News & Events

When the Money Runs Out

We now have confirmation of what everyone has been living through: fundraising and investment levels in emerging markets fell by over 50% in the first half of 2009 compared to the same period in 2008, according to the latest figures put out by the Emerging Markets Private Equity Association (EMPEA). A total of 84 emerging market funds raised US$16 billion in the first six months of 2009, way down on the US$36 billion garnered in H1 2008. Investment figures tell the same story.

The figures will not come as a surprise to anyone, least of all those that are currently out in the market attempting to raise capital from the world’s capital-constrained limited partners. It is tough out there. “It is very difficult if you are out raising,” says Richard Laing, chief executive of CDC Group. “LPs across the world are facing problems from the denominator effect and so are overweight in private equity relative to other asset classes. They just cannot invest in new funds.” Add to that the lack of distributions from their private equity investments and you have a situation in which the cupboard, once full, is now almost totally bare.

This is especially true of the US endowments, which have traditionally been big supporters of emerging markets private equity. Many have scaled back their overall allocations to private equity and are effectively shut for new business for the time being. The story is the same in the Middle East, where investors were increasingly looking to emerging markets as a home for their capital before the crisis hit hard. Sovereign wealth funds are scaling back their private equity commitments and many smaller banks and insurance companies are halting their investment programmes. The Emirates Insurance Company was recently quoted as saying that it was planning to reduce its commitments to private equity funds gradually because of the crisis and had no plans to invest new capital for the foreseeable future.

Even those funds that reached a close in the first half of 2009 were mainly ones that had started the process before the collapse of Lehman Brothers and so, if you stripped out these, the numbers would tell an even bleaker picture. “The funds that were already in the pipeline before the crisis hit had gained momentum,” says David Wilton, new business manager at the International Finance Corporation (IFC). “Anyone that launched after then has found it very hard, even if they have a good track record. The whole market has been affected.”


The result is stalled fundraisings and delayed processes. “We are hearing of some funds that had planned to come to market over recent times because they had fully invested their previous fund,” says Jennifer Choi, director of research at EMPEA. “Yet, when they looked at their internal resources, they decided that they would have to hold off until conditions improve.” We are also seeing smaller-than-anticipated funds. Actis recently closed its second infrastructure fund at US$750 million – it had been attempting to raise US$1.25 billion. Aureos Capital also struggled with its Latin American fund. Its original target was US$300 million, which was then reduced to US$200 million. It finally closed in August at US$184 million.

Clearly, the development finance institutions (DFIs) have a role to play to ensure that the nascent private equity industry in the poorer regions of the world does not wither on the vine. Yet, even these are struggling under the weight due to a lack of distributions from their private equity portfolios.

“Those that already have large private equity portfolios have not had the capital back that they expected; that applies to us at CDC,” says Laing. “It means that they have less capital available to make new investments.” Indeed, it is believed that one of the reasons the Actis infrastructure fund was much lower than anticipated was CDC’s inability to commit as much as it had originally planned to.

The DFIs are also finding that there are demands for their capital elsewhere. “I was at a recent World Bank meeting,” explains Laing. “There was a whole raft of initiatives being put forward for emerging markets and private equity is only a small part of that. There are a lot of calls on DFI resources and private equity has to compete.”

The IFC is being swamped with requests for capital from private equity fund managers. “We cannot invest in managers that have built track records,” says Wilton. “Yet, we are seeing funds that we have not backed because they are meant to have graduated from us, coming back to us for capital; they cannot get it elsewhere.” It may not have the same kinds of capital constraint that CDC is currently facing, but the amount it can invest in private equity has not risen to take account of the increased demand from private equity. “We have been investing at a rate of about US$400 million a year over recent times and we have the same amount now,” says Wilton. “Yet, our pipeline is in the order of about US$1 billion.”

Limited Capacity

DEG is in a similar position. “Now that conditions are starting to improve on the ground, fund managers are looking at fundraising once more,” says Christoph Evard, who is responsible for DEG’s equity investments in Africa. “Yet, the institutional investors have not come back. The cash issues of the Western investors will not resolve themselves overnight; we probably will not see as much interest in emerging markets private equity as we have over recent times for another two years. That means funds can only turn to the DFIs and they cannot take up all the residual left by the private investors. I am getting more fund proposals than ever before, but we have only got the same pot of money.”

Yet, even where DFIs can support funds, capital will generally be contingent on the fund attracting capital from private investors. “DFIs do have capital available, but they have to look at their catalytic role,” explains Jan Rixen, managing director at European Development Finance Institutions, the umbrella body for European DFIs. “They need to ensure that they are helping funds attract private investors and right now, that is the missing link.”

Looking Ahead

Given the current situation, it seems likely that some funds will not get raised, in particular, those without a track record. We will also see some private equity firms simply disappear as they are starved of capital.

But despite the doom and gloom of today’s market, many believe that the longer-term picture is rather rosier. EMPEA believes that fundraising is likely to pick up this year.

“The world has not stopped,” says Choi. “We are not seeing the kind of capital flight from emerging markets that we would have seen ten years ago. We will not go back to the Stone Age. We believe the outlook for fundraising will be better in 2010 and may match 2006 levels. Over the longer term, the indications are that LPs know that they are under-allocated to emerging markets private equity and it is just a question of when they will have the capital to commit to funds.”

The Quest for Growth

“Things will improve over the next 12 to 18 months,” says Laing. “We are already seeing valuations in our portfolio pick up from their lows of June 2009 and they look set to rise again in December. When investors see this and they compare that with the performance of their Western European and US funds, from which there are still issues to emerge, they will look at emerging markets once more. Investors should be looking for growth and they will find it in emerging markets. By 2010 or 2011, we will see a return of confidence and LPs will start to recover their appetite for emerging markets. I am bullish that it will get better.”

Wilton agrees. “The opportunity is still there,” he says. “We have analysed our portfolio and the returns have remained good even throughout the crisis unlike in past crises. Once LPs have started to iron out their own issues, they will look to get more growth in their portfolios and that will mean emerging markets.”

Investing Locally

There will also be new sources of capital for funds to tap. Local LPs are starting to emerge in many markets as regulations change to enable them to invest in private equity. “We are seeing greater support of domestic LPs for local private equity funds,” says Choi. “They are looking locally rather than internationally; Indian fund managers are doing well raising capital from Indian institutions, for example.”

It is a trend noted by Evard, too. “This should be a good opportunity for local investors who understand the local markets and risks to commit to local funds. We are now seeing a few local investors that have not previously invested in private equity looking at funds.”

They may not be able to pick up all the slack left by international investors, but it is a step in the right direction.

This article first appeared in emerging Private Equity (Pg 4, Vol 3, Issue 6, November/December 2009). For more information, please visit