PE Tech Report

NEWSLETTER

Like this article?

Sign up to our free newsletter

Over USD432bn raised for private investment in developing economies between 2006 and Q3 2015

Figures released by EMPEA show that between 2006 and Q3 2015, fund managers raised over USD432 billion via long-term, private direct investment funds, for the emerging markets of Africa, Asia, Europe, Latin America and the Middle East.

The investments, all backed by institutional investors, were across three asset classes – private equity, private infrastructure and real assets and private credit.
 
Robert van Zwieten, President & CEO of EMPEA, says: “The USD432-plus billion raised for private funds is a milestone for emerging economies and a significant achievement for fund managers putting capital to work in places most in need of entrepreneurial funding, increased employment and sustainable development. However, fundraising and investment activity in emerging markets continues to comprise a relatively low share of the global total compared to the composition of GDP, strongly suggesting many more opportunities remain. These growing markets still need substantial additional private investment, and there’s a lot of money to be made by discerning investors who are bridging these financing gaps.”
 
While more than USD224 billion has been deployed by private funds in emerging markets since 2008, private capital penetration rates, or disclosed capital invested as a percentage of national GDPs, remain relatively low in developing economies in comparison to developed market equivalents. For example, China’s private capital investment represented only 0.15 per cent of its GDP in 2014, while Brazil’s private capital penetration rate was 0.13 per cent and South Africa’s was 0.12 per cent. By comparison, private capital investment was 1.44 per cent of GDP in the United States, 1.58 per cent in the United Kingdom and 0.73 per cent in Israel over the same period. Moreover, though EM economies collectively comprise approximately 62 per cent1 of the world’s 2015 GDP based on purchasing-power-parity, capital raised via private funds for these economies has represented only 13 per cent of the global private capital total raised from 2006 through Q3 2015.
 
The majority of private capital raised from 2006 to Q3 2015 has been via private equity funds, which accounted for USD367 billion, or 85 per cent, of private capital raised for emerging markets over that time period, while private equity investment accounted for USD199 billion, or 88 per cent of capital invested from 2008 to Q3 2015. Growth capital deals have attracted the majority of capital deployed over that time period, though recent trends have shown a surge in EM venture capital (VC) activity – which is included in EMPEA’s private equity coverage – in both absolute and relative terms in recent years, most notably in China and India, mirroring the global trend of increased activity in this space.
 
VC deal count and capital invested in 2015 are on pace to reach a record high, with India-based taxi booking mobile application ANI Technologies (Ola) representing the largest disclosed EM VC deal in the first three quarters of 2015. Beyond growth capital and venture capital, fund managers have also deployed capital via buyouts, presenting investors with a more diverse spectrum of opportunities to access in emerging markets. Moreover, from 2014 to Q3 2015, ten emerging markets-focused buyout funds held a final close in excess of USD1 billion – led by RRJ Capital Master Fund III’s USD4.5 billion September 2015 final close – representing a significant amount of capital available for firms to deploy via this strategy over the next few years.
 
Fund managers have raised USD41 billion for EM-focused private infrastructure and real assets funds since 2006, or 9 per cent of total capital raised for all private funds focused on emerging markets over this time period. Driven by large infrastructure vehicles raised for Latin America and Emerging Asia, such as Patria Investimentos’ USD1.7 billion P2 Brasil Private Infrastructure Fund III and Equis Funds Group’s USD1 billion second fund, infrastructure and real assets fundraising reached USD4.9 billion through the first three quarters of the 2015 and is on pace to become the highest annual total recorded by EMPEA. GPs investing in infrastructure have not only raised significant capital, but also put it to work in a diverse array of geographies and via a multitude of deal strategies. Private fund managers have deployed USD21 billion in disclosed capital in infrastructure and real assets companies and platforms and completed 375 private investments in the space since 2008. Deals such as CVC Capital Partners’ USD372 million privatisation of Poland-based electric utility PKP Energetyka and Actis’s USD220 million “buy and build” commitment to South Africa-based development platform Lekela Power, both recorded in 2015, exemplify this strategic and geographic variety.
 
Jeff Schlapinski, Manager of Research at EMPEA, says: “Despite the current challenges faced by investors in emerging markets, including slowing growth, currency depreciation and financial market volatility, the need for investment in infrastructure across emerging economies is vast. Fund managers investing in infrastructure have the potential to deliver compelling risk-adjusted returns for limited partners given the strong fundamentals underpinning individual projects and companies in sectors like power.” The launch of EMPEA’s expanded infrastructure coverage coincides with the release of its Special Report: Private Investing in the Power Sector in Emerging Markets, which explores how burgeoning demand for electricity in developing economies presents an opportunity for investors to earn attractive returns while also spurring economic growth and development.
 
Though capital raised via private credit funds remains a small minority of the total raised for private funds in emerging markets, 112 EM-focused private credit funds have raised USD25 billion since 2006.
 
These funds invest across a range of strategies, including direct lending, mezzanine financing, distressed debt, venture debt and special situations. With bank loans typically difficult to obtain for small and mid- size businesses in developing economies, particularly following the global financial crisis, debt financing via private funds can play a crucial role in providing more long-term capital necessary for entrepreneurs to grow their businesses, without having to part with equity in their companies. While the private credit asset class in emerging markets is still relatively small, institutional investors are increasingly aware of the potential for this asset class to generate attractive returns. In EMPEA’s 2015 Global Limited Partners Survey, mezzanine-focused funds were ranked second to growth capital-focused funds as the strategy that the highest percentage of investors plan to increase their commitment levels to over the next two years in emerging markets. In fact, some of the most active managers in this space held closes on private credit-focused vehicles in the first three quarters of 2015, including Shoreline Capital Management, Vantage Capital and Cordiant Capital.
 
David Creighton, Senior Advisor at EMPEA and Chair of EMPEA’s Private Credit Council, says: “Private credit is playing an increasingly important role in emerging markets by providing much needed capital for growing businesses. It also provides institutional investors a way to access these markets with tailored risk mitigants and upside potential. By expanding data coverage into private credit, EMPEA can better serve investors seeking these types of opportunities and emerging market companies facing acute financing gaps.” 

Like this article? Sign up to our free newsletter

MOST POPULAR

FURTHER READING

Featured