Managers eye 'emerging' LPs for fundraising

Private equity general partners in the emerging markets are having a hard time convincing traditional limited partners to allocate capital to developing economies.

This challenge exists despite confident, bullish words from many LPs who say they are interested in gaining exposure to the emerging markets, according to panelists at the 12th annual Global Private Equity Conference Tuesday.

The event, held each year in Washington DC, is hosted by the International Finance Corporation and the Emerging Markets Private Equity Association.

Graham Thomas, managing director with Standard Bank Private Equity, noted that in general “there is a huge denominator effect that will take several years to work its way out”.

Thomas was part of a panel that included Paul Fletcher, senior partner at Actis, Peter Marber, global head of emerging markets fixed income and currencies at HSBC and Ed Mathias, managing director at The Carlyle Group.

The panel was in agreement that the overall opportunities for private equity in emerging markets like India or Brazil were enormous, especially now that the developed western nations have “shackled themselves like big anchors to debt”, Marber said.

“We're expecting [emerging] economies to grow in the next decade,” Marber said. “There's a lot more liquidity, and a lot of it is in sovereign wealth funds. There's several trillion dollars and a lot of it hasn't filtered down to the private sector.”

Managers who need to raise funds for emerging markets strategies may have to look beyond the traditional network of LPs, Thomas said.

“Funding will be tough from a traditional LP base,” Thomas said, adding that many Western investors may not be satisfied with the exit options available to GPs in emerging markets.”Domestic liquidity is one of the holy grails of emerging markets private equity.”

LPs in emerging economies may have a greater appetite  for, and understanding of, capital markets in developing nations. They also may have more capacity to build out private equity allocations. For example, pension funds in Colombia were not hurt badly in the downturn like some of their counterparts in the developed nations, Fletcher said.

Carlyle sees enormous opportunity for fundraising in Asia, where the firm has already collected $2.2 billion for a fund, Mathias said. China is a holder of “staggering wealth”, Mathias said.

Carlyle also likes Brazil, Mathias said, but raising money in that country is tougher. “Brazil is less likely to become a larger market”, he said.

To bring traditional LPs around to spending money on emerging markets-focused funds, managers must start to distribute capital back to investors, he said.

“We need to realise and send back capital to LPs to demonstrate the asset class can do what it says,” Fletcher said.