Emerging markets funds raised record $59bn last year

Commitments to emerging market vehicles increased by 78 percent in 2007, as the strategy becomes increasingly popular among institutional investors.

Private equity funds targeting emerging markets raised $59 billion (€39 billion) across 204 funds in 2007, a 78 percent increase from the $33 billion raised across 162 funds in 2006, according to the Emerging Markets Private Equity Association (EMPEA).

Emerging markets funds have become “a credible, commercial asset class attracting sizable investments from well-known institutional investors, including public pension funds”, EMPEA president Sarah Alexander said in a statement.

In December 2007, the Los Angeles County Employees’ Retirement Association announced a search for a private equity fund of funds manager to invest $150 million over the next three years with emerging managers. The California Public Employees’ Retirement System was the first investor in emerging markets private equity fund investment specialist EMAlternatives in July 2007 committing $100 million.

“LPs are increasing or interested in increasing the amount of [their] portfolio going to emerging markets generally,” said EMPEA head of research Jennifer Choi. She added that the trend is apparent in numerous asset classes, not just private equity.

In addition to total capital raised, emerging market fund sizes have shown a marked increase. Nineteen funds raised $1 billion or more, including Kohlberg Kravis Roberts’ $4 billion Asia fund, TPG’s $4.25 billion Asia fund and MARFIN Investment Group’s $7 billion fund targeting the Balkans. In 2006, only four funds hit or surpassed the $1 billion mark.

The average size of closed funds reached $426 million in 2007, up from $272 the previous year. The 2007 average was driven by the largest of the emerging markets funds, being that “34 of the $59 billion total came from 16 funds”, according to Choi.

A number of $1 billion-plus emerging markets funds are currently being raised, according to Probitas Partners’ 2008 Private Equity Deskbook, including Carlyle Asia Partners III, targeting $2 billion; Carlyle Middle Eastern Fund, targeting $1 billion; CVC Capital Partners Asia Pacific III, targeting $4 billion; Siguler Guff’s Russia Partners III, targeting €750 ($1.1 billion); and Siguler Guff BRIC Opportunities Fund, targeting $1 billion.

The total number of funds in the market is also rising quickly. At the end of 2006, there were 229 open emerging markets funds. At the end of 2007, this number was up to 369.

In terms of regions, Asia attracted the greatest level of capital commitments in 2007, representing 49 percent of total capital raised for emerging markets funds. The $28.7 billion raised was a year-over-year increase of 48 percent. Currently, 64 Asia-focused funds are being raised, according to Probitas.

The most dramatic percentage growth was in funds raised for investment in Central and Eastern Europe, up more than 300 percent from 2006 to $14.6 billion.

Fundraising grew by 66 percent for investment in Latin America to $4.4 billion and by 71 percent in the Middle East to $5 billion. Funds raised for Africa remained flat at $2.3 billion, while pan-emerging markets funds raised $4 billion in 2007, a $1.5 billion increase from 2006.

It is unknown to what extent emerging markets will be affected by tightening global credit markets but EMPEA predicts limited impact. “It’s unlikely we’ll see the same level of difficulties in getting deals done relative to the US and Western Europe, primarily because use of significant leverage is less prevalent in private equity deals in the emerging markets, and, when debt is used, it can often be provided by local banks that aren’t affected by the credit squeeze,” said Alexander.

EMPEA is an independent, global industry association dedicated to promoting investment in emerging markets. The organisation has 195 members across 74 countries which collectively have $700 billion in assets under management.

In partnership with EMPEA, sister magazine Private Equity International will host an emerging markets conference in New York beginning on 27 March.