Bumper year for emerging markets

Private equity investors continue to increase their exposure to emerging markets – particularly China and India – resulting in a record fundraising year.

Investors are continuing to increase their allocations to emerging markets private equity, as the growing expertise of managers – and diminishing returns in more mature markets – encourages them to look further afield for the best investment opportunities.

Today, the Emerging Markets Private Equity Association revealed that funds targeting emerging markets – to include Asia, Eastern Europe, Latin America, the Middle East and Africa – raised a record $33.2 billion last year. This was a 29 percent increase on 2005, and more than five times more than the equivalent total for 2004.

EMPEA’s Alexander

EMPEA president Sarah Alexander said: “The strong fundraising record in 2006 demonstrates continued investor interest and confidence in this asset class—at least in part driven by improving returns.”

Many investors are increasing their allocations to the asset class generally. But this explosive growth over the last two years suggests that emerging markets are now seen as a genuine opportunity.

The main focus of the fundraising in 2006 was Asia, which accounted for more than half of the capital raised. 93 funds raised $19.4 billion between them, 26 percent more than in 2005.

About a third of this capital will target investments in China and India, where the market has huge growth potential – last year private equity investment equated to just 0.2 percent of GDP in China and 0.5 percent of GDP in India, whereas in more mature markets the figure is closer to 1 or 2 percent.

Other regions that saw a substantial increase in investor demand were sub-Saharan Africa, which grew at 198 percent, and Latin America, with 109 percent growth.

Across the globe, the industry is constantly pushing back its frontiers. For example, The Carlyle Group has raised a fund targeting investments in Mexico. “Private equity is expanding to new markets with no or a limited history of private equity,” said Alexander.

EMPEA’s research also shows that investors are now able to back managers with substantial experience in their target regions. Less than a third of the funds raised were first-time funds, with the vast majority being follow-on efforts. For investors, this makes allocation to emerging markets less of an unknown quantity.

And the other good news is that there is no sign of fundraising slowing down. EMPEA thinks funds raised in 2007 could almost double the 2006 total – it estimates that there are 262 funds in the market, which could raise as much as $65 billion between them.

The likelihood is then that emerging market managers will be faced with the same problem as managers in the more mature markets – with record pools of capital at their disposal, will they be able to put this money to work? Alexander isn’t sure. “It remains to be seen whether investment opportunities in these markets will develop to absorb the increased liquidity,” she said.