Investors from large institutions to family offices are showing considerable interest in investing in emerging and frontier markets. The slowdown in emerging market growth is seen as a short term detour in a long run growth story. This post is the first of a three part discussion of private equity investing in today’s emerging markets.
As background we begin with highlights of private equity activity in 2013, culled from various reports from The Emerging Markets Private Equity Association, Alternative Emerging Investor, and Ernst & Young, with our particular focus on Latin America and Africa:
Total emerging market PE investing in 2013 was $224 billion in 883 deals, a 7% decrease in dollar volume from the prior year.
Most of the growth in capital deployed occurred outside the BRICS—on the so-called frontier. Several of these deals were in East Africa and Latin America (not including Brazil). These economies are growing during a time of relative sluggishness in the BRICS.
One non-BRIC, Mexico reached a five year high in capital deployed in 2013. Mexico was also the scene for Axis capital’s buyout of Oro Negro for $200 million, one of the ten largest emerging market deals of the year.
One fast growing sector within the private equity universe is venture capital. VC investing made up 43% of the deal activity in 2013 vs 17% in 2009. Many of these deals were in emerging Asia where the tech sector is more developed and more connected to the western tech ecosystem. Most of the major investors have been US based firms like Sequoia Capital and other familiar names from Boston and Silicon Valley. That said, one of the biggest emerging market VC deals was online language school Open English of Panama. A burgeoning tech sector is also developing in Africa with hubs in Kenya, Nigeria and Ghana. We discussed the growing African startup ecosystem in an earlier post. Many of the companies are of a type that can scale across borders and would be attractive to VC investors.
2013 Deal volume in Africa reached its highest level in five years, up 43% to $1.6 billion according to EMPEA.
In Africa these industries saw the most deal activity in 2013:
- Oil & gas
- Electric power
- Financial Services
One sector where we do not see a large private equity presence is housing and property. Yet there are vast housing shortages in the most attractive countries. One possible reason could be the emphasis on affordability which requires holding prices down which would of course depress potential returns to investors. We have nevertheless seen that with the right mix of properties, a project can be structured in a way that satisfies investors and contributes to the availability of housing. Investors with a model oriented toward project financing should find attractive deals in the housing and property sector.
It has also been noted that African deals have tended to be smaller than those in other regions. It is possible that the bigger PE shops are passing on deals simply because they are too small or have less opportunity to scale or to grow a pan-African enterprise. For this reason we believe there is an opening for smaller PE firms, family offices and other direct investors.
In the next post we will explore the lessons from 2013 from the investor’s perspective, focusing on the smaller direct investor in a family office or small fund.