Fundraising by private equity funds focused on the emerging markets held steady in the first two quarters and maintained a 15 per cent share of the global fundraising total, according to the Emerging markets Private Equity Association (EMPEA).
With USD17.2bn raised in the first six months of 2012, or nearly half of the USD38.5bn raised in all of 2011, emerging market funds are on track to match 2011 levels.
During the same period, investment activity cooled slightly, with decreases in the number of deals in China and India offset by an uptick in deals in the Middle East, Africa, Russia and Brazil. Total invested capital fell 34 per cent, and average investment sizes dropped 22 per cent due to a one-third decrease in the number of USD100m-plus transactions versus the same period in 2011. A total of 411 emerging market private equity investments totalling USD9.8bn in disclosed value were completed in the first six months of the year, compared with USD14.9bn invested across 460 deals in the same period in 2011.
“In an environment that’s challenging for all investors globally, the belief that most of global growth will come from emerging markets continues to drive a significant share of global private equity capital to these economies,” says Sarah Alexander, founding president and chief executive of EMPEA. “However, private equity firms grappling with legal and regulatory uncertainty and anticipated currency depreciation are slowing the pace of investments or alternatively looking to listed markets, which may offer readier opportunities for exit.”
EMPEA’s data reveals that five of the 15 largest emerging market private equity deals in the first six months of 2012 were PIPE deals, or private investment in public equities. PIPE deals represented three of the 15 largest emerging market PE deals in all of 2011.
The resilience in emerging markets private equity fundraising through mid-year was attributable to a select few individual closes including the largest pan-emerging markets fund raised to date, Capital International’s USD3bn sixth fund and two of the largest Turkey funds ever raised. Ten of the 60 funds holding closes through mid-year accounted for 75 per cent of capital raised, compared with the ten largest funds accounting for 37 per cent of capital raised in all of 2011 and 35 per cent raised in 2010.
“For institutional investors seeking exposure to high growth markets but lacking the resources to source and manage multiple fund relationships, mature platforms with large funds present an efficient option. However, this concentration of capital obscures the abundance of opportunities in emerging economies that lie within the middle market, often better accessed via smaller or specialized vehicles,” says Alexander.
Fundraising for China fell sharply, with only 12 funds raising USD4bn through mid-year compared to USD11bn the same period a year prior and USD17bn in all of 2011. China’s share represented 23 per cent of total capital raised January through June, versus 53 per cent of total capital raised in the first half of 2011. Hony Capital’s fifth and largest USD fund to date, which closed at USD2.4bn in January, was not enough to offset a sharp decline in RMB-denominated funds.
“In light of growing investor awareness of opportunities elsewhere in emerging Asia, and the challenging exit and regulatory environment in China, we anticipate a potential shift away from China-only strategies in favour of a more regionalised approach, consistent with the pattern among many Asian funds being raised today,” says Alexander.
Even as China fundraising slowed, funds focused on emerging Europe surged through mid-year, drawing 15 per cent of total capital led by Turkey and Poland. Six emerging European funds raised USD2.6bn, the most raised for the region since 2008.
While investment pace has slowed in developed markets private equity and emerging markets M&A, private equity dealmaking in emerging markets remained strong in the first two quarters, with 411 deals versus 460 transactions in the same period the year before.
Deal activity slowed at the upper end of the market, where the number of deals over USD100m fell by one-third, pushing total investment down 34 per cent and average deal sizes down 22 per cent versus the same period in 2011.
Whereas China and India saw deal counts fall by eight per cent and 25 per cent, respectively, compared to the first half of 2011, markets beyond Asia saw transaction volumes rise four per cent with notable upticks in Brazil, MENA and Sub-Saharan Africa, where the number of deals rose 53 per cent, 42 per cent and 27 per cent, respectively.
Emerging Asian markets continued to account for the majority of investment, representing nearly two-thirds of both total invested capital and number of deals. With 124 deals, China alone accounted for 40 per cent of total investment and 30 per cent of transactions. Latin American markets including Brazil, and emerging European markets including Turkey drew 12 per cent and eight per cent of deals, respectively. Sub-Saharan Africa drew seven per cent of deals, while Russia accounted for five per cent of transactions and the MENA markets represented four per cent.
