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  • Is Emerging Markets Private Equity Dying?Michael CaseyFounder & Managing Director

    November 2016

    porticoadvisers.com

  • Introduction

    1 Is EM PE Dying? | | November 2016

    Periodically o er e la e years, one a i question o ld burrow its way into my mind: is the e er i markets private equity industry (EM PE) dying?

    Some of the data told a straightforward story: stagnant volumes of capital being raised by fewer and larger managers; a smaller number of funds achieving a final close. In other instances, a news story would cross my screen and leave me befuddled. IFC committed to CDH Fund V? The African Development Bank committed to Carlyle? I dont know the rationale for these decisions, and Im certainly not passing judgment on them. They did, however, spark a curiosity to examine EM PEs vital signs.

    The prognosis that follows suggests that existential challenges are besetting the industry, despite its continued viability as an attractive asset class that can create value for investors and investee companies alike. I worry that fewer entrepreneurs will access the human and financial capital they need to grow, fewer people in emerging markets will find jobs, and we all will continue into the morass of secular stagnation.

    I hope that you enjoy this piece, and that it kindles a search for solutions o e i d ry c alle e . o lea e drop us a line and let us know what you thinkwed love to hear from you.

    Best wishes,

    P.S. As Roger Leeds, founding Chairman of EMPEA and Professor at Johns Hopkins SAIS, notes

    in his book on the asset class, a health warning is warranted on EM PE data. Caveat lector.

    ContentsWhere are we in the industry life-cycle? | 2 |

    Are new firms entering? | 9 |

    Are stragglers leaving? | 17 |

    Are there substitutes? | 20 |

    Are legal and regulatory policies

    supportive of industry growth? | 25 |

    Where are we going? | 28 |

    https://www.amazon.com/Private-Equity-Investing-Emerging-Markets/dp/1137435348/

  • Where are we inthe industry life-cycle?

  • The EM PE industry is not growingaFollowing rapid growth at the end of the last decadeand a swift recovery on the heels of the global financial crisisthe volume of capital raised annually has been stagnant since 2011

    73 5

    7

    26

    33

    58 57

    23

    37

    48

    41 42

    57

    47

    15

    2001 02 03 04 05 06 07 08 09 10 11 12 13 14 15 1H 16

    Total capital raised ($B)

    Source: EMPEA, Portico Advisers3

    106%CAGR

    - 0.6%CAGR

    Emerging Growing Shakeout Maturing Declining?

    Chinas expansion, commodity supercycle, global search for yield

    EMs take over as engine of global economy, easy

    liquidity conditions

    China slows, commodities hit,

    liquidity cycle turns

    Consolidation within the industry as number of zombie funds grows

    Is EM PE Dying? | | November 2016

  • A fundraising slowdown is visible across regionsOutside of Sub-Saharan Africa and the MENA region, PE fundraising hauls peaked in 2011 / 2012

    0

    5

    10

    15

    20

    25

    30

    35

    Emerging Asia CEE & CIS Latin America MENA Sub-Saharan

    Africa

    Multi-region

    Private equity fundraising by region and strategy ($B), 2009-15

    Source: EMPEA, Portico Advisers4 Is EM PE Dying? | | November 2016

  • Fewer private equity funds are achieving a closeaWhile an average of ~ 25 buyout funds achieve a close each year, there has been a 30% decline for growth equity funds since 2010

    128

    87

    0

    20

    40

    60

    80

    100

    120

    140

    160

    2009 2010 2011 2012 2013 2014 2015

    # o

    f F

    un

    ds

    # of PE funds achieving a close by strategy

    Buyout Growth

    Source: EMPEA, Portico AdvisersNote: Excludes Venture Capital, Infrastructure & Real Assets, and Private Credit funds5

    >30%decline

    Is EM PE Dying? | | November 2016

  • Capital is concentrating in fewer funds a

    Fund vehicles $1 Billion in size are capturing a larger share of EM PE fundraising, while constituting only 7% of the total number of funds achieving a close in a given year (on average)

    $6.2$12.9 $15.7

    $16.3 $16.1

    $29.6

    $14.5

    0%

    10%

    20%

    30%

    40%

    50%

    60%

    70%

    2009 2010 2011 2012 2013 2014 2015

    % o

    f To

    tal P

    E C

    ap

    ital R

    ais

    ed

    % and volume of capital raised by PE funds $1B in size

    Source: EMPEA, Portico Advisers6 Is EM PE Dying? | | November 2016

  • and in larger segmentsLeading to questions regarding a potential mismatch between capital flows and the landscape of investable companies in certain markets

