Private Equity Pumping Into Emerging Markets

According to the Emerging Markets Private Equity Association (EMPEA), fundraising dedicated to the emerging markets over the last three years has totaled more than $118 billion, compared with just $13 billion in the three previous years.   Moreover, last year 204 funds collectively raised $59 billion in fresh capital, a 78% increase over the $33 billion raised in 2006, according to EMPEA, a global industry association that “…promotes a greater understanding of and a more favorable climate for private equity investing in emerging markets,” according to a press release.

“2007 was a year of significant milestones for the asset class. What was once a primarily development finance-backed experiment is now, in many emerging markets, a credible, commercial asset class attracting sizable investments from well-known institutional investors, including public pension funds,” said Sarah Alexander, President of EMPEA, in a press release.

Record-Shattering

Fund sizes in 2007 shattered records. Notable closes, according to EMPEA were:

• a $4 billion oversubscribed pan-Asia fund,
• a $2.1 billion fund for Central Europe, and
• 3 $1 billion-plus country-dedicated funds in Brazil, China, and India.

Nineteen funds had raised $1 billion or more as of December 2007, compared to only 4 that achieved the same milestone in 2006. Average fund sizes also increased sharply, with closed funds averaging $426 million in 2007, versus $272 million in 2006.

Growth also expanded to sector-specific funds, with the most notable increases in natural resources, technology, infrastructure, and agriculture, according to EMPEA.

Funds focused on the emerging markets reached historical highs across multiple emerging markets regions. Emerging Asia remained the premier destination for capital commitments, with $28.7 billion in 2007, roughly 49% of total fresh capital raised ⁽¹⁾ – and a 48% increase over the $19.4 billion raised in 2006. However, EMPEA notes that the growth in Asian fundraising was less dramatic than elsewhere: Central & Eastern Europe saw totals surge by more than 300% due to two record-breaking multi-billion dollar closes. Latin America grew fundraising by 66%, while capital raised for investments in the Middle East surged by 71%.

Subprime’s “Fine”

The impact of the tightening of the global credit markets in 2007 ignited by troubles in the American subprime mortgage market has yet to be seen, according to EMPEA.   Alexander noted, “The markets need time to adjust to this new environment, but it’s unlikely we’ll see the same level of difficulties in getting deals done relative to the US and Western Europe, primarily because use of significant leverage is less prevalent in private equity deals in the emerging markets, and, when debt is used, it can often be provided by local banks that aren’t affected by the credit squeeze.”

EMPEA’s 195 members collectively represent 74 countries and over$700 billion in assets under management.

⁽¹⁾ Adjusting for two very large Central and Eastern Europe funds of $7 billion and $2.1 billion,‘s share of the total remained nearly constant in 2007 at 57%, versus 58% of total funds raised in 2006, according to an EMPEA footnote.

*Reported together as Africa/Middle East in 2003 and 2004. Detail may not sum to totals due to rounding.