At a time when limited partners are facing extreme difficulties with asset allocation issues, a recent report from Emerging Markets Private Equity Association (EMPEA) has showed that 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 their developed market counterparts.
“The good news is that there is a pool of capital that can take advantage of unprecedented investment opportunities in emerging economies,” said Sarah Alexander, President of EMPEA. “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 globalization of the financial crisis will impact expansion plans into new markets,” she said.
Bucking global trends, 210 private equity funds focused on emerging markets raised a record-breaking $66.5 billion in 2008, a 12 per cent increase over the $59 billion raised in 2007, according to EMPEA.
“2009 will be a difficult year 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,” said Alexander. “The real challenge is convincing Western investors to maintain exposure to what are considered riskier markets,” she added.
EMPEA estimates that 371 private equity funds focused on emerging economies are presently in the market looking to raise as much as $144 billion in capital.
“The private equity model in emerging markets is about equity investments in growing companies—not leverage. 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,” said Alexander.
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According to EMPEA, Brazil, Russia, India and China have attracted the lion's share of attention in our industry in recent years, and the private equity industry in each of these important economies is being impacted by the global economic crisis in different ways. EMPEA is also emphasizing that the long-term growth thesis remains intact, and future success is waiting for those who effectively manage through current difficulties.
Emerging Asia continues to dominate the private equity landscape in developing countries accounting for 60 per cent of total funds raised in 2008 versus 48 per cent in 2007. Emerging Asia funds raised $40 billion, a 39% increase over 2007, driven by a significant increase in capital raised by China-dedicated funds. Funds focused on China raised $14.5 billion in 2008 compared to $3.9 billion in 2007. India-dedicated funds raised $7.7 billion in 2008 versus $4.6 billion in 2007. No other single region accounted for more than 10 per cent of total capital raised.