Money wanes for EM-focused private funds

Posted on September 10, 2016

A Chinese investor walks past screens sh...A Chinese investor walks past screens showing stock indexes at a trading house in Shanghai on August 13, 2010. Chinese shares closed up 1.21 percent amid growing signs that the world's third-largest economy is slowing, making further tightening policies unlikely, dealers said. AFP PHOTO / PHILIPPE LOPEZ (Photo credit should read PHILIPPE LOPEZ/AFP/Getty Images) high frequency©AFP

Fundraising by private capital funds specialising in emerging markets fell sharply in the first half of 2016, even as investors poured money into public markets.

Investors shovelled a net $61.6bn into emerging market equity and bond funds between March and June, more than making up for outflows in January and February, according to the Institute of International Finance, an industry group, as sentiment sweetened towards EMs, as the first chart shows.

    However investors in private equity, private credit and infrastructure and real asset funds are shying away from emerging markets.

    EM-focused private capital funds raised just $15.1bn in the first six months of 2016, 33 per cent less than in the same period last year. The sector is on track for its worst year for fundraising since 2009, in the depths of the global financial crisis, when EM funds raised just $25bn, as the second chart shows.

    In contrast, private funds focused on developed markets raised $210bn in the first six months of the year and are on course for their best full-year total since 2007.

    As a result, emerging market funds accounted for just 7 per cent of industry-wide capital raising, the lowest figure since at least 2006, as indicated in the third chart.

    Robert van Zwieten, president and chief executive of the Emerging Markets Private Equity Association, which compiled the data, said: “Ultra-low or negative interest rates across developed markets have again spurred large amounts of capital to be invested in emerging markets, driven first and foremost by the search for yield.

    “However, most of the money appears to be going towards public markets. This is noteworthy since EM private markets have significantly outperformed EM public markets over every time period.”

    Jeff Schlapinski, director of research at EMPEA, said that when sentiment towards the developing world turns, as it did in March, “the pace of the turnaround does tend to happen much more slowly in private equity than in public markets”.

    Mr Schlapinski added that relatively few high-profile managers have been marketing EM-focused funds this year, “given that so much was raised in the last two years”, some of which will not yet have been put to work.

    The decline in fundraising was particularly sharp for emerging market infrastructure and real asset funds, where five vehicles raised $1.6bn between them, compared to full-year figures of 25 funds raising $6bn in 2015. Even in 2008, in the depths of the financial crisis, this sector saw commitments of $4.7bn.

    EM-focused private equity funds also appear to be out of favour, with 77 vehicles raising a total of $10bn in the first half, compared with full-year figures of 183 funds raising $36bn in 2015.

    Chart: EM private capital funds

    Only private credit funds are holding up, having raised $3bn in the first half, compared with $5.9bn during 2015.

    The most successful houses in the first half of the year were Beijing-based Hony Capital, which raised $1.7bn for a China-focused private equity vehicle (taking its total to $2.7bn), Australia’s Macquarie, which had commitments of $1.2bn for an Asian infrastructure vehicle, and San Francisco’s Farallon Capital Management, which raised $1.12bn for an Asian special situations fund.

    Private funds also deployed little money in the first half of 2016, making investments of $13.3bn, 20 per cent down on the same period last year, putting them on course for their quietest year since 2010, as shown in the second chart.

    Chart: EM fundraising and investment

    The slowdown was particularly notable in the consumer goods and services sectors, with investment instead rotating towards more defensive industries such as healthcare and business services.

    The largest deal completed in the first half was a $724m takeover of Singapore-listed medical device maker Biosensors International by Hony and Chinese peer Citic.

    China itself bore the brunt of the pause in activity, however, with investment plunging 59 per cent from the same period last year. Stripping out China, investment actually rose from $8.6bn in the first half of 2015 to $10bn, driven by growth in Southeast Asia.

    EM investing: Why it is back in fashion

    EM markets

    Switch into emerging markets is less about potential growth and more to do with stagnation at home

    Recession-hit Russia was out of favour, with not a single fund focused on the countries of the former Soviet Union closing in the first half of 2016 and only one significant deal completing — Moscow-based Elbrus Capital’s $131m acquisition of online job search platform Headhunter from Mail.ru.

    Just $65m was raised for equally troubled Brazil, the lowest tally since 2006 and a 96 per cent year-on-year slide. In contrast, $497m was invested in Mexico, 30 per cent more than the sum put to work during the whole of 2015.

    Sub-Saharan Africa saw a 75 per cent drop in capital raising to $724m, which EMPEA attributed to a lot of regional managers being in a deployment phase after raising significant sums in recent years. Despite this, just $584m was deployed, a 10 per cent year-on-year decline, driven by a retreat from South Africa.

    Turkey has seen a vote of confidence, however, despite worries over terrorism, a refugee crisis and the fallout from the country’s failed coup, with Dubai-based Abraaj Group closing a $526m Turkey fund in July.

    “That is an example of a fund manager and their investors taking a long-term approach to investment in a market and looking past some of the short-term news,” said Mr Schlapinski.

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