FT Alphaville will be reporting this week from the annual Global Emerging Markets Private Equity Conference in Washington, DC — and we plan to use the event as an excuse to write a series of posts on this fascinating market throughout the next week or two.
Something that surprised us at last year’s meeting (see our report, in pre-FT Alphaville guise) was the cautious mood of the PE fund managers and investors we spoke to. As we said at the time: “people were confident that private equity in emerging markets has a bright future, but there was some doubt about how quickly it should grow.”
The tone seemed distinctly at odds with the extraordinary resilience of emerging market economies after the financial crisis relative to their counterparts in the developed world.
Yet the sober mood also made sense. Although private equity in emerging markets didn’t collapse as badly as it did in mature markets after the crisis, dealmaking and fundraising were still hit hard — and GPs were stung after record-breaking investment totals in 2007 when estimated IRRs plummeted in the subsequent couple of years, according to Cambridge Associates (more on which later).
And investors also worried that target company valuations hadn’t declined to reasonable levels because of the better growth in the bigger emerging countries, and also because new private equity entrants were starting to crowd into some of the preferred destinations, mostly China and Brazil.
But as it turned out, expressing caution to a reporter was one thing; what investors actually did with their money last year was quite another:
The chart is from the Emerging Markets Private Equity Association, or EMPEA, and uses Preqin numbers for the developed world estimates. Fundraising for emerging markets private equity didn’t return to the record-breaking numbers of 2008, when the asset class raised $67bn.
But the $23bn raised in 2010 was still a slight increase on the prior year, and given the decline in developed world PE represented another jump in the emerging world’s share of the global total. The $10.4bn of funds closed in just the first quarter, most of the them targeting China, suggests a further acceleration (with the usual caveat that the funds closed reflect fundraising activity that started in previous years, and therefore isn’t a precise measure of what happened in the quarter that it is counted).
And although fewer in number, the median size of funds has climbed, probably because there are now more large, globally focused funds and because GPs are targeting the sweet spot of $250m-$1bn. Chart from EMPEA:
The tension between this enthusiasm and worries about overcrowding and high valuations is captured in a recent survey of investors by Coller Capital. Investors said the countries where they most expected there to be intense competition for deals were China, Brazil, and India. They added that the single factor most likely to deter their investments in these countries was high valuations. No surprise there.
Yet investors also said that Brazil and China were the two most attractive regions for GP investments in the next twelve months; that they would continue increasing their new allocations to emerging markets; and that they expected 2011-vintage funds in emerging markets to outperform their developed-world counterparts.
As for dealmaking, it slowed for the fourth straight quarter in Q1, though it is above last year’s first quarter:
We’re not sure what’s behind this, though one guess is that the low number for Latin America might be missing a few deals.
Which brings us to another theme we’ll be revisiting in our posts: just how hard it is to measure the performance of these funds given problems with collecting data.
Only a few organisations actually gather data on emerging markets private equity. EMPEA is obviously one. Others include regional membership organisations such as the Latin America Venture Capital Assocation; commercial data providers such as Zero2IPO Group for Asia; and development finance institutions (DFIs) such as the IFC or the European Bank for Reconstruction and Development, which invest alongside private equity funds in a country’s early stages of capital markets development.
Through no real fault of these organisations, their data collection procedures all have systematic problems related mostly to the youth of the asset class and the discretion of its participants. In other words, every single one of the charts and graphs above should be viewed cautiously. (Sorry, we should have mentioned that sooner.)
So we’ll discuss some of these problems, keeping in mind also that even developed-world private equity remains tough to scrutinise, with similarly contradicting findings in some areas, especially around performance.
We think it’s an interesting time to do this series. Private equity remains a much smaller part of emerging economies than of the developed world, which is probably another reason why global limited partners (LPs) continue sensing an opportunity despite the overcrowding problem described above:
But in the bigger emerging countries, it looks like it’s starting to catch up, and part of the growing pains will involve greeting new questions about the impact of the asset class on companies, innovation, employment, growth — the same questions that the major US and European players have been fielding with for a long time.
And what about persistence, ie the idea that the best private equity fund managers tend to stay the best? As EM private equity ages and more funds finally start fully divesting, maybe we’ll start to get a better sense of whether this applies to emerging markets managers as well.
Moving on, we’ll also discuss the issue of leverage — or rather the paucity of it used in deals, which is such a fundamental part of the EM private story narrative. Will the absence of financial engineering continue? How will we know if this changes?
Finally, we’ll have a few posts focusing on specific regions — Latin America, China, MENA — and anything else we come across that strikes our fancy.
And if there’s anything else you’d like us to explore while we’re on the subject, please let us know in the comments and we’ll do what we can.
Related links:
Bigger is not necessarily better in private equity – FT Alphaville
EM private equity: other things to worry about – FT Alphaville
Article Series - EM Private Equity
- The past, present and future of EM PE