5 questions with Jim McGuigan

Capital International, the emerging markets arm of the Capital Group Cos., last week announced that it has closed its fifth emerging markets private equity fund with $2.25 billion in capital commitments. It is the largest fund raised solely for investment in emerging markets this year.

So PE Week Editor-at-Large Dan Primack tracked down Jim McGuigan, a Capital International partner for the past eight years, to ask him five questions.

Q: There’s a perception that emerging markets deals are relatively cheap. So why raise $2.25 billion?A: As we began to raise our fourth fund in January 2004, many of the markets we were covering were becoming stronger, more transparent and more fiscally responsible. This is particularly true in Russia, China, Brazil and South Africa. At the same time, we’re investing in market-leading companies—companies that are in first, second or third position in their countries—so these have become much larger-scale enterprises that require larger investment sizes to make a meaningful position.

The average investment size in our earlier funds was just $6 million, but it’s now $100 million. The last thing we wanted to do with this fund was to marginalize ourselves, so we felt an appropriate fund size would be around $2 billion.

Q: You’ve already invested 25% of the fund. So how long until you’re back in market?A: We’re in no rush to raise a new fund, but will obviously do so when the time comes.

I mentioned to an institutional investor recently that we may be 50% invested by the end of this year. This is because we’ve got a very strong pipeline of new deals. Our average due diligence period is six months, so we’re committed to taking our time.

Q: Is LP demand for emerging markets funds appropriate for GP supply, or is there an imbalance?A: The whole business of emerging markets needs to be kept in perspective. For years it was a niche, and top LPs were much more focused on buyouts and venture funds in developed countries, with maybe a very modest emerging markets exposure. But now LPs are moving the emerging markets allocation much more toward the mainstream.

Q: Are there any nations or region that have dropped off your radar because they’ve moved from emerging to emerged?A: Korea would be one that’s soon going to graduate into the developed markets. But we look at opportunities rather than regions. So we have no must-do countries.

Q: Given the growth of global and local emerging markets managers, has it become harder for Capital International to hire and retain key talent?A: Yes, there’s certainly a lot more competition. About $60 billion was raised in 2007 for emerging markets funds, which is a 78% increase over 2006. But, to keep it in perspective, it’s still just one-seventh of what was raised for buyout funds in the developed markets, even though emerging markets have about half the global economy and 85% of the world’s population.

We’ve found that our 16-year longevity has helped us in attracting attractive professionals and in keeping our senior private equity pros. Most of our partners have been with us for more than five years.

I was told recently by an LP that he considered our team to be the most senior in the emerging markets, which I think was a major factor in our fund-raising success.