Private Equity Investment Increasing Globally, Dry Powder Still a Worry


April 30, 2015

Recent data on the first quarter performance of private equity investment in 2015 shows the industry remains strong. Global growth markets have seen a lot of growth and PE investors are spending a lot of capital for global entrepreneurs now. But at the same time, dry powder remains a key talking point, with private equity funds sitting on top of record-breaking amounts.

Data by the Emerging Markets Private Equity Association (EMPEA) shows capital deployed in emerging markets hit the highest annual total since EMPEA started tracking private equity investment statistics in 2008. Interestingly, Southeast Asia has seen big improvements, although overall investment in China is closing down a little. Furthermore, sub-Saharan Africa and Latin America have been able to increase their own shares of the private equity fortunes.

The First Quarter Results
In the first quarter of 2015, private equity and venture capital fund managers invested roughly $34 billion in the emerging markets. As mentioned above, the biggest winners were Southeast Asian countries, as well as sub-Saharan Africa and Latin America (excluding Brazil). The total amount invested has climbed 26% year-over-year compared to the levels in 2013.
On the other hand, fund managers only raised $8.5 billion for 46 different private equity vehicles focused on the emerging markets. This isn’t a big dip from the $8.6 billion raised in the first quarter in 2014. Yet, a year ago there were 62 funds.

In addition, fund managers deployed 19% less capital in the first quarter of 2015, with the total deal number standing at 316 deals and $5.6 billion deployed. The number of completed deals only decreased by 3%. Emerging markets have been able to increase their share of the invested funds in recent years, although the US remains the largest target for funds. But as global growth has moved to these emerging markets hubs, private equity investment has also followed suit.

Brazil’s Troubles Have Meant Gains Elsewhere
Brazil’s economic situation has meant that private equity investment flows to the country have slowed down. But this hasn’t stopped the region’s other countries for gaining some foothold in the markets. According to the data by EMPEA, Latin America increased its total raised investment levels by 107% in 2014. Fundraising in the region stood at $7.8 billion at the end of 2014, when it was just $3.8 billion in 2013. This gain was also the largest gain since 2011.

Private equity firms have been focused on the region. For example, Advent International closed a $2.1 billion fund at the end of last year, the largest-ever private equity fund in the region.

The Focus Turning Away from China
The focus on emerging markets is starting to slowly turn away from China. In a Forbes interview on the data, Jeff Bunder, a global private equity leader at Ernst and Young, told the newspaper, “Funds that were laser-focused on China are now switching to a Pan Asian focus”. China has turned into a more competitive market for lucrative deals, and countries such as Malaysia and Singapore are starting to be deal hotspots instead. Big private equity firms have turned some of their attention to these other countries in the region. For example, Carlyle Group established an office at Jakarta in 2014.

Sub-Saharan Africa Is the Surprising Newcomer
We’ve previously talked about the rise of private equity interest in the sub-Saharan Africa and the region is a clear newcomer in terms of the emerging markets. In the Forbes article, Mr Bunder pointed out that the African continent has its own complexities when it comes to investments, one of which is the amount of languages spoken. For fund managers, having to learn 56 different languages might be a tougher challenge than making hefty returns!

PE Penetration in Israel Improves, But Drops in the UK
The data also showed some interesting private equity developments in the Western markets. PE penetration, in terms of investment and gross domestic product (GDP) ratio, improved a lot in countries like Israel and the US. In Israel, the ratio went up from 1.47% in 2013 to 1.64 in 2014. In the US, the corresponding figures were 1.14% and 1.27%. On the other hand, the UK saw the percentages drop from 0.99% in 2013 to 0.81% in 2014. Other countries with declining figures included South Korea, Brazil and Turkey, for example.

Dry Powder Worries
But private equity’s dry powder also continues to make headlines. Business Insider wrote on Wednesday, although corporates sitting on mountains of cash have recently made headlines, it is the private equity’s dry powder, which should be the talking point.

The article cited the recent figures by Preqin, stating that dry powder has reached a record amount at $1.2 trillion. Credit Suisse’s Andrew Garthwaite told the newspaper, “For instance, Blackstone, in its first quarter results, reported ‘dry powder’ of a record $6.5bn.”

Furthermore, Garthwaite went on to say, “If we assume that half of PE firms’ available funds are invested, and that a typical leverage multiple for private equity is 4x to 5x, then that could add a further $3trn to corporate firepower.”

Managers Continue to Invest in Emerging Markets
Overall, investment levels in the emerging markets are continuing to rise. In a recent survey by EY of 106 LPs from 30 different countries, 41% were planning to continue allocating more funds from private equity to emerging markets. In 2013, the number was just 32%, so confidence in these markets is growing. In fact, investors aren’t afraid of the risks often involved in these markets. In the same survey, 67% believed the risk profile is unchanged, while they also believe higher returns are on the horizon.

A hefty portion, 78%, of investors felt the emerging market returns have either exceeded or met the expectations they had when they first invested. Private equity industry is doing very well, especially when you look at the emerging markets. It is interesting to see in what directions do fundraising and deal-making take during the rest of the year. If you are looking for deals in the emerging market, visit DealMarket’s private equity platform.

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