Emerging markets private equity is on a roll.
The level of private equity fund-raising targeting emerging markets is at record levels with further growth expected to be sustained over the long run, according to consultants, managers and pension fund executives.
In 2007, private equity fundraising dedicated to emerging markets nearly doubled to a record $59 billion globally compared with $33 billion the previous year, according to data from the Emerging Markets Private Equity Association, Washington. The industry organization represents 195 managers in 74 countries with $700 billion in total assets under management.
Despite the credit crunch, which is causing acquisitions in the U.S. and other established markets to dry up, private equity capital continues to be deployed at a healthy pace in emerging markets, managers said. In general, M&A transactions in emerging market economies depend less on leverage, they said.
Furthermore, asset managers and pension fund executives bracing for an economic slowdown in the U.S. and Western Europe might be looking toward less mature markets in Europe and Asia to diversify their sources of returns, said Christopher Rowlands, managing partner of Asia for 3i Group PLC based in Singapore. In April, 3i raised $1.2 billion for an India infrastructure private equity fund. The amount was 20% above the target.
“Emerging markets is our principal strategic objective for a number of reasons — portfolio diversification and excellent growth prospects being among them,” Mr. Rowlands said. “The fundamentals look strong, not withstanding current market turbulence.”
Recent volatility in emerging markets might actually help private equity managers by pushing companies to seek private equity funding and potentially lowering valuations, managers said. In addition, emerging market economies have also largely escaped the subprime crisis and resulting credit problems, leaving local financial institutions in a better position to finance small to medium-size deals.
As a consequence, private equity managers who have been building their presence in emerging markets over the past several years might find that they're now in a better position to weather the global economic downturn, consultants said.
“Private equity's job is that it has to invest; it has to put that money to work,” said Paul Schaye, managing director of New York-based Chestnut Hill Partners LLC, which helps private equity firms find investments. “If that means finding opportunities in the less mature markets, then that's what has to be done.”
However, consultants also warned that a lengthy credit crisis inevitably will damage returns for private equity managers globally, including those operating in emerging markets.
“I think strategic investors are still moving forward and looking on a case-by-case basis in regions that are less likely to be affected by the (credit) crisis ... emerging markets are viewed as being more insulated,” said Eric Johnson, managing director at Cambridge Associates LLC, Boston. “But if we have a prolonged crisis, that's not good for exit (strategies), which will hurt returns and eventually make fundraising more difficult.”