Bucking global trends, 210 private equity funds focused on emerging markets raised a record-breaking USD66.5bn in 2008, a 12 per cent increase from USD59bn in 2007, according to the Emergi
Bucking global trends, 210 private equity funds focused on emerging markets raised a record-breaking USD66.5bn in 2008, a 12 per cent increase from USD59bn in 2007, according to the Emerging Markets Private Equity Association.
‘The good news is that there is a pool of capital that can take advantage of unprecedented investment opportunities in emerging economies,’ says Empea president Sarah Alexander. ‘The bad news is that fundraising in 2009 will be much more challenging.
‘Western institutional investors are grappling with their own asset allocation issues, and the globalisation of the financial crisis will impact expansion plans into new markets.’
Empea estimates that 371 private equity funds focused on emerging economies are currently in the market looking to raise as much as USD144bn in capital. ‘This year will be a difficult one for fund managers seeking to raise capital, but funds with dry powder to invest are in a very good position right now,’ Alexander said.
‘We’re entering a period of potentially very ripe conditions for private equity in these markets: lower entry prices, less competition for deals and very attractive deal flow from entrepreneurs with few alternative options for raising capital. The real challenge is convincing Western investors to maintain exposure to what are considered riskier markets.’
According to a recent Empea survey, 52 per cent of institutional investors believe that their emerging markets private equity fund portfolio will be less negatively affected by the financial crisis than similar investments in developed markets.
‘The private equity model in emerging markets is about equity investments in growing companies, not leverage,’ Alexander says. ‘Whereas the lending draught in the West resulted in stalled buyout markets, in emerging markets deals are still getting done.
‘Those funds that were prudent in their investment pace when valuations were high are well positioned in this environment, and those investors who stick with them will be rewarded.’
Emerging Asia continues to dominate the private equity landscape in developing countries, accounting for 60 per cent of total funds raised last year compared with 48 per cent in 2007. Funds raised USD40bn, a 39 per cent increase over 2007, driven by a significant increase in capital raised by China-dedicated funds, from USD3.9bn in 2007 to USD14.5bn. India-dedicated funds raised USD7.7bn in 2008 versus USD4.6bn in 2007. No other region accounted for more than 10 per cent of total capital raised.
Empea also identified a significant increase in the number and size of funds targeting multiple regions or pan-emerging markets opportunities. ‘One explanation for this is the growing size of successor pan-emerging market funds,’ says Jennifer Choi, the association’s director of research.
‘In 2008 we saw two follow-on pan-emerging market funds close at USD2bn or more. Another reason is the expanding mandate among some Middle Eastern funds that now includes opportunities in Asia.’
Funds dedicated to Africa (including North Africa) and the Middle East raised respectively 37 per cent and 17 per cent more than in 2007. In Africa, the number of funds with closes in 2008 reached 21, up from 16 in 2007.
The share raised by funds focused on emerging Europe and former Soviet Union countries (including Russia) fell sharply, from 25 per cent of the total in 2007 to 8 per cent, due in large part to two multi-billion-dollar funds that skewed the 2007 regional total.
Sixteen funds achieving final closes in 2008 raised USD1bn or more, compared with 19 the previous year and just four in 2006. Notable closes in 2008 included two of the largest pan-emerging market funds raised to date, with USD2.25bn and USD2.9bn; a USD2.5bn China fund; a nearly USD2bn fund focused on central and eastern Europe; and two pan-Asia funds that raised more than USD4bn. The size of funds achieving a final close in 2008 averaged USD400m, compared with USD426m in 2007 and USD272m in 2006.
The Emerging Markets Private Equity Association is an independent industry association that aims to promote greater understanding of and a more favourable climate for private equity investment in the emerging markets of Africa, Asia, Central/Eastern Europe and Russia, Latin America and the Middle East. Its 260 members represent a range of private equity fund managers, institutional investors, service providers and other industry stakeholders.
