Local or global?

In May, PEI revealed that after almost two years on the road trying to raise a $3.5 billion fund, UK-based emerging market specialist Actis had reduced its target to $1.6 billion and changed the investment structure of the vehicle. 

The firm had initially targeted $2.2 billion for Actis Global 4, plus additional region-specific investment vehicles for India, Africa, China and Latin America, which brought the overall fund target to $3.5 billion. Actis has now consolidated the regional vehicles into the main fund – apart from the Africa side pool, which has a $200 million target (although that’s more like a co-investment vehicle which enables the firm to do larger deals).

“We have purposely changed our strategy and believe a global fund is more beneficial,” says Peter Schmid, head of private equity at the firm. “Emerging markets are volatile and there’s always a risk that too much capital is flowing to one specific region. In Brazil, for instance, $10 billion has been raised in the last 24 months. We truly believe that a global fund provides much more flexibility and reduces the risks of operating in an overheated market.”

The firm doesn’t want to be forced to do a number of investments in a region if it believes the timing isn’t right or the opportunities aren’t there. “India is a case in point – it was expensive in the past few years [so] we underinvested. Most LPs don’t want to be locked into India or Brazil for 20 years and they welcome this new strategy,” he says.
Some investors do, certainly. “I love the edge they can get from having people in all of the big emerging markets to swap notes on deal trends, macro issues, management stuff and so on,” one LP told PEI recently.

In May 2012, Capital International closed its sixth emerging markets vehicle on its $3 billion hard-cap, showing that global emerging market funds haven’t completely fallen out of fashion. 

And there’s still an argument that global groups may be better placed to help national champions expand beyond their country borders, and to find synergies between portfolio companies in different regions. They also make it easier for LPs that are newer to the asset class to get broad exposure to emerging markets. 

We truly believe that a global fund provides much more flexibility and reduces the risks of operating in an overheated market. 

Peter Schmid 

However, the more experienced LPs tend to develop firm views about where their capital should go. “If you want to invest in Africa, and you back Actis, then you have to deal with their global fund and some people don’t want to do that,” says one LP source. “LPs [have specific ideas about where they want to invest, so they] put together their own global portfolio.”

“Investors may have originally invested in Actis to get a training course in emerging markets [before going] into the local market,” suggests another source.