Southeast Asia seduces LPs(3)

LPs intend to allocate more capital to emerging markets private equity funds – with southeast Asia a particularly popular investment destination.

LPs will allocate more and more capital to emerging markets funds, according to the Emerging Markets Private Equity Association’s (EMPEA’s) 2007 Survey of LP Interest in Emerging Market Private Equity, which surveyed 81 LPs globally.

78 percent of respondents stated that they will keep increasing commitments to these markets during the next three to five years – up from just 65 percent of LPs surveyed in 2005 and just 45 percent in 2004.

The most popular emerging markets region for LPs is Asia – with commitments expected from 79 percent of respondents – and southeast Asia in particular. Southeast Asian funds are predicted to raise more than $1.5 billion of private equity capital in 2007.

One of the factors behind southeast Asia’s attractiveness as an investment destination for LPs is the region’s trade surplus. Alun Branigan, partner at emerging markets GP Actis, said: “The region benefits from its location between two economic powerhouses [China and India] and is running substantial trade surpluses with both.” Indeed, the region’s trade surplus was $20 billion with China and $7 billion with India in 2004.

The ready availability of exits is another driver of the region’s popularity with LPs. Mark Mobius, president of the Templeton Emerging Markets Fund, said: “The enormous scale of money has made for a quick path to maturity. Capital markets have deepened, improving our ability to exit.”

However, the report also warns of fundamental challenges that LPs in the region face. One of the biggest concerns is lack of transparency. Rebecca Xu, managing director at Asia Alternatives, said: “In all facets of transparency the region is making great progress in rule-making but the enforcement of these rules is the big question. It’s very inconsistent.”

Another concern for LPs is regional fragmentation. Chihtsung Lam at Axiom Asia said: “The ASEAN market is no European Union, so the lack of a single, integrated market makes this different from investing in India or China.”