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PE fundraising and investment activity sees upturn in emerging markets

Emerging markets private equity (EM PE) fundraising and investment activity in the first half of 2014 showed positive signs of growth, as funds raised and capital invested increased year-on-year.

Fund managers raised USD20 billion and invested USD14 billion through the first six months of 2014, corresponding to a 48 per cent and 28 per cent increase, respectively, compared with the same period in 2013, and on pace to surpass last year’s totals.
EM PE’s share of global private equity funds raised increased from 11 per cent in 2013 to 13 per cent in 1H 2014, an indication of recalibrating fundraising levels across both emerging markets and developed markets, after the latter witnessed high levels last year.
As a percentage of global PE investment, emerging markets maintained its 10 per cent share, on par with annual proportions since 2010.
EMPEA’s Global Limited Partners Survey, released earlier this year, noted that 54 per cent of LP respondents plan to increase the dollar value of new commitments to private equity funds in emerging markets over the next two years, and the increase in funds raised in 1H 2014 lent support to this survey response.
Capital raised increased 48 per cent in 1H 2014 compared with 1H 2013; yet, only four more funds held a close in the first half of the year compared with the same period last year, suggesting a continued concentration of capital in fewer funds. Fund managers with established track records raising large funds accounted for a number of the EM PE vehicles holding closes in the first six months of 2014.
EM PE-focused funds raised by managers TPG, CVC Capital Partners, Affinity Equity Partners, Mid Europa Partners, The Carlyle Group, IDG Capital Partners and Sequoia Capital all held closes above USD500 million in the first-half.
“Large and established fund managers continue to raise an ever increasing proportion of capital in EM PE. These funds are investing in the types of fast-growing companies that can absorb larger amounts of capital. These are the EM companies that investors anticipate will become the national, regional or global champions and brand names of the next decade,” says Robert van Zwieten, president and CEO of EMPEA. “One layer down, smaller fund managers are investing in a plethora of entrepreneurial activity, the SME space, which in many markets is starved for private capital.”
The three largest EM PE funds to hold a close in 1H 2014, Affinity Asia Pacific Fund IV, CVC Capital Partners Asia Pacific IV and TPG Asia VI, and all with buyout strategies and pan-Asia remits, together accounted for USD5.1 billion, or 34 per cent, of the first-half capital raised for emerging Asia.
For Sub-Saharan Africa-dedicated funds, the USD2.2 billion capital raised in the first six months of 2014 surpassed annual totals for the region since 2008. This was driven by four funds raised by The Carlyle Group, Amethis Finance, Helios Investment Partners and Investec Asset Management, which represented 75 per cent of the total capital raised for the region.
Smaller funds focused on a single market or niche strategy also successfully raised capital, including the first private equity fund focused on Ethiopia, raised by Schulze Global Investments, which held a first close of USD87 million, and Alta Growth Capital’s follow-on Mexico fund, which held a final close on USD142 million.
Maryam Haque, head of data and analysis at EMPEA, says: “Well-known global fund managers entering new markets like Sub-Saharan Africa opens the eyes of new institutional investors. The Carlyle Group’s first Sub-Saharan Africa-focused fund and KKR’s first investment on the continent in Ethiopia puts the region on the radar of LPs who have not yet committed capital there. These firms’ activities can help to lower the risk perception of these markets.”
Capital raised for private equity fund strategies diversified in 2014, with buyout vehicles and venture capital (VC) vehicles accounting for 37 per cent and 27 per cent of funds raised, respectively. Funds raised by buyout- focused vehicles in 1H 2014 represented the highest proportion of total capital raised since 2008, and the surge in VC fundraising led the strategy to surpass growth capital vehicles for the first time since EMPEA began tracking statistics in 2006. Diversification of fund strategies was most pronounced in emerging Asia. Of the 28 emerging markets VC funds to hold a close in 1H 2014, 19 had a geographic focus on China or India. Only one of ten funds raised in 1H 2014 for India focused on growth capital, while seven were focused on VC and two on special situations. In China, VC-focused funds accounted for 27 per cent of total capital raised for Emerging Asia.
On the investment side, China and India also dominated, together accounting for 85 per cent of all investments in Emerging Asia in 1H 2014, their highest share since 2011. VC deals in China increased four-fold compared with the same period last year, contributing to a 96 per cent increase in total capital deployed in the country. Multi-strategy firms such as Warburg Pincus, Orchid Asia and General Atlantic contributed to this growth.
At a sector level, fund managers increasingly looked to emerging markets for technology products and services that can meet the growing demand from business and consumers. The technology sector attracted the highest number of VC deals, while companies in the consumer sector received the most capital in 1H 2014. Within the consumer sector, e-commerce companies, Meituan and in China and Snapdeal in India, comprised the three largest VC investments of the first six months.
“With the substantial venture funding going into China and India’s e-commerce and social media sectors, we expect to see the initial phases of localisation and adaptation ushering into true innovation. This evolution could come about rather quickly,” says van Zwieten.
Emerging Asia fundraising and investment in the first half of 2014 accounted for 76 per cent and 78 per cent of overall EM PE, respectively. In comparison, Sub-Saharan Africa gained the most ground, comprising 11 per cent of total capital raised for emerging markets, the highest proportion on record. Within emerging Asia, Southeast Asia did not maintain its high pace of fundraising and investment levels seen in 2013 and witnessed 42 per cent and 40 per cent declines, respectively, due in part to cyclical effects following a banner year for the region. Nonetheless, investor interest beyond the BRICs continued with the CEE and CIS markets seeing the second highest first-half fundraising totals for the region in the last six years, raising a total of USD1.5 billion in 1H 2014.
Unrest in Russia and Ukraine’s uncertainty about the future corresponded to a shift in capital raised to neighbouring markets, where funds targeting Central and Southeastern Europe, the Baltics and Turkey accounted for 75 per cent of the capital raised for the region. Other markets outside the BRICs receiving interest in the first six months of 2014 included Colombia, which hit a five-year high in capital invested of USD462 million, and Nigeria, where fund managers deployed USD375 million in capital, the most on record for the country.
2014 is on pace to finish with year-end increases in fundraising and investment for emerging markets in total. Many fund managers continue to look to deploy capital raised in previous years, while a number of others have successfully come back to market and held closes or expect to this year.

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