Private equity funds with mandates to invest across the globe are increasingly focusing on US opportunities, according to Jeffrey Bunder, global private equity leader at Ernst & Young.
“I’ve certainly seen a trend emerging where there’s more of a will to invest in the US in this current economic cycle than potentially put more money into emerging markets,” Bunder said. “There’s an acknowledgement that China, India and Brazil are tougher places than expected to get deals done and those economies are pretty volatile.”
Declining interest in emerging markets is not entirely related to fewer new investment opportunities, Bunder said, but also has to do with exit opportunities for fund managers looking to sell portfolio companies.
“They look at it in some cases and say ‘We can’t find deals, and also the companies we have now are having trouble exiting, so we may not necessarily want to put more capital into those markets,’” Bunder said.
The increasing attractiveness of opportunities in the US, however, comes during a period of declining US deal volume. The number of acquisitions in the US fell 25 percent to 386 during the first half of 2013, compared to 512 during the same period last year, according to research from Ernst & Young.
While interest in emerging markets from global funds may be declining, regional funds investing in emerging markets – particularly Asia – continue to attract strong commitments from limited partners. Last week, KKR closed the largest ever Asia private equity fund on $6 billion, Southern Capital hit its $400 million hard-cap, plus another $8 million from affiliates, for its Southeast Asia fund, and The Riverside Company held a second close on $115 million for its second Asia-Pacific fund.
For US denominated global funds, investing in emerging markets today can carry an additional risk due to fluctuating currencies, according to Bunder.
“If you’re a US dollar fund and you’re investing in India, Brazil or other emerging markets, you run the foreign currency risk,” he said. “Some of those foreign currencies this year have really taken a dive.”