Private equity funds focused on developing countries in Asia raised $40 billion in 2008. This is a 39 percent increase from the $29 billion they raised in 2007, according to the Emerging Markets Private Equity Association (EMPEA).
China-focused funds contributed largely to the dramatic rise in 2008 fundraising levels, raising $14.5 billion in 2008, compared to $3.9 billion in 2007.
The second-most active subset was India-focused funds, which saw an increase from $4.6 billion raised in 2007 to $7.7 billion in 2008.
Middle East- and Africa-focused funds respectively saw year-over-year fundraising increases of 17 percent and 37 percent. Middle Eastern funds raised $5.9 billion in 2008, compared to $5 billion in 2007, while African funds raised $3.2 billion in 2008, compared to $2.3 billion in 2007.
In contrast, capital raised by Central and Eastern European funds experienced a sharp decline, from $14.6 billion in 2007 to $5.6 billion in 2008. These funds accounted for 8 percent of total emerging markets capital raised in 2008, down from 25 percent in 2007.
Latin American funds made up 7 percent of total capital raised in emerging markets in both 2008 and 2007, raising a total of $4.5 billion in 2008 and $4.4 billion in 2007.
The number and size of funds targeting pan-emerging markets also swelled, primarily due to the growing size of successor funds. “In 2008, we saw two follow-on pan-emerging markets funds close at $2 billion or more,” said Jennifer Choi, director of research at EMPEA.
The real challenge is convincing Western investors to maintain exposure to what are considered riskier markets.
In December 2008, Actis Emerging Markets 3 closed on $2.9 billion, more than double its Actis Emerging Markets 2, which had closed on $1.4 billion in 2004.
“Another reason is the expanding mandate among some Middle Eastern funds that now includes opportunities in Asia,” Choi added.
For example, the Global DIB Millennium Islamic Buyout Fund, launched by Kuwait-based Global Investment House and Dubai-based Millennium Capital late last year, invests in MENA, Turkey and South Asia or the MENASA region.
This year, EMPEA estimates 371 emerging markets funds are seeking about $144 billion, or nearly double the capital raised last year.
“[This] will be a difficult year for fund managers seeking to raise capital, but funds with dry powder to invest are in a very good position right now,” EMPEA president Sarah Alexander said in a statement. “We’re entering a period of potentially very ripe conditions for private equity in these markets: lower entry prices, less competition for deals and very attractive deal flow from entrepreneurs with few alternative options for raising capital.”
She added: “The real challenge is convincing Western investors to maintain exposure to what are considered riskier markets.”
A recent EMPEA Survey found 52 percent of institutional investors believe that their emerging markets private equity fund portfolio will be less negatively affected by the financial crisis than their developed market counterparts.
“The private equity model in emerging markets is about equity investments in growing companies – not leverage,” Alexander said. “Whereas the lending draught in the West resulted in stalled buyout markets, in emerging markets deals are still getting done. Those funds that were prudent in their investment pace when valuations were high are well positioned in this environment, and those investors who stick with them will be rewarded.”