07 Mar 2013
Public equities in most emerging markets are strongly biased to natural resources or a few sectors, according to the Emerging Markets Private Equity Association (EMPEA).
EMPEA is an independent, global membership association whose mission is to catalyse private equity and venture capital investment in emerging markets around the world.
According to EMPEA, private equity is the only way to capture greater diversity of sectors and capture the sectors standing to benefit the most from the growing middle class and thus, the consumption story in these markets.
Early this year, EMPEA released a report that showed that emerging markets private equity fundraising continues to take a greater share of global private equity commitments, accounting for 20 percent of all capital raised in 2012, up from 12 percent in 2007 and 5 percent in 2003.
However, the report also noted that private equity investors were ditching BRICS and eyeing Asia instead.
Read the article here.
Asked what is driving investors away from the BRICS countries to Asia, EMPEA explains that the emerging markets witnessed several prominent private equity cycles in 2012.
Brazil provided the strongest counter to capital invested falling in the BRICS - China (falling 33 percent to US$7.1 billion, a five-year low) and India (falling 57 percent to US$2.7 billion, a seven-year low) as investment in Brazil increased 78 percent to US$4.4 billion.
This rise in investment in Brazil is not surprising after record private equity fundraising and there is a lot of capital to deploy, says EMPEA.
Following a record fundraising year for Brazil in 2011, where five funds each raised over US$1 billion, capital raised for Brazil declined more than 63 percent to US$2.6 billion in 2012 as these left the fundraising trail and began deploying capital, driving investment volumes up 78 percent to US$4.4 billion.
EMPEA says on BRICS' share of emerging markets fundraising, BRICS as percentage of emerging markets has actually fluctuated a bit – 51 percent in 2010, 69 percent in 2011 and 38 percent in 2012.
Major drop in 2012 as China and India fell and regional Asia funds jumped, meaning investors may be accessing China and India through regional funds, not just country-specific funds, which is where we saw the decline.
They note that in India, there are still valuation challenges as the public markets do not provide adequate comps to value private equity deals, and the investors in private equity funds are still waiting to see exits on existing funds before committing more capital.
“While investors like the ‘China growth story,’ there are a host of factors at play that possibly reduced the number of commitments to funds from investors in 2012 than would be expected.”
For example, people are waiting out the market on government changes and policy shifts.
There is a lot of capital going into China and people are seeing where it is going and the returns.
From an investor point-of-view, there is also the decision of whether to invest in China-dedicated funds, which is where the China figure is coming from, versus pan-Emerging Asia vehicles which can accommodate larger pools of capital and incorporate the growth stories of other markets in the region, according to EMPEA.
Emerging markets are the undisputed future for investment. At EMPEA’s London Conference in October, John Powers, chief executive officer of Stanford Management Company drew a comparison to the old story about Willie Sutton’s reply when asked why he robbed banks : “why invest in emerging markets? Because that’s where the money is!”
Institutional investors, your pension funds, endowments, insurance companies, have obligations to make and they are not going to meet those obligations with investing in low growth economies, says EMPEA.
Emerging markets are key to hitting the numbers they need and growing portfolios – they are not a “nice to have” or “fun to have,” but now, a “must-have.”
As an example, emerging markets contribute 35 percent of global GDP and 85 percent of the population.
In 2012, projected growth in these markets was 5.6 percent versus 1.4 percent growth in advanced economies while the annual consumption in emerging markets is set to increase to US$30 trillion by 2025 (half of the global total), according to McKinsey.
Furthermore, says EMPEA, penetration of private equity in these markets is still comparatively low – not over-heated, pointing out that investors want exposure to high growth companies/markets, and listed markets don’t offer investors the same depth of exposure to economy, including sector diversification.
Private Equity in Africa
EMPEA notes that fundraising and investment totals in Sub-Saharan Africa (SSA) ended the year with a modest increase, closing at US$1.4 billion raised and US$1.2 billion invested in 2012 compared to US$1.3 billion raised and US$1.1 billion invested in 2011.
However, this volume of capital masks a marked uptick in private equity activity, with the total number of funds closed and investments made increasing by 66 percent and 35 percent, respectively, signaling the prevalence of smaller funds and transaction sizes across the region.
Asked about what attracts investors to Africa, EMPEA says investor interest in SSA is diversifying beyond the traditional hubs—the economies of Central and East Africa witnessed a 61 percent increase in the number of private equity investments year-on-year.
Amid a global slowdown, SSA’s share of emerging market private equity investment increased from 5.1 percent in 2011 to 7.4 percent in 2012, suggesting an improvement in investor perception of the region’s risk-return profile and a willingness to capitalise on the opportunities presented by many of its rapidly growing economies.
Commenting on the EMPEA report, Kevin Teeroovengadum director for real estate at Actis says it demonstrates the trend of higher investment being made in emerging markets over the last decade, albeit the one-off drop in 2008/09 following the collapse of Lehman brothers at the end of 2008 and the fact that global investors preferred to sit on liquidity rather than increase their commitment to private equity funds.
Actis is a pan-emerging market private equity firm with US$5 billion managed by 105 investment professionals.
He points out that they’ve seen confidence back in the emerging market after 2009 and the percentage of fund raising for emerging market increased from 15 percent in 2008 to nearly 20 percent by 2012 driven mainly by two key markets - China and India.
“The same trend can be noticed for SSA though as a percentage of global private equity investments it’s still less than one percent”
However, says Teeroovengadum, this tells us private equity funds still have a lot to offer to Africa pointing out that he is confident that the percentage of investment will increase over time.
On the prospects for SSA, Teeroovengadum says it is difficult to predict what will happen in 2013, but perhaps one needs to look at a seven year view of say for example, how much investments will be made in the region by 2020 and this will increase.
Teeroovengadum says this is because there are huge resources in a number of SSA countries such as oil, gas, coal and copper in countries such as Mozambique, Zambia, Ghana and Nigeria.
There is also the rise of the middle class in Africa with a growing and young population and this is bound to follow the same growth cycle that occurred in India and China 10 to 15 years back, he says.
Teeroovengadum believes now is a good time to be in Africa saying one of the trends likely to characterise the private equity sector in Africa is the fact that global investors have got their eyes on the African opportunities and do believe in the African story.
“There are good companies on the continent that can make use of private equity funds to take them to the next level, not only by bringing capital but also by bringing in best practice expertise to assist these companies to grow faster and implement the best systems/process and latest technologies,” he says.
Stewart Shaw-Taylor, head corporate and investment banking real estate at Standard Bank points to a changing African investment landscape and growth of the formal retail sector in SSA can be expected.
“This is set to continue with Africa being clearly part of South African and other multi-national corporate expansion strategy going forward,” he says.
Shaw-Taylor says on a macro-economic level, GDP growth is forecast to reach between 6 and 10 percent for SSA over the next few years.
This will be due to a growing population in key locations, increase in political stability in the region and the deepening financial sector and increasing technological advances with the prevalence of mobile phones and other technologies.
He says increasing transparency in SSA makes this region more attractive for foreign direct investment into projects.
“We are seeing increasingly large investments being made into resource rich countries like Angola, Nigeria and Mozambique.”
Shaw-Taylor points out that investors into these countries face a lack of quality real estate in the residential, hospitality and commercial office sector as well as in logistics and warehousing.
“The social and economic impact of investments will in turn make real estate investment in the retail sector more feasible.”
He adds that the continued support of resources growth on the continent and economic growth is the key driver of change in Africa. – Denise Mhlanga
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