Total assets held by private equity managers based in emerging markets (EM) have increased year-on-year to touch a record high of $300 billion as of September 2015, according to a special report by Preqin.
While the combined assets under management (AUM) of EM-based managers did not see much growth in 2014, rising from $248 billion at the end of 2013 to $258 billion a year later, the growth charted in the first nine months of 2015 was notable.
Total assets have risen $39 billion in the nine-month period primarily based on an increase in the value of assets from which funds have yet to exit, Preqin stated in its Special Report: Private Equity in Emerging Markets
Preqin noted that the level of uncalled capital available for investment peaked at $94 billion at the end of 2013 and has since fallen to $89 billion, while unrealised value has grown from $154 billion to $208 billion in the same period.
“This increase in AUM comes despite the growing interest shown in emerging markets by fund managers based outside of these regions. The proportion of aggregate EM-focused capital which was raised by managers based in these regions peaked in 2011, when they accounted for 77 per cent of the $69 billion raised, but has since fallen year-on-year,” the report noted.
The median net internal rate of returns of EM-based funds have generally been rising since vintage 2008 – 10 per cent for 2010 vintage funds compared with 8 per cent in 2009.
Fundraising slows among EM-based managers
In 2015, EM-based managers accounted for 49 per cent of the $40 billion raised, the lowest level of aggregate capital raised since 2009.
In 2016 year-to-date, EM-based managers have accounted for just a third (33 per cent) of the total capital raised for EM, an all-time low.
2014 represented a record year for EM-focused fundraising in terms of capital raised, with $69.2 billion secured in 235 vehicles closing.
Over the course of the past 10 years, EM-based fund managers have raised an aggregate $322 billion for private equity vehicles.
The majority of EM-based private equity fund managers are concentrated in Asia, specifically Greater China, although there are large numbers in Central & Eastern Europe, South Asia, the Far East and Sub-Saharan Africa, Preqin noted.
As for the proportion of EM-focused funds raised by firms headquartered elsewhere, the trend has steadily increased since 2012.
Fifty-one percent of EM-focused funds that held a final close in 2015 were raised by managers based outside the region, compared with 23 per cent in 2011.
The largest fund raised by an EM-based manager is Inventis China Growth USD Fund VI, which closed on $3 billion in September 2014.
“Emerging markets have developed significantly over the past decade; as many more developed markets have seen slower growth in the wake of the Global Financial Crisis, some economies in emerging regions maintained double-digit growth rates. As such, private equity funds focused on these regions have been able to capitalize on opportunities, and the total assets held by these funds is now just less than $300 billion,” Preqin head of private equity Christopher Elvin commented.
Elvin added that recent years have also seen increased participation in emerging markets from international GPs, which are attracted by the robust underlying demographics and potential for strong returns.
“While managers based in these regions may struggle to compete with the resources of larger market entrants, they might be able to leverage their in-depth local understanding of these markets in order to attract investors,” he said.
Buyout remains a strategy, despite strong VC trend
Buyout remains an important strategy among EM-focused fund managers, even as venture capital and growth funds have together raised 55 per cent of EM-focused capital since 2008.
Buyout funds account for nine of the 10 largest EM-focused private equity funds closed since 2013.
Eight of the 10 largest private equity funds to close since 2013 that focus on investments in EM have been raised by managers based outside these regions.
The largest of these is the 2013 vintage KKR Asian II fund, which secured $6 billion, while Affinity Asia Pacific Fund IV ($3.8 billion), PAG Asia II ($3.7 billion) and RRJ Capital Master Fund ($3.5 billion) also raised considerable amounts of capital.
Noteworthy still is the growing interest in venture capital, being the most sought-after strategy for EM-based investors. 55 per cent of the investors state a preference for the fund type, and only 35 per cent of investors in these regions prefer buyout funds, a lower proportion than for investors in North America or Europe.
EM-focused growth funds have raised $146 billion since 2008, the highest of any fund type, with buyout funds attracting $134 billion of investor capital. Despite only attracting $83 billion of investor commitments, 859 venture capital funds have reached a final close, by far the most of any fund type.
The 625 growth funds that have held a final close since 2008, also greatly exceeds that of buyout funds over the same period of only 249.