What now for pre-IPO funds?

With the recent stock market corrections for several emerging economies, those private equity groups targeting ‘pre-IPO’ investments could have an interesting ride ahead. Judy Kuan reports.

In recent months, a spate of pre-IPO oriented private equity funds have been launched in Asia, the Middle East, and other emerging economies. However, the recent corrections seen in the public markets in these regions – which analysts attribute to concerns that rising interest rates in the US, might lure investors away from the emerging markets – potentially killing the golden goose of pre-IPO funds.

As of yesterday, the Morgan Stanley Capital International Emerging Market Index had fallen more than 17 percent to 726.3 – the index’s lowest point since January 3rd of this year – after recording a high of 881.5 on May 8th.

Emerging correction: a wrinkle in the plans of ’pre-IPO’ funds?

What has been coined by some as the “May mayhem” has clearly put a wrinkle in the plans of those private equity firms that had been planning to make grand exits amid the strong performance of the stock markets in several emerging economies.

For instance, Mexico’s second largest cable operator Cablemas had aimed to raise $247 million (€195 million) via an IPO on the Bolsa Mexicana de Valores – Mexico’s stock exchange – last month. However, the company’s shareholders – which include the Washington DC-based private equity firm EMP Global’s Latin America group – decided to postpone the listing in light of the slip in Mexico’s stock market in May.

A similar drop in the Bovespa stock exchange – which fell 9.5 percent last month – has also caused public listings to grind to a halt in neighbouring Brazil. There, Brazilian communications service provider Telemar – backed by local private equity firm GP Investimentos – is also on standby for an IPO on the Bovespa’s Novo Mercado and the New York Stock Exchange.

The correction in the runaway public markets of India has also delayed the IPOs of a number of local companies there as well, including state-run Power Finance Corporation. The MSCI index for India has dropped over 6 percent in dollar terms for the month to date – and over 16 percent since the start of the second quarter.

Overall, the implications are unclear for those funds being raised and recently raised that will pursue pre-IPO opportunities. One such fund was launched just earlier this week, with Vietnam-based private equity firm Mekong Capital announcing that it had made a final close on $50 million for its Mekong Enterprise Fund II, which will invest in “unlisted companies, which, at the time of the original investment, are typically about two-to-four years away from a listing on one of Vietnam’s stock exchanges,” according to a company statement. Earlier, Japanese VC firm Japan Asia Investment Co and Malaysian bank Maybank announced in mid April that they would co-sponsor a new $50 million Southeast Asian private equity fund to invest in mid- to late-stage pre-IPO companies in the region.

Only time will tell whether the correction is merely a temporary blip, or if it will have a longer lasting effect. Either way, it provides further evidence that the window for exits through the public markets can indeed be slimmer and more difficult to identify in the emerging markets, and that private equity firms operating in these regions need to be nimble…and have a plan B.