EM funds make record distributions

GPs gave back $5.6bn to investors in Q2, with Asia still driving emerging markets.

Distributions made by emerging market private equity and venture capital firms hit record highs in the second quarter of the year, according to figures released by data provider Cambridge Associates this month.

The data tracks 445 emerging market funds globally, with a combined value of about $105 billion.

These managers returned $5.6 billion during Q2 2013, a 123 percent increase from distributions made during the first quarter of the year and the highest amount of quarterly distributions by emerging market managers seen over the 27 years that Cambridge has tracked the industry.

It is welcome news after emerging market private equity and venture capital distributions to limited partners fell 36 percent to $7.7 billion in 2012, the first annual decrease in emerging market distributions since 2009, according to research from Cambridge released earlier this year.

While distributions soared, Asia continued to dominate the emerging markets index.

During Q2, companies headquartered in emerging Asia attracted over 60 percent of total capital invested by managers in the index, which is in line with the historical average.

Four countries – mainland China, India, South Korea and Russia – by market value made up roughly 54 percent of the total index. Brazil and South Africa, typically included in the five major emerging economies globally, were not in the top markets for private equity investment.

During 2013, Brazil had the steepest plunge in private equity deal value across all BRICS, to $450 million from $3.2 billion last year, according to Mergermarket data.

In terms of exits, on a dollar-weighted basis, private equity firms in the four best performing countries broke even for the second quarter, with Russia performing the best and India, dragging down returns, Cambridge data showed.

Russian GPs delivered 1.9 percent IRR during the second quarter of the year, with Indian managers delivering a -4.6 percent IRR during the same period.

Although distributing a record amount of capital, emerging markets continue to be a disappointment to private equity investors that had viewed their commitments to these funds as a GDP growth play.

Even in China, exits and liquidity have been problematic, and returns have weakened, with domestic IPO markets frozen for more than a year.

Mainland China alone represents 34.7 percent of the Cambridge index, but only returned 0.7 percent to investors during Q2.

“China has been such a massive driver of the fundraising for emerging markets, but has produced very little in the way of positive returns in the last two years,” Javad Movsoumov, executive director at UBS private funds group in Singapore, told Private Equity International in an earlier interview.

However, China’s IPO markets look set to re-open as soon as January, according to a statement from the China Securities Regulatory Commission in early December, offering some hope to GPs with portfolio companies to exit.