Private equity funds are disappointed with their emerging market fund portfolios, particularly with the pace of realisation, research from Altius Associates shows.
Altius Associates, which advises and manages private equity funds, says investors have generally increased their allocation to emerging markets such as Brazil, China and India over the past ten years to try to capture economic growth.
Yet exits still lag far behind other destinations, says Elvire Perrin, investment partner.
Citing numbers from the Centre for Asia Private Equity Research, Perrin says there is a realisation rate on capital deployed of less than 25% since 2007 in Asia.
“If we look at the broader emerging markets data over the last ten years, the picture is the same,” he says, adding that the realisation rate for emerging markets is only 11.6%.
This compares to a median of 35.2% for funds raised between 2003 and 2012 in the US and 28.6% in Europe.
“The difference for top quartile funds is also very meaningful with the US at 75.7%, Europe at 70.8% and emerging markets at 11.6%.”
Perrin adds that in emerging markets the ratio of investor distributions to capital contributed is lower than elsewhere.
“Indeed, the vast majority of the investments are made in fast growing companies by providing growth capital,” he says. “For these companies to get to a size which becomes attractive to trade buyers or the public market, it generally takes longer than for a buyout manager to create value on its companies.”
He says that providing growth capital will not give the fund manager control over the management of the company.
Altius Associates concludes that if private equity investors are to generate more liquidity out of their emerging markets exposure and therefore manage risk, a growth strategy portfolio should be complemented with other strategies that provide earlier liquidity.
These can include secondaries strategies, such as direct secondary funds, funds using structured equity to invest, or distressed and other type of credit funds.
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