    0%

    10%

    20%

    30%

    40%

    50%

    60%

    70%

    80%

    90%

    100%

    Emergi

    ng Asia

    Latin

    Americ

    a

    Sub-

    Saharan

    Africa

    Multi-

    Region

    CEE &

    CIS

    MENA

    Volume of capital raised by region and fund size, for vintage years 2012-16

    $1B

    $700m-$999m

    $500m-$699m

    $250m-$499m

    $100m-$249m

  • 8

    A preemptive dispelling of criticism

    Is EM PE Dying? | | November 2016

    I received some gentle pushback on this issue of capital concentration when I wrote an article

    about Sub-Saharan Africas private equity landscape two years ago. To be clear:

    The problem is the thinning out of small-cap and mid-market funds, not the fundraisingsuccesses of larger funds. Many of the larger funds are managed by excellent firms,

    and their ability to scale offers a potent demonstration effect.

    The diminished number of small-cap and mid-market funds is a shame because thereare companies in need of expansion capital and business expertise, and theyre not

    able to secure it. Moreover, it reduces future deal flow for larger funds.

    The available data do suggest that the pools of investable companies at largersegments look relatively shallow, but that could be because there are, indeed, too few

    companies in the formal sector; or simply because obtaining quality data remains an

    onerous task.

    The focus on investable companies misses the broader evolution underway, in whichfund managers are deploying capital into platforms and companies that do not yet

    exist (more on this point later). In addition, it underplays the volume and tranches of

    capital that some EM companies require to achieve scale.

    Objectively, there is a non-zero risk that the concentration of capital in largersegments could lead to poor performance. But investors generally know the peer

    groups of larger managers that are coming to market (often at the same time), and

    they have placed their trust in these managers ability to execute their investment

    strategies with discipline.

    https://www.ft.com/content/b5ef2596-190f-3208-a738-6571591892f8

  • Are new firms entering?

  • Fewer first-time funds are achieving a final closeGrowth equity funds, in particular, are being pummeled as the private capital ecosystem is beginning to take the shape of a barbellmore VC and large-cap funds, leaving a thinned-out middle market

    104

    95

    34

    2526

    19

    24 18

    13

    8

    714 13

    12

    9

    13

    2008 2009 2010 2011 2012 2013 2014

    # of first-time funds holding a final close by strategy

    Venture Capital

    Growth

    Buyout

    Source: EMPEA First-time Funds in Emerging Markets Brief, Portico AdvisersNote: Growth includes mezzanine funds10

    - 10%CAGR

    Is EM PE Dying? | | November 2016

  • And theyre not getting help from DFIsDFIs are committing to more Funds IV+ than to Funds I, II or III, raising questions about GP viability, a DFI flight to quality, and the amounts of commercial capital that DFIs are catalyzing

    0

    10

    20

    30

    40

    50

    08 09 10 11 12 13 14 15 16

    # o

    f D

    FI C

    om

    mit

    men

    ts

    Fund I Fund IV+

    Source: EMPEA, Preqin, Portico AdvisersNote: Includes 12 DFIs; fund # is based on the total number of funds that a firm has raised,

    not simply sequential funds in a series; data through 1H 16 or latest available11

    08 09 10 11 12 13 14 15 16

    Vintage Year

    Fund II Fund IV+

    08 09 10 11 12 13 14 15 16

    Fund III Fund IV+

    Is EM PE Dying? | | November 2016

  • 0

    1

    2

    3

    4

    1 10 100 1,000 10,000

    Fu

    nd

    #

    Fund size ($m)

    log scale

    DFI Commitments by fund #, size, and region, for vintage years 2006-16

    CEE & CIS

    Emerging Asia

    Latin America

    MENA

    Sub-Saharan Africa

    Multi-region

    Source: EMPEA, Preqin, Portico AdvisersNote: Includes 12 DFIs; fund # is based on the total number of funds that a firm has raised,

    not simply sequential funds in a series; data through 1H 16 or latest available12

    +

    Is EM PE Dying? | | November 2016

  • A lack of established GPs inhibits new commitments

    0%

    10%

    20%

    30%

    40%

    50%

    60%

    China India Southeast Asia CEE Brazil Latin America

    (ex. Brazil)

    MENA Sub-Saharan

    Africa

    % of LPs noting that a limited # of established GPs deters commitments to said market

    2012

    2013

    2014

    2015

    2016

    Source: EMPEA Global Limited Partners Surveys, Portico Advisers13 Is EM PE Dying? | | November 2016

  • Despite clear opportunities for alpha in early fundsThe dispersion of returns historica