Europe faces a flat economy for years ahead and investors bet on the rising tide of growing economies. 

Earlier this year, EMPEA found that three-quarters of private equity fund investors were looking to increase their exposure to emerging markets in the next two years. 

By contrast only 23 per cent of LPs intended to grow their exposure to more developed markets such as Europe and the US. 

UK private equity firms too are looking past home borders, with aggregate deal value from Britain into emerging markets reaching £2bn last year, a four-fold increase on 2005. 

While much has been made of the BRICs, particularly Brazil and China, 50 per cent of respondents to the Kroll survey believe that Central and Eastern Europe will present significant investment opportunities over the next two years.