Emerging markets special: new fund structures required

These markets force managers to be creative around the standard structure.

The 10-year private equity fund structure has provided a solid framework for many types of investment. Every so often, however, the desire to invest in a particular asset class, strategy or geography causes investment professionals to question its usefulness.

Emerging markets are a good example. According to online private equity fund marketplace Palico, the median life of a private equity fund was 13.2 years in 2015, up from 11.5 in 2008. For firms investing in markets such as the Commonwealth of Independent States or Africa where assets often need to be developed in the face of economic and political headwinds, 13.2 years might seem especially brief. 

Even without volatility, the traditional model might not always be ideal. It makes sense that investors want to commit to a pool of capital with a defined strategy and timeline, but such funds are often too large to invest in the small and medium-sized enterprises that form the bedrock of emerging economies.

Swiss investment house Edmond de Rothschild, whose debut private equity fund hit final close in June 2014 on $530 million, established an innovative structure for its Africa-focused vehicle. At the five-year point the fund, managed by Paris-based Amethis Finance, will give investors the option to convert their fund stakes into shares of a company that would seek a listing. This, in effect, extends its life. Another popular alternative is a permanent capital vehicle, which has an unlimited time horizon and raises cash on an evergreen basis.

Earlier this year, CDC Group invested $20 million in Solon Capital Holdings, a small investment holding company based in Sierra Leone, through a modified version of a PCV. The fund is open-ended with an unlimited time horizon, giving the assets the necessary time to develop. But it also offers periodic liquidity options to existing investors who might not want to stick around until an eventual IPO.

Traditionally, it was very difficult for emerging markets players to gain support for innovative structures, mainly due to fears about liquidity. Speaking at the Private Equity in Africa conference, Will Poole, managing partner of impact investor Capria, recounted how a friend developed a long-life vehicle to hold slow-growing emerging market agriculture investments.

“We love what you’re doing but we’re not giving you a penny because it doesn’t have capital liquidity,” was the standard response.

But with institutions such as CDC now leading the charge, such vehicles may well find greater acceptance.