Reaping rewards from forward thinking

By Paul Mackintosh - 30/07/12

The end of July brings perhaps welcome signs that private equity in emerging markets, especially Asia, is not only back in favour with institutions, but also is delivering the commensurate returns. Signs of vitality are everywhere. China-focussed GP FountainVest Partners has hit a first close of US$1 billion on its second fund, bringing it close to the $1.25 billion target despite being in the market for only some four months. This follows fast on Pantheon’s close of $700 million for its fund of funds Pantheon Asia Fund VI LP, against a reported target of $500-600 million, and Bain Capital’s closing of its Bain Capital Asia Fund II at $2.3 billion.

The China Insurance Regulatory Commission (CIRC) has issued draft rules to allow PRC insurers to invest up to 10% of their total assets in private equity, from the present threshold of 5%, potentially releasing up to $50 billion. And PRC SWF the China Investment Corporation (CIC), facing a 4.3% loss on overseas investments for its 2011 financial year, has doubled its allocation to private equity and other alternatives, with private equity and direct investments accounting for 31% of all its investments last year.

Just as crucially, though, according to Cambridge Associates’ just-released Q4 2011 update of its performance benchmarks, its Emerging Markets Venture Capital and Private Equity Index showed the highest distribution on record. “The $12 billion distributed to investors in 2011 was the highest amount in any year since the inception of the benchmark, topping 2010 by $400 million,” states Cambridge Associates. Note that their emerging markets index is 38.7% weighted towards China, with Russia comprising 4.7% and Brazil just 3.5%. And in Q4 2011, furthermore, “over 45% of capital invested during the quarter went into companies headquartered in mainland China.”

Some of this performance at least is purely structural: the index is almost 75% weighted towards funds of