Private Equity’s Public Pain Pricks
The Emerging Markets Private Equity Association reported first-half respective 50 percent and 10 percent drops in fundraising and allocation offset by geographic diversification, including the second largest deal for the period in Kenya. $10 billion was mobilized for 60 funds, three-quarters under $100 million, and the same amount went into 350 transactions. One-quarter of the capital was for Latin America ex-Brazil pools, and Sub-Sahara Africa saw the highest annual regional increase at 45 percent. Smaller vehicles may benefit from a wider investor base drawn also from development lenders, family offices and local limited partners, the group believes. According to its survey of big institutions, one-third intends to maintain rather than elevate current exposure, with middle-market companies a main target. A $6 billion Asia structure from buyout giant KKR closed too late to register in the tally but represents momentum going into the third quarter following two major Vietnam transactions. The $1 billion Carlyle Group acquisition of China’s Focus Media was the leader, but mainland and Indian activity otherwise cooled. In Africa $850 million went to 35 placements as frontier destinations regularly feature in the portfolios of member firms with $1 trillion in assets. Anti-poverty advocates have drawn attention to public equity engagement there as well, with a recent paper by the Washington-based Center for Global Development highlighting the lack of correlation for outperformance and crisis avoidance. The continent only receives one percent of global flows, and African exchanges are also unsynchronized except where cross-listings exist as in Kenya and Uganda and Botswana and South Africa. The ratio to the S&P 500 has been under 0.5 and even though Johannesburg accounts for over 80 percent of the area’s capitalization, co-movement has been small the past two decades. Nigeria is around one-tenth the size at number two, and the number of listings, free float, and turnover are typically negligible in comparison with the broader emerging market universe. Illiquidity may prevent entrance since outside managers often require $1-2 million share blocks, and currency risk may erase dollar-denominated returns, the analysis suggests. A study of volatility over five years shows standard deviations less than in Asia and Latin America, although Zimbabwe is an outlier underscoring potentially dramatic swings from political conflict.
Among MSCI Index components Mauritius has been the laggard with a single-digit gain as it strives to overcome offshore tax and monetary policy fallout from India’s fiscal and currency squeezes. Foreign institutional investors have registered net securities outflows as regulators review derivatives and fee stances and brake high-speed trading. The central bank has pushed the rupee above 60 to the dollar with gold import and interbank access tightening as it refuses to tamper with benchmark rates or resort to heavy intervention. Bilateral commercial talks were just held with the US as financial service providers lamented the forgone frontier in insurance, pensions, and other fields.
