Emerging fervour

According to a new survey from EMPEA, limited partners are becoming enthusiastic over the opportunity in emerging markets. Ken MacFadyen reports.

Globalisation has been a key theme for a number of years now, but as is typically the case, it tends to take awhile before that enthusiasm trickles up to the institutional decision makers. There usually needs to be a couple of highly publicised homeruns, a book or two celebrating the opportunity and a rising tide of group think confirming that the opportunity is in fact legit.

From there, it’s anyone’s guess as to what happens next, but for now all those factors are lined up, and institutional money is rallying around the emerging market theme.

According to a new study released last week by the Emerging Markets Private Equity Association (EMPEA), limited partner commitments for emerging market funds topped $21 billion (€17.3 billion) last year, a full three and a half times more than just one year earlier. Further, 65 percent of limited partners surveyed by the association said they intend to increase commitments to the emerging market private equity segment in the next five years.

Broken down, Asia would appear to be a favourite of LPs, as $15.45 billion was dedicated toward the region. That represents five times more capital than 2004, as well-known groups such as JPMorgan Partners Asia and others mounted well-received fund drives last year.

Central and Eastern Europe, including Russia, made up $2.7 billion of the capital raised last year, with Baring Vostok and Mid Europa among those contributing significantly to the 2005 sum, and Latin America also notched $2 billion of funds raised. Africa and Middle East fundraising came in at “just under” $1 billion.

If there is any concern regarding these up and coming regions from limiteds, respondents to the EMPEA survey cited governance concerns both at the corporate and government level.

But the survey also indicates that LPs are jumping into emerging markets impelled by a desire for diversification and a belief that these regions will yield better returns. Those surveyed predict a 6 percent premium on profits from Asia and CEE/Russia funds versus US private equity vehicles.

But that raises an important question: Does that premium take into account all the new money flowing into the space?