EM PE Quarterly Review – Volume V, Issue 2
Viewpoint from Sarah Alexander
The first half of 2009 has been a dismal time for private equity and venture capital firms worldwide, and emerging markets PE fund managers are seeing their share of challenges. The recent upswing in the emerging markets stock indices gives hope that the impact of the financial crisis has already hit bottom in these markets, ahead of developed countries. But even if this trend holds—and it is not yet clear it will—private equity and venture capital fund managers in developing countries are not out of the woods yet.
Fundraising for EM PE remains very difficult, with Q1 2009 totals down 71% year-on-year, with no clear rebound in sight. LPs retain a positive outlook for new EM PE investment opportunities and expect outperformance from legacy and new funds relative to developed market buyouts. However, near-term financing constraints among many Western LPs will limit their ability to commit substantial funds to the asset class this year.
In the midst of this crisis, the financing gap for developing market companies is raising its head, as equity and debt availability is constrained. Fund managers and development finance institutions are looking at innovative ways to fill the gap using debt and mezzanine fund structures and vehicles, but these nascent efforts are not yet off the ground.
In the meantime, GPs are laser-focused on their existing portfolios, most of which contain one if not more businesses whose plan is off-track due to the financial crisis. As the Cambridge Associates benchmark statistics show, one-year returns for the asset class have fallen dramatically. While one-year returns are not a harbinger of real returns for this long-term asset class, they do represent the extent to which fund managers have had to write down their portfolios both to fairly represent current business challenges and to conform with FAS 157 requirements by incorporating public market comparables, if available, in their valuations. Most fund mangers appear to have taken their major write downs at year-end 2008, driving the one-year return to -32%—a painful result, but not as bad as the MSCI EM Index as of that date (-53%) or the Western European PE Index (-40%).
Despite the gloom, there remains optimism about the long-term outlook for EM PE. The record number of registrants (700) at the 11th Annual IFC/EMPEA Global PE Conference signals a commitment among the industry’s professionals to work through this crisis. Additionally, the consensus among speakers at the conference was clear: although the number of funds active in the market will decline in the short-term, there will be solid survivors capable of capitalizing on extraordinary opportunities going forward as valuations drop. The growth capital model remains intact in these markets. The need for equity financing isn’t going away and growth continues, so the best fund managers should be well placed to ride through the storm.