EM PE Quarterly Review – Volume V, Issue 3
Viewpoint from Sarah Alexander
With consensus growing that we are turning the corner to recovery, now seems an appropriate time to take stock of the impact of the crisis on emerging markets private equity.
The good news is that most emerging economies weathered the crisis intact, and some are in fact leading the global recovery. The not-so-good news is emerging market fund managers’ dependence on the hardest hit Western institutional investors has made fundraising extremely difficult. As reported in this issue, fundraising through mid-year fell 55% year over year, testament to the internal capital constraints tying the hands of even the most enthusiastic potential investors for the next few quarters. The 52% year over year drop in investments, by contrast, seems to be a temporary side effect of the crisis. Fund managers who have capital were waiting for markets to stabilize and valuations to sink lower. There are already signs of a pick-up in deal activity in the second half of the year. To put the gloomy start to 2009 into perspective, it’s important to note that fundraising and investment totals for the first six months of 2009 still exceed those for all of 2004, and are on pace to match 2006 activity levels.
One key driver for the continued vibrancy of the asset class will be increased diversification of sources of capital to include local institutions, and the necessary regulations allowing for comingled capital. This issue includes expert commentary from EMPEA members Clifford Chance and KPMG on the legal and tax considerations for creating such a framework for China RMB funds, and serves as an excellent preview of the topics for discussion at the upcoming 2nd annual Beijing Private Equity Forum, co-hosted by EMPEA and the Beijing Private Equity Association and taking place November 8th and 9th.
While the China growth story has been a pivotal part of the recovery narrative, the expected boom in distressed investments has yet to materialize. EMPEA’s findings from a recent study for the International Finance Corporation, summarized in this issue, suggest that pockets of distressed opportunities do exist, particularly in Emerging Asia and Central and Eastern Europe. However, most sellers remain more “stressed” than distressed, as use of leverage leading up to the crisis was minimal, and restructurings have been slow in coming. A small set of players are well-positioned to exploit the growing stream, rather than flood, of deal flow as it emerges.
Looking ahead to our inaugural Africa PE event with the Financial Times on November 2nd, and the 5th Annual Emerging Markets Private Equity Forum on November 3rd and 4th, we anticipate some vigorous stock taking from the podiums and in the hallways of London. We hope you can join us there.