Emerging market fundraising accelerates

Fundraising by firms targeting emerging markets is accelerating, says trade body EMPEA, which predicts the total will reach $40bn by year end, almost double the $23.5bn raised in the whole of 2010.

Private equity firms have already raised $22.6 billion across 89 funds for emerging markets by June this year, and are on course to reach $40 billion, according to research from trade body the Emerging Markets Private Equity Association. The amount is only just shy of the $23.5 billion raised in the whole of 2010, demonstrating the increasing interest in these developing markets by investors.

Although the total so far this year is dwarfed by the $66.5 billion raised in 2008, the fact 2011’s total is on course to easily surpass last year’s will offer encouragement to general partners looking to raise capital for  emerging markets. 

On the investment side, the pace of dealmaking in emerging markets held steady through June, EMPEA said in its report, with 431 deals valued at $14.1 billion, compared with 434 deals valued at $12.8 billion during the same six-month period last year and 856 investments totalling $28.8 billion in the whole of 2010.

Much of the emerging markets-focused capital is being concentrated in three countries, however. In the first six months of the year, 70 percent of capital raised for emerging markets was dedicated to China, Brazil and India, with China-dedicated funds alone raising $10.3 billion. In the whole of last year, those three markets accounted for 50 percent of all funds raised, suggesting investors’ focus is narrowing. 

Brazil has also had record-breaking results, with investment group Gavea surpassing Brazilian bank BTG’s impressive fund with its $1.8bn vehicle in June, the biggest pool of capital yet raised for a Brazilian private equity fund. 

Genuine frontier markets such as Laos, Honduras, Madagascar, Mongolia and Uruguay saw limited deal activity, EMPEA said. Jen Choi, head of research at EMPEA, was optimistic interest in these markets would increase however. 

“Limited partners will seek to broaden their exposure beyond the largest emerging markets.  Another factor driving expansion into frontier markets will be funds pursuing opportunities in new markets that complement their existing portfolios. Examples include Chinese GP Hony Capital’s investment in an iron ore project in Madagascar, pan-emerging markets investor Actis’ investment in a Guatemalan energy supplier,  and Vietnam-based Dragon Capital’s investment in clean energy in Laos. In addition, the depth of frontier markets themselves will grow as fund managers already in those markets, such as Leopard Capital in Cambodia, deepen their track records,” Choi said. 

The overall increase in emerging markets fundraising can largely be credited to increased interest from local investors, EMPEA said. In China and Latin America in particular, significant portions of funds were generated locally from domestic limited partners such as government agencies or pension funds. For example, yuan-denominated funds drawing on local investors provided 40 percent of the total capital raised in China in the first half. 

Foreign investors are also increasing allocations to emerging markets however. Sarah Alexander, president and chief executive of EMPEA, said in a statement: “Western institutions are continuing to seek greater exposure to the world’s fastest growing markets, and institutions in the emerging markets themselves are significantly ramping up their investment in the asset class.

“Institutions such as pension funds realise they have to increase their exposure to alternative investments to yield the returns needed to meet their escalating liabilities over the next 5-10 years.  Given the drubbing to their equities and fixed income portfolios this summer, we anticipate even greater interest from institutional investors in private equity in emerging markets,” Alexander added. 

Not all emerging markets are benefiting from domestic interest however. The $1.1 billion raised for Africa, for example, was largely comprised of a $900 million fund raised by Helios Investment Partners, which relied heavily on commitments from outside investors given the scarcity of African LPs willing to commit to private equity.