Actis: Emerging markets to attract more LP capital

As limited partners cut back on commitments to traditional private equity funds, they will invest more money in emerging markets-focused funds, according to Jonathon Bond, head of fundraising for Actis.

Emerging markets-focused private equity accounts for about 9 percent of investors’ overall allocation to private equity. That figure could go up to as much as 12 percent, Bond said in an interview with PEO’s sister site, infrastructureinvestor.com.

This growth would occur while many institutional investors cut back on their overall allocations to private equity. “We think that over the next three or four years there’s likely to be a 20 to 25 percent reduction in the size of the global private equity market, against the peak or the boom. A lot of people are reducing their allocations as they realize it’s not as alternative as they thought,” he said.

Actis has prepared for the growing interest in emerging markets, especially in the realm of infrastructure. The firm has raised $750 million for Actis Infrastructure II Fund, which focuses on investments in power assets in emerging economies.

Paul Fletcher

Opportunities in the emerging markets go beyond power, according to Actis senior partner Paul Fletcher. Transport is at least as big an opportunity as power, but “power generates big capital needs and can support quite significant funds”, Fletcher said.

During its next fundraising round, Actis will drop the term “infrastructure” from the fund, Fletcher said.
“There is a big labeling issue here. Infrastructure has had a torrid 12 months as a label and I think it is going to be an unhelpful fundraising label for the emerging markets going forward,” Fletcher said.

The difficulty of the “infrastructure” label is illustrated in many institutional investors’ allocation schemes to the asset class. Many bundle the asset class together with private equity, while others invest in it from a real estate or real assets allocation. Some have begun to carve-out specific allocations for infrastructure alone.
But the differing risk-return profiles for different infrastructure investment strategies, such as developed-market infrastructure versus emerging markets infrastructure, again make it difficult for investors to assign a uniform definition to the asset class as a separate allocation.

Despite its labeling problems, infrastructure continues to attract investor interest. But more education is needed if limited partners and advisors are to fully appreciate the opportunities available.

“We’d say that generally advisors are behind the curve on emerging markets infrastructure. I think this is partly due to internal resources – historically advisors have not had experts dedicated to focusing on this area,” Bond said.

“However, in the last six months we have detected a change in approach. Some key advisors have now built out their infrastructure teams and I think this has been done in anticipation of more capital going into emerging markets,” Bond said.