LPs commit to emerging markets, infrastructure

Credit Suisse has published its first quarter report showing that limited partners have been working to build exposure to emerging markets and infrastructure funds.

Private equity funds are continuing to build their focus on emerging markets as demand for exposure to these economies is driven by pension plans and endowments, according to a report published this week by Credit Suisse.

Private equity fundraising in the emerging markets increased by 64 percent in 2011, reaching a total of $38.6 billion, according to the Asset Management Alternatives Quarterly Q2 2012 report. As a percentage of new global commitments to private equity, emerging markets captured about 15 percent of the total in 2011, up from 11 percent in 2010, the report said.

Also, private equity investment levels in the emerging markets have increased for three consecutive years, the report said, reaching more than $60 billion last year. About 18 percent of global private equity investments go to Asia.

Manager selection is critically important in emerging markets.

Credit Suisse

Asia, which has been the select destination for private equity for the past decade, is the largest market outside the US and Europe, with fundraising totaling $16.6 billion in 2011. Asia’s fundraising volume represents more than 43 percent of the capital raised for emerging markets, according to the report. Fundraising in Latin America also set records last year, totaling about $10.3 billion compared to $8 billion in 2010.

“Manager selection is critically important in emerging markets. We believe top-performing managers may be less sensitive to market conditions, due to their ability to add operating value to companies across market cycles,” the report said.

The private equity section of the report was authored by Kelly Williams, head of the bank’s Customized Fund Investment Group, Nadim Barakat, chief investment officer of the group, and market researcher David Weissman.

The findings that demonstrate limited partners’ desire for more exposure to the asset class were mirrored in an LP survey earlier this year from the Emerging Markets Private Equity Association. The EMPEA survey found that three-quarters of LPs expect to increase their commitments to emerging markets over the next two years. By contrast, only 26 percent of LPs in the survey anticipated they would expand their commitments to developed markets funds in the same time period.

The survey, which collected the views of 106 LPs from 28 countries, also found that 72 percent of LPs expected 2011-vintage emerging markets funds to deliver net returns of at least 16 percent, compared with only 26 percent that had the same return expectations for developed market funds.

Credit Suisse’s study also found that fundraising for infrastructure funds has increased over the last five years, with aggregate targets in early 2012 set at $93.2 billion across 144 infrastructure funds, compared to 2007 when about $38.5 billion was raised for 47 funds, according to the report.

Last year, top infrastructure-related sub-classes included renewable energy, transport, utilities and energy.

“We continue to view private infrastructure as an attractive investment alternative based, in part, on the potential to receive current payments over the life of the investment and the ability to have asset coverage,” the report said.