Mark Mobius

Despite some speed bumps, Templeton continues to see promise in private equity

Templeton Emerging Markets Group's private equity business is poised to enjoy a pickup in growth on the strength of a track record established over a volatile 15-year period, said Mark Mobius, the group's executive chairman.

In a July 30 interview, Mr. Mobius said if Templeton Strategic Emerging Markets Fund IV, which closed in March with commitments of more than $220 million, can follow through on a strong start and meet its target annualized internal rate of return of 20% or better, the group's next fund should be able to aim for commitments of $600 million or more.

Templeton's private equity assets under management stand at about $400 million, less than 1% of the group's $49 billion total.

A previous breakout moment for the business was tripped up by the global financial crisis, Templeton executives said.

Momentum had looked set to accelerate after the group's first fund, launched in 2000 with $110 million, and its second, launched in 2005 with $132 million, delivered healthy IRRs of 20% and 34%, respectively.

But returns for the group's third fund — launched a week after the Lehman crisis in 2008 with $180 million — remain well below 10%, said Ong Tek Khoan, Singapore-based managing director of Templeton's private equity business, in the same interview. That fund remains in divestment mode.

Despite that setback, the logic for Templeton's push into private equity — first discussed by Templeton executives at the time of the Asian financial crisis in 1997 — has remained compelling, said Mr. Ong.

That logic revolved around better exploiting the company's global emerging markets database of 20,000 companies, only 800 of which might meet the investment criteria for Templeton funds at any one time.

How to take advantage of undiscovered, unlisted gems — while learning more about various industries — was the question, and private equity was the answer, said Mr. Mobius.

Templeton's experience is part and parcel of a broader industry trend that has seen the walls separating long-only money managers and alternatives managers of various stripes continue to crumble, noted Mr. Ong.

A subset of Templeton Emerging Markets Group's 51 investment professionals is primarily focused on private equity, just as others are focused on emerging markets, small-cap stocks or frontier markets, but all contribute to the broader effort, said Mr. Ong. So even though Templeton's current fund has $220 million in commitments, “we have the resources” of the company's full investment team, he said.

Meanwhile, the niche Templeton targets for its private equity business — making investments of $5 million to $30 million in companies with enterprise value of $500 million or less heading for an initial public offering or in need of growth capital under a private investment in public enterprise arrangement — has left the company in a strong competitive position, executives said.

Most of the big private equity firms raising money in billion-dollar increments will say “$20 million? That's not worth our time,” said Mr. Mobius. For Templeton, “this is where our niche is,” he said.

With those big firms focused on deals of $100 million or more, “we typically compete with local players and smaller regional firms,” a competitive environment where Templeton's global reach, knowledge of public markets and relationships with investment banks are strengths that firms looking at an IPO can use to their advantage, said Mr. Ong.

Templeton's ability to coach companies looking to do an IPO is likewise an attraction, Messrs. Ong and Mobius contend. “A lot of people will come to us and say 'we really don't need your money; we need your reputation,'“ because having Templeton on board provides assurance to the investors those companies are looking to appeal to,said Mr. Mobius.

As for the investors in Templeton's private equity funds, the latest fund has drawn broader interest than the company's first two funds.

U.S. institutional investors — mostly public pension funds and insurance companies — accounted for 100% of the funding for Templeton's first two private equity funds. But in the latest fund, they account for 60% to 70% of the total, said Mr. Ong. A national pension fund in Asia and a few private banks in the region have contributed to the non-U.S. portion, he said. He declined to name any clients.

If Templeton has focused on growth-style private equity investments for fast-growing companies in need of additional capital “to get to the next stage,” the company is gaining experience in more transformational private equity as well, noted Mr. Mobius.

He cited the mandate Templeton won from the government of Romania in 2010 to manage a $4 billion fund, Fondul Proprietatea, meant to compensate people there who lost their property during communist rule.

The government injected the shares of government-owned companies into that fund, and Templeton's six Romanian-based analysts have had “to go in and reform those companies” — work that has included launching lawsuits against company directors, appointing professional managers and bringing select companiesto market.

It's “a real PE effort,” Mr. Mobius said.