UK-based emerging markets specialist Actis has just closed a new $1.7 billion global private equity fund. The process was not straightforward – it took two years, and involved an apparent shift in strategy. But senior partner Paul Fletcher insists that the new model is more in keeping with the firm’s founding ethos – and will make it easier for the firm to meet LPs’ changing demands.
Is there anyone in private equity with a better view than Paul Fletcher? The senior partner of emerging markets specialist Actis spends his days in a glass-walled corner office eight floors up on the banks of the Thames, a stone’s throw from Tower Bridge: on a clear autumn afternoon like this one, he can look out at the rosy-fingered dusk creeping over some of the most famous buildings in London, without even needing to get up from his desk. Not bad for an ex-civil servant.
It also seems appropriate for a firm focused on far-flung markets to be based right on the Thames, the artery through which so much wealth flowed into the heart of London during the days of the British Empire. Like the merchants that used to line the water’s edge, Actis may be London-based, but its outlook is decidedly global.
When PEI visited Fletcher in November, the firm had just closed its flagship private equity fund, the $1.7 billion Actis Global 4, and was putting the finishing touches to a new $1.1 billion energy fund. But while the latter is going to end up well above target (even above its hard cap), the fundraising for the flagship vehicle was not so straightforward. The firm started talking to investors about the fund in late 2011; at the time, it was targeting $2.2 billion for the global fund, plus a further $1.3 billion acrossfour region-specific vehicles (India, Africa, China and Latin America). However, following conversations with LPs, it subsequently decided not to raise the side pools (other than a small Africa-specific pocket, which it had already promised to existing investors) – and later reduced the target for the main fund too.
While Actis is hardly the only firm to have had a hard time on the fundraising trail in the last couple of years, the fact that it ended up with less than half the total originally targeted – after almost two years in market – has inevitably prompted some speculation. Some have suggested that the global model has less appeal to LPs now they’re more experienced in emerging markets. Fletcher, on the other hand, argues that his firm now has a model that’s better suited to the current market and its own structure. Whoever’s right, the Actis story tells us some interesting things about the way LPs are thinking about emerging markets these days.
A CHANGING WORLD?
The last two years clearly haven’t been easy for Actis. But Fletcher doesn’t strike you as a man who is easily ruffled. After all, he’s been dealing with brickbats ever since he led a management spin-out from the Commonwealth Development Corporation (CDC), a UK government-sponsored development finance institution, to create Actis in 2004. His team paid just £373,000 to acquire a 60 percent stake in the management company, and the government of the time subsequently came under fire for selling the business too cheaply.
The controversy rumbled on in various forms until last year, when the current government – which has been vocal in its criticism of the original deal – sold off its remaining 40 percent share to management for about £8 million in cash, claiming it was the best way to create some value for the UK taxpayer (back in 2011, Fletcher reportedly described the pressure from the government as a ‘game of shaking us down’). However, the point typically missed in the coverage of this row was that as a cornerstone investor in all the Actis funds, CDC has seen some substantial financial benefits. At the time of the stake sale last year, Actis said it had invested some $1.6 billion on CDC’s behalf, and returned $3.1 billion.
During the four years following the spin-out, Actis became a very different beast. It was able to expand its investor base from just a single LP to more than 160, and it racked up around $5 billion of funds under management, including the $2.9 billion Actis Emerging Markets III, which closed in 2008 (it has since also raised a $278 million Africa real estate fund).
Clearly sentiment towards emerging markets has changed since then, particularly in the last year as the growth has slowed and investors started to worry about the end of the cheap money. So were the relative travails of the most recent fundraise just a reflection of a changed world?
“I’m not sure the world changed on us dramatically,” Fletcher demurs. “Generally LPs remain in a similar place: they’re interested in emerging markets, but there’s also a degree of caution. Certainly the emerging markets came under some stress from LPs in 2013. But we still had good interest from LPs. I’m sure that if we’d wanted to, we could have raised more money; but we chose to draw a line in the sand.”
So what did change? “In 2006-8, everyone had the wind at their backs. Post-2008, LPs started to process everything through a much higher level of due diligence, and view things through the prism of: ‘Do we have to put our capital there?’”