PE Fundraising and Investment Activity Experiences Upturn in Emerging Markets as Investors Access Opportunities through Multiple Strategies

• Fund managers raised US$20 billion for emerging markets private equity through the first six months of 2014, a 48% year-on-year increase and on pace to surpass last year’s total.
• US$14 billion was invested in the first half of 2014, a 28% year-on-year increase, and also on pace to reach or exceed last year’s total.
• The success of large funds in fundraising for 1H 2014 led to continued concentration of capital in fewer funds.
• Fund strategies diversified, with buyout vehicles and venture capital vehicles accounting for 37% and 27% of funds raised, respectively.
• China and India accounted for 19 of the 28 emerging markets venture funds to hold a close.

13 August 2014, Washington, DC – Emerging markets private equity (“EM PE”) fundraising and investment activity in 1H 2014 showed positive signs of growth, as funds raised and capital invested increased year-on-year. Fund managers raised US$20 billion and invested US$14 billion through the first six months of 2014, corresponding to a 48% and 28% increase, respectively, compared with the same period in 2013, and on pace to surpass last year’s totals. EM PE’s share of global private equity funds raised increased from 11% in 2013 to 13% in 1H 2014, an indication of recalibrating fundraising levels across both emerging markets and developed markets, after the latter witnessed high levels last year. As a percentage of global PE investment, emerging markets maintained its 10% share, on par with annual proportions since 2010.

Well-Established Fund Managers Return to Market with Successful Fundraises for Large Vehicles

EMPEA’s Global Limited Partners Survey, released earlier this year, noted that 54% of LP respondents plan to increase the dollar value of new commitments to private equity funds in emerging markets over the next two years, and the increase in funds raised in 1H 2014 lent support to this survey response. Capital raised increased 48% in 1H 2014 compared with 1H 2013; yet, only four more funds held a close in the first half of the year compared with the same period last year, suggesting a continued concentration of capital in fewer funds. Fund managers with established track records raising large funds accounted for a number of the EM PE vehicles holding closes in the first six months of 2014. EM PE-focused funds raised by managers TPG, CVC Capital Partners, Affinity Equity Partners, Mid Europa Partners, The Carlyle Group, IDG Capital Partners and Sequoia Capital all held closes above US$500 million in the first-half.

“Large and established fund managers continue to raise an ever increasing proportion of capital in EM PE. These funds are investing in the types of fast-growing companies that can absorb larger amounts of capital. These are the EM companies that investors anticipate will become the national, regional or global champions and brand names of the next decade,” commented Robert van Zwieten, President and CEO of EMPEA. “One layer down, smaller fund managers are investing in a plethora of entrepreneurial activity, the SME space, which in many markets is starved for private capital.”

The three largest EM PE funds to hold a close in 1H 2014, Affinity Asia Pacific Fund IV, CVC Capital Partners Asia Pacific IV and TPG Asia VI, and all with buyout strategies and pan-Asia remits, together accounted for US$5.1 billion, or 34%, of the first-half capital raised for Emerging Asia. For Sub-Saharan Africa-dedicated funds, the US$2.2 billion capital raised in the first six months of 2014 surpassed annual totals for the region since 2008. This was driven by four funds raised by The Carlyle Group, Amethis Finance, Helios Investment Partners and Investec Asset Management, which represented 75% of the total capital raised for the region. Smaller funds focused on a single market or niche strategy also successfully raised capital, including the first private equity fund focused on Ethiopia, raised by Schulze Global Investments, which held a first close of US$87 million, and Alta Growth Capital’s follow-on Mexico fund, which held a final close on US$142 million.

Maryam Haque, Head of Data and Analysis at EMPEA, noted, “Well-known global fund managers entering new markets like Sub-Saharan Africa opens the eyes of new institutional investors. The Carlyle Group’s first Sub-Saharan Africa-focused fund and KKR’s first investment on the continent in Ethiopia puts the region on the radar of LPs who have not yet committed capital there. These firms’ activities can help to lower the risk perception of these markets.”

Investors Look to Venture Capital as One of Multiple Strategies for Private Equity in Emerging Markets

Capital raised for private equity fund strategies diversified in 2014, with buyout vehicles and venture capital (“VC”) vehicles accounting for 37% and 27% of funds raised, respectively. Funds raised by buyout-focused vehicles in 1H 2014 represented the highest proportion of total capital raised since 2008, and the surge in VC fundraising led the strategy to surpass growth capital vehicles for the first time since EMPEA began tracking statistics in 2006. Diversification of fund strategies was most pronounced in Emerging Asia. Of the 28 emerging markets VC funds to hold a close in 1H 2014, 19 had a geographic focus on China or India. Only one of ten funds raised in 1H 2014 for India focused on growth capital, while seven were focused on VC and two on special situations. In China, VC-focused funds accounted for 27% of total capital raised for Emerging Asia.

On the investment side, China and India also dominated, together accounting for 85% of all investments in Emerging Asia in 1H 2014, their highest share since 2011. VC deals in China increased four-fold compared with the same period last year, contributing to a 96% increase in total capital deployed in the country. Multi-strategy firms such as Warburg Pincus, Orchid Asia and General Atlantic contributed to this growth.

At a sector level, fund managers increasingly looked to emerging markets for technology products and services that can meet the growing demand from business and consumers. The technology sector attracted the highest number of VC deals, while companies in the consumer sector received the most capital in 1H 2014. Within the consumer sector, e-commerce companies, Meituan and Mogujie.com in China and Snapdeal in India, comprised the three largest VC investments of the first six months.

“With the substantial venture funding going into China and India’s e-commerce and social media sectors, we expect to see the initial phases of localization and adaptation ushering into true innovation. This evolution could come about rather quickly,” remarked van Zwieten.

Emerging Asia Continues to Dominate, Sub-Saharan Africa Gaining Ground

Emerging Asia fundraising and investment in the first half of 2014 accounted for 76% and 78% of overall EM PE, respectively. In comparison, Sub-Saharan Africa gained the most ground, comprising 11% of total capital raised for emerging markets, the highest proportion on record. Within Emerging Asia, Southeast Asia did not maintain its high pace of fundraising and investment levels seen in 2013 and witnessed 42% and 40% declines, respectively, due in part to cyclical effects following a banner year for the region. Nonetheless, investor interest beyond the BRICs continued with the CEE and CIS markets seeing the second highest first-half fundraising totals for the region in the last six years, raising a total of US$1.5 billion in 1H 2014. Unrest in Russia and Ukraine’s uncertainty about the future corresponded to a shift in capital raised to neighboring markets, where funds targeting Central and Southeastern Europe, the Baltics and Turkey accounted for 75% of the capital raised for the region. Other markets outside the BRICs receiving interest in the first six months of 2014 included Colombia, which hit a five-year high in capital invested of US$462 million, and Nigeria, where fund managers deployed US$375 million in capital, the most on record for the country.

2014 is on pace to finish with year-end increases in fundraising and investment for emerging markets in total. Many fund managers continue to look to deploy capital raised in previous years, while a number of others have successfully come back to market and held closes or expect to this year.

###

About EMPEA

EMPEA is the global industry association for private capital in emerging markets. We are an independent non-profit organization. As EMPEA celebrates our 10th anniversary in 2014, we have over 300 member firms, comprising institutional investors, fund managers and industry advisors, who together manage more than US$1 trillion of assets and have offices in more than 100 countries across the globe. Our members share EMPEA’s belief that private capital is a highly suited investment strategy in emerging markets, delivering attractive long-term investment returns and promoting the sustainable growth of companies and economies. We support our members through global authoritative intelligence, conferences, networking, education and advocacy.