01 June 2010

Will emerging markets provide a PE upsurge?

When Bridgepoint Capital agreed to sell UK pet store chain Pets at Home to Kohlberg Kravis Roberts for USD 1,542 million in January, many heralded the return of private equity. There have since been 11 leveraged deals worth over USD 1,000 million announced or completed but the question of how private equity will adapt to the post-Lehman M&A arena still remains.

Data from the alternative assets intelligence service Prequin for the first quarter of 2010 showed only a “slight” improvement in private equity fundraising, with USD 50,000 million raised during the three months – compared to USD 48,000 million in Q4 2009.

Historically the result was still very low and conditions remain extremely challenging. It will take some time for improving global economic conditions to translate into stronger fundraising, and the effect of the sovereign debt crisis is not yet clear.

Tim Friedman, spokesman for Prequin, said: “While confidence is returning to the market, investors are still exhibiting increased caution when making new investments […] More stringent due diligence processes and increased attention towards fund terms and conditions are also causing the fundraising process to lengthen for many firms.”

However, Friedman was optimistic for the remainder of 2010, describing the outlook as “encouraging” as most investors have indicated they will increase activity. Prequin anticipates a more substantial recovery in fundraising for Q2 2010 compared with Q1 2010.

In terms of private equity deal value, sustained growth is proving elusive. According to Zephyr, the M&A database, the total value of M&A deals in January – some USD 12,447 million – dipped by a fifth in the four weeks to February only to surge 70 per cent in March and fall again in April (February: USD 9,926 million; March 16,827 million; April: USD 13,966 million). Private equity deal volume for 2010 peaked at 596 transactions in March but reached a four-month low of 464 in April.

All eyes are on emerging markets for growth but, paradoxically, the high-value deals are still targeting companies in the US and Europe. The largest debt-backed investment in an emerging market company this year was the USD 795 million buyout of Malaysia-based gas storage firm KNM by GS Capital Partners. There were 17 other deals valued in excess of USD 795 million – and all of them targeted US or European companies, according to Zephyr.

This could be set to change as institutional investors participating in the most recent EMPEA/Coller Capital Emerging Markets Private Equity Survey said they plan to accelerate new commitments to this segment. More than half of limited partners currently invested in emerging markets private equity intend to accelerate their new commitments over the next two years, the survey showed.

Erwin Roex, partner at Coller Capital, said limited partners expect emerging market funds to outperform those in developed markets. “Investors are still increasing the proportion of their private equity commitments targeted at emerging markets.”

“Brazil continues to lead the emerging markets in terms of attracting new investors, with almost one in five experienced emerging market investors planning to begin investing in the country,” he said.

© Zephyr