The shape of PE in emerging markets

January 2013  |  FEATURE  |  PRIVATE EQUITY

Financier Worldwide Magazine

January 2013 Issue

January 2013 Issue

The economic crisis faced by the eurozone and the rest of the ‘old world’ has seen the world’s emerging markets become an increasingly popular destination for private equity (PE) investors. New investment opportunities have appeared in Latin America, emerging Europe and South East Asia. Brazil, Russia, India and China (the BRICs) in particular, have seen extraordinary levels of funding raised since 2008. 

According to Jennifer Choi, vice president of the Emerging Markets Private Equity Association (EMPEA), investment and fundraising for emerging markets fell in the first three quarters of 2012. This decline, argues the EMPEA, is a result of the continuing global slowdown. While it is true that funding has fallen across the emerging markets and confidence in these regions has been shaken, the outlook for future investment and prosperity is far from negative. The cyclical nature of the PE industry would suggest that the dropping off of these numbers is no great cause for alarm. It is fair to say that the emerging markets still remain an attractive proposition for firms.

Since the onset of the financial crisis in 2008, the emerging markets have demonstrated themselves to be more robust than their counterparts in more developed countries. Free from the fear of recession and the sovereign debt millstone that continues to weigh down large parts of Europe, the macroeconomic climate and continuing improvements in infrastructure of the emerging markets have proven to be very popular, with firms looking for investment opportunities. Research agency Preqin reports that 72 percent of limited partners will invest in, or consider investing in, emerging markets in the next 12 months. Furthermore, 95 percent of limited partners interviewed expect to increase their exposure in these markets during the same period.

Latin America

The Latin American market has become a PE leader in its own right. Whereas previously an emphasis has been placed almost exclusively on Brazil, the region as a whole has proven extremely successful in attracting PE investment. Accordingly, Latin America, excluding Brazil, rose to first place in the EMPEA 2012 survey, becoming the most attractive region globally for emerging market PE investors, narrowly beating competition from Brazil itself, China, and Southeast Asia. 

Other nations in the region, particularly, Mexico, Peru and Colombia, have proven to be fertile environments for investment. Indeed, Mexico and Colombia have seen levels of PE investment in their countries expand rapidly since H1 2011, rising from $84m and $1m to $228m and $99m respectively in H1 2012. Research presented in Ernst & Young’s (E&Y) joint report with the EMPEA indicates that investor interest in Latin America is at an all time high. 2011 saw 15 percent of all global PE funds raised in the region. 2004 saw only 4 percent. Furthermore, although there has been a decline in funds raised within Latin America, investment and spending has continued regardless. The first half of 2012 saw 90 deals completed, worth a total of $2.73bn – up from the $2.67bn generated during the same period in 2011.

The Latin American Private Equity & Venture Capital Association (LAVCA) announced that a record breaking $10.3bn of funding was committed to the region in 2011, up from $8.1bn in 2010. Although the first six months of 2012 saw only $1.9bn of funding raised, there is no cause for concern. It is fair to assume that the vast level of funding generated over the last two to three years could not possibly be maintained. Cate Ambrose, president of the LAVCA bears this theory out, telling the Financial Times “if you raised $1bn last year then you are not going to raise $1bn this year because someone has to go and invest the $1bn that has already been raised first.” Ms Ambrose noted that PE’s interest in Latin America is as strong as ever. “Latin America is a region that is not going away” she said, “it’s going in one direction: up.” Patrice Etlin, managing partner of Advent International agrees with this appraisal of fundraising in the emerging markets, noting that “it usually takes three to four years for capital to be deployed. The fundraising cycle should pick up again in 2013 and 2014.”

Brazil, despite being overtaken by the Latin American block is still the leading light in the region, generating 45 percent of Latin American funds and 83 percent of deals struck in the region, by value. Though there are some regulatory and tax difficulties, the country’s burgeoning middle class and increasingly positive exit options make it an incredibly attractive proposition for PE firms.

Equally, although infrastructure within Brazil has improved enormously since 2002, the World Economic Forum’s survey of infrastructure quality only awarded the country a score of 3.6 on a scale of one to seven. Bearing in mind this poor rating, and with both the FIFA World Cup in 2014 and the Olympic games in 2016 being staged in the country, the continuation of its program of infrastructure improvement is imperative. In August, the Financial Times noted that the Brazilian government looked to invest $470bn, in conjunction with foreign investors, into improving its roads, ports, airports and power plants. This represents an enormous opportunity for investors within the region.

