Small Funds Show Signs of Resilience in Downturn and Bright Spots Emerge Outside of BRICs

CORRECTION: Issued on 31 July 2013

  • Small private equity funds, raising less than US$250 million, represented nearly 70% of funds that closed in the first half of 2013, compared to an average of 53% over the past two years.
  • Reflecting the cyclical shift to deployment of capital previously raised, emerging markets private equity (“EM PE”) fundraising declined 52% in total fund commitments in 1H 2013, while capital invested declined 11%.
  • While Emerging Asia was still the regional leader, representing 63% of total EM PE fundraising, Latin America’s recent upswing in fundraising activity took the region to a 23% share from 10% in 2012.
  • Two of the ten largest EM PE deals so far in 2013 took place in Vietnam, the year’s second largest deal was in Kenya and the third was largest in Malaysia.

31 July 2013, Washington, D.C. — Private equity firms raised US$10.8 billion through 58 funds and invested US$9.5 billion into 360 deals in the first six months of 2013, a 52% drop in fund commitments and an 11% decline in capital invested from the same period last year, according to the Emerging Markets Private Equity Association (EMPEA). Small funds, less than US$250 million each, showed remarkable resilience in comparison to larger ones and represented 68% of all funds that closed in the first half of the year, versus an average of 53% over the past two years.

While fundraising and investments both experienced slowdowns in the past six months, some bright spots emerged in markets outside the BRICs. Latin America (ex-Brazil) experienced an upswing in the fundraising cycle taking 23% of the share of capital raised for EM PE funds, an increase from a 10% share in 2012. Nearly two-thirds of capital raised for Latin America was in country-dedicated funds with mandates directed outside of Brazil. For capital invested, Sub-Saharan Africa saw the largest regional increase in the first half of 2013, 45% growth compared to the same period last year, following recent periods of impressive fundraising. While the largest emerging markets deal so far in 2013 was in the China-based company Focus Media, Kenya and Malaysia had the second and third largest deals, respectively.

Smaller EM PE Funds Show Resilience, Accounting for Majority of EM PE Funds Closed in 1H 2013

Some of the decline in total capital raised for EM PE funds was the result of the larger concentration of smaller funds closing in the first half of the year. Smaller funds have benefited from the diversity of their investor base, including development finance institutions, funds-of-funds, family offices and local limited partners (“LPs”), in an overall tough fundraising cycle. The 21 small funds that closed on less than US$250 million in the first six months of the year accounted for 22% of capital raised, the highest percentage since 2010.

While funds raising less than US$250 million appeared to be less affected by the recent downturn in private equity fundraising across emerging markets, there has been a significant drop in the number of larger funds raised, as many such funds closed in recent periods. A remarkable ten EM PE funds raising over US$1 billion each closed in 2012. According to EMPEA’s 2013 Global Limited Partners Survey, while the majority of investors surveyed expect to make new commitments to EM PE over the next two years, 36% of LPs plan to maintain their current level of EM PE commitments. This number has risen from 17% in 2012, suggesting that an increasing number of institutional investors are reaching their target level of exposure.

“The resilience of smaller funds in recent months and continued investor interest are proof that the emerging markets growth story remains intact. Funds of these sizes are well-positioned to take advantage of the wealth of middle-market investment opportunities available at smaller ticket sizes in these markets,” commented Robert van Zwieten, President & CEO, EMPEA. “Even the recent demonstrations in Brazil and Turkey are proof positive of growth, where you see a budding middle-class asserting itself in the political sphere. This is the same middle-class driving consumer demand and economic development. Private equity is a compelling way to capitalize on this long-term growth.”

Upswings on Investment Side in Africa and Asia with Notable Deals in Kenya, Vietnam and Malaysia

Investment side upswings are following recent periods of robust fundraising in regions where the pendulum of activity is moving towards capital deployment. In South Asia, while funds raised 62% less capital in the first half of the year than in the same time period in 2012, investments increased 11% to US$1.7 billion. Sub-Saharan Africa had the largest regional increase in investment activity for the first six months of 2013 after record fundraising in prior periods. 36 deals in the region represented US$850 million in capital, a growth of 6% in the number of deals and 45% in capital compared to the same period last year.

Notable deals took place in Sub-Saharan African and Southeast Asian markets. The second largest deal for emerging markets in the first half of 2013 took place in Kenya, a US$600 million growth investment in Delonex by Warburg Pincus. Of the five investments in Malaysia in 2013, CVC Capital Partners’ US$407 million buyout of restaurant operator QSR Brands-KFC Holdings was the third largest emerging markets deal of the year thus far. Companies based in Vietnam closed two more of the ten largest private equity deals through mid-year, including KKR’s US$200 million growth investment into Masan Consumer, and Warburg Pincus and Dragon Capital’s US$200 million growth investment into Vincom Retail. However, the largest deal so far in 2013 was in China-based Focus Media, a US$1.1 billion management buyout backed by the Carlyle Group, CITIC Capital Partners, and FountainVest Partners.

Please note KKR’s US$6 billion Asian II Fund, which reached a final close in July 2013, is not represented in these statistics for the first half of 2013; the amount is included in EMPEA’s Q3 2013 dataset.