Research

Viewpoint from Sarah Alexander

2009 will go down as one of the most challenging years on record for the global private equity industry. But for PE in the emerging markets, although challenging, 2009 will be also be remembered as the year that set up the longterm development of a stable asset class.

This was the year that emerging markets PE survived intact, unlike earlier in this decade when the industry almost disappeared from the map. While fundraising plummeted in 2009, falling by 65% in the first three quarters compared to 2008, by year end capital raised will likely reach 2006 levels. By mid-2009, EM PE fundraising represented some 20% of global PE funds raised, compared to just 5% in 2004. So while EM PE didn’t grow this year, it took a larger share of a shrinking global pie.

Deal activity, unlike in the Western buyout space, continued in 2009 at a fairly brisk pace. While investment amounts were down by 54% through September, deal activity as measured by number of transactions was down only 26%, suggesting that fund managers took calculated risks and continued to invest in smaller—or, better yet, just cheaper—deals.

2009 will also be remembered as the year when local industries began to take up the slack left by a cash-constrained Western institutional LP base. China accelerated its effort to develop its own brand of private equity. From government-backed funds, to local LPs, to new fund structures, China is betting on the PE and VC industry as critical to its future economic development.

As in China, there is a slowly growing base of domestic institutional capital in many other emerging economies, including Brazil, Colombia, Peru, South Africa, Mexico, Nigeria, and India. In India, although public pension funds are barred from investing in the asset class, several leading domestic fund managers still raised the lion’s share of their capital locally from banks, insurance companies and other institutions. Many of the Western global megafunds have been seen hunting for pension fund commitments in Peru and Colombia.

So what’s the outlook for 2010? There is no question that fundraising from Western institutions will continue to be challenging until they see liquidity from their large buyout funds that represent the bulk of their PE exposure. Development finance institutions will continue, alongside local EM investors, to fill the financing gap and keep established, well-performing managers alive. And there will inevitably be market consolidation, as some funds are simply unable to raise additional capital. But given the explosive growth of 2007 and 2008, pausing for breath, letting the dust settle, and seeing the strong emerge may be just the right recipe for the next stage of the development of the PE and VC industry in emerging markets.