Back to School: Asia drives $22 bln H1 emerging-markets investment

  • Investment at highest since EMPEA began reporting in 2008
  • Largest-ever EM fund, KKR Asian Fund III, closed in June
  • Investors increasingly turn from generalists to sector-specific funds

The first six months of 2017 were busy for private capital in emerging markets.

Data from the Emerging Markets Private Equity Association shows $22 billion in disclosed deals in H1, including private equity, infrastructure and private credit investments. That’s the highest half-year total since the group began tracking investment in 2008.

“The increase in capital deployed is largely tied to investments in emerging Asia, China in particular,” said Jeff Schlapinski, EMPEA’s research director. Asia saw $15 billion of investments by GPs in the first half. “The last time we saw capital deployed in emerging Asia this high was 2014, previously the highest year on record.”

On the fundraising side, managers pooled $23 billion for emerging markets investing in the first half, up from $18 billion in the year-earlier period. In June, KKR closed the largest emerging markets fund on record, KKR Asian Fund III, with $9.3 billion.

Schlapinski said that activity in Asia’s tech and consumer-services sectors fell off in 2016, as though PE and venture capital mangers had recalibrated their approach to the region. But 2017 has seen a rebound: In H1 “we saw a new appetite for some consumer-facing deals, especially online-to-offline … as well as strong interest in healthcare.”

“While the number of investments completed were on par with previous half-year totals,” EMPEA reported, “large deals dominated the [Asian] investment landscape, especially in China and South Korea.” There were 13 deals exceeding $300 million across private investment strategies, a sign that the Asian market has matured.

But the lion’s share of capital went to China, India and South Korea, with Southeast Asia attracting only $896 million — a year-on-year decrease of 51 percent, signaling “an inconsistency in investor outlook.”

In Latin America, disclosed capital invested reached almost $3 billion, up 54 percent from H1 2016. Deal count was highest in Brazil, but fundraising there “has dissipated in the last couple years,” Schlapinski said. “Local pensions, in line with the broader economic situation, have had to put the brakes on new commitments to private equity funds. … That said, there’s still a lot of capital being deployed in the country” — the highest first-half level since 2014. “It’s still a destination for managers interested in Latin America.”

Schlapinski said it’s encouraging to see capital being invested in Brazilian infrastructure, given that the economy is still recovering. “That’s a big need locally. … I think it’s a sign that managers are ready to move on Brazil again.”

Though emerging markets have faced some difficult circumstances recently, Schlapinski said PE investors are taking the long view. “The types of managers they commit to have evolved a little bit,” he added. “The story for a long time was traditional growth equity funds that are generalist from a sector perspective.” Now, “more and more fund managers that have deep operational experience and sector-specific focus are looking to build on those strengths” by entering the space. Sector-specific funds claimed 23 percent of the capital raised so far this year, the largest share EMPEA has ever recorded.

Action Item: EMPEA’s December 2016 report on PE and healthcare in emerging markets:

Asian Infrastructure Investment Bank President Jin Liqun (left) delivers a speech at a session of the Belt and Road Forum for International Cooperation in Beijing on May 14, 2017. Photo courtesy Reuters/Stringer