Annual Review 2015: Emerging markets rollercoaster

Emerging markets had a difficult 2015, buffeted by currency volatility, falling commodity prices, capital outflows and knock-on effects from China’s slowdown.

In its year-end report, the Emerging Markets Private Equity Association (EMPEA) said a little over $44 billion was raised for emerging markets private equity funds during the 12 months, down 17 percent on a year earlier. In terms of number of funds raised, only 115 vehicles held final closes last year – an all-time low since EMPEA started recording them in 2006.

Investment levels also decreased by nearly 24 percent, with $29 billion invested, though EMPEA noted that capital was deployed in the highest number of companies (1,475) since 2008.

“Reduced fundraising and investment totals for 2015 were nevertheless in line with annual totals for 2012 and 2013, suggesting that private fund managers remained resilient in the face of what, for many emerging markets investors, was a difficult year,” EMPEA noted.

Despite a slow-down in emerging market fundraising and investment, there was a buzz building in 2015 about various emerging and frontier markets. Here’s a look at a few:

Myanmar’s middle and affluent classes are projected to double to 10.3 million by 2020, according to business school INSEAD. That, coupled with its location, make it an increasingly interesting destination for private capital.

“Myanmar is on the border of China and Thailand; Intra-Asian trade, and particularly intra-ASEAN trade, will become much more important now, especially with the removal of tariff and trade barriers in the ASEAN region,” says Josephine Price, a partner at private equity firm Anthem Asia, which is based in Yangon, Myanmar's largest city.

“The real challenge for Myanmar is how it opens up to a lower growth world. You can’t play Myanmar the same way as China was two decades ago because the world is not the same.”

An INSEAD study last year found fewer than a dozen local private equity firms operating or in fundraising mode, including Anthem, Golden Rock Capital and PMM Partners. Among global firms, TPG has been a first-mover in Myanmar; last year it made its third investment there with the purchase of a 50 percent stake in Myanmar Distillery.

However, Myanmar’s nascent economy will need careful navigating; fund managers face challenges ranging from educating potential investee companies to governance and regulatory issues. But, proponents would argue, private equity has worked through similar stages in other emerging markets, too.

Private equity firms have historically shown little interest in the Philippines, looking instead to Vietnam and Indonesia. But with the country’s strong macro growth (between 6-8 percent in the last five years), improved ratings from the investment community (a BBB Stable from S&P), and favourable population (second largest in ASEAN at 100 million), the Philippines makes an increasingly compelling case for investment.

Capital Partners, Capital International, Stockholm-based Brummer & Partners and Singapore’s GIC are among those that agree. As do Baring Private Equity Asia and ADM Capital, which last year announced investments of up to $150 million to construct offices near Manila’s airport, a destination trumpeted as the next call-centre hub in Asia after India. While awareness of private equity in the local business community remains low, Honorio Poblador, managing partner of Makati City-based firm Navegar, tells PEI that more companies have matured and are ready to absorb capital injections from PE firms.

“There will be opportunities in the larger size companies, but the real opportunity is in the mid-market space,” he says. “However, you have to be on the ground to find those opportunities. In the Philippines you can do $15 million, that’s the sweet spot. You’re talking about companies that have been there for a while, with proven business models that still have room to grow.”

Higher governance standards have made it easier to do business in the country. But with national elections ahead in May, global investors may worry about continuity of reforms amenable to foreign investors.

The Pacific Alliance trade bloc, formed by Latin American countries Mexico, Chile, Colombia and Peru, has a combined population of 218 million and accounts for almost 40 percent of Latin America’s total GDP and half of its exports, according to the International Monetary Fund. Collectively sharing a commitment to free trade, economic integration and democracy, the alliance is a bigger economy than Brazil making it an increasingly attractive option for private equity.

Economic reforms in recent years, such as Mexico’s energy sector opening up to foreign investors (after more than 75 years as a state monopoly), as well as broader tax reforms in Chile have also spurred fund formation and operations in the region.

The Latin American Private Equity & Venture Capital Association, however, reported a significant drop in fundraising in 2015, with just $6 billion raised compared with 2014’s record high of $10.4 billion.

While Brazil remains the dominant nation in the LatAm market, private equity firms have noted Mexico’s steady expansion as a catalyst for investment. Eight Mexico-focused vehicles were in market last year targeting a total of $1.74 billion, according to PEI Research & Analytics.

Some notable fund closes include Linzor Capital Partners’ $621 million Fund III and The Abraaj Group’s garnering of $191 million through a series of certificados de capital de desarrollo (development capital certificates also known as CKDs), which are publicly listed vehicles enabling Mexico’s pension funds to invest in private equity. The development of the CKD market – and thus fund managers’ access to domestic investors – only began in 2009 following government reforms.

Ralph Keitel, principal investment officer at the International Finance Corporation, says LPs continue to have appetite for those countries in Latin America that implement reforms benefiting the private sector.

“The Pacific Alliance countries have put trade at the centre of their programmes and used some of the account surpluses from the past years’ commodity boom to implement reforms that are conducive to the investment environment.

“These countries have been doing much better than government-policy oriented and commodities-based economies like Brazil and Venezuela. Many of our funds are targeted at these alliance countries. In addition, Mexico stands out as it’s not so much a commodities exporter, but much better integrated commercially with US companies.”