East Asia

Despite the fact that China has seen a significant slowdown in 2012 compared to 2011, the figures are still encouraging. Q1 and Q2 in China saw the total value of announced deals reach $1.9bn and $2.5bn respectively. Total exits for Q2, according to E&Y, hit $1.3bn. China is still the most popular region with investors, taking 38 percent of all investment in the BRIC nations.

The drop-off of capital activity recorded within the greater Chinese region can be attributed to some extent to a disparity in price valuations between buyers and sellers. Equally, escalating concerns over the sustainability of the Chinese export market has led to some potential investors meeting the unrealistically high valuations placed on their assets. A Bain & Co report expects PE deals completed in China this year to match 2011’s $5.3bn or to post a decline before entering a period of revival in the next two years.

Although the expected growth of China seems to have stalled recently as the region has felt the impact of the European debt crisis, the wider Southeast Asian market maintains a positive outlook. A number of PE firms, such as KKR and the Carlyle Group, have opened offices in the region and have begun to expand their operations. At a press conference on 27 October, Henry Kravis of KKR noted “Companies of all shapes and sizes need and want growth capital; we see tremendous opportunity in the region. Southeast Asia is our most active market in Asia after China.” KKR has raised over $4bn in its second Asian fund, and is hoping to raise $6bn in total. Singapore, Indonesia and Vietnam are also helping to drive to the region forward; these nations have quickly become attractive hotspots for investors.


Russia currently stands as the least popular of the BRIC powerhouses, according to data from Preqin. That said, it is doing all it can to make itself more popular with investors. Entry to the World Trade Organistaion (WTO) in August 2012 will make the country a far more viable option for PE firms in the future. According to E&Y, over a quarter of the 100 PE investors interviewed said they will be increasing activity in Russia in the next 12 months. Russian PE firm Baring Vostok announced a fund of $1.5bn in October, the largest fund ever raised in the country. This new record-setting fund is a sign of new PE investment faith in the country.

Another reason for PE firms looking to invest in Russia is the new generation of ecommerce companies established in the region. The rapidly expanding ecommerce sector and business-to-business markets have been drawing the attention of PE investors, with Russia now surpassing Germany as the largest internet market in Europe. The Financial Times estimates that the ecommerce market will be worth $100bn by the end of the decade.


India enjoyed significant growth in PE investment throughout 2011 which unfortunately has not been sustained in 2012. Worsening conditions within the economy led to a drop-off in PE investment over H1 2012. GDP growth has slowed and the country has struggled with rising inflation and increasing fiscal debt. Despite these problems, India is still an attractive prospect for investors, particularly in light of an increase in exit activity in H1. Exit value, according to KPMG, is up. The country saw 66 transactions with a total value of $1.6bn, rising from 63 transactions valued at $1.5bn in H1 2011. Fundraising has declined by 43 percent in the region, but again, this is not to be taken in isolation – fundraising globally has fallen. India remains an attractive proposition for investors.

Emerging Europe

Emerging Europe has seen significant improvement in 2012, belying the notion that PE investment has faltered in the emerging markets. Located in central and Eastern Europe, these markets are predominantly free from the continuing debt crisis. 

According to data released by the EMPEA, the emerging European nations saw $4.2bn of PE funds raised between January and September 2012, double the amount raised in the same period in 2011. Furthermore, the European Bank for Reconstruction and Development has forecast that the region will grow 2.7 percent in 2012, with 3.2 percent growth predicted for 2012. Foreign direct investment (FDI) in the region is also increasing, most notably from the BRIC nations, according to E&Y’s mid-year European Attractiveness Survey. During H1 2012, BRIC nations were responsible for 5.7 percent of FDI projects and 7 percent of jobs created in Europe. It is estimated that FDI in the region will rise to around $172bn by 2014.

A number of global factors have helped curtail the runaway progress that had been made by the emerging markets. Though we have started to see a recovery in certain regions, a sense of uncertainty still lingers and the eurozone debt crisis and fears of recession loom large. 2012 has also seen uncertainty in the world’s biggest economies – the US election and Chinese leadership transition have undoubtedly taken their toll.

Although there has been a marked reduction in the levels of funds raised by firms in the emerging markets, this is not due to these regions becoming any less popular with investors. Rather, the drop-off in funding is in line with the cyclical nature of fundraising. Fundraising across the emerging markets has generated billions in the last two to three years; accordingly, we have seen that money begin to be invested, and many analysts are pointing to 2013 or 2014 as the start of the next great fundraising cycle.

© Financier Worldwide


Richard Summerfield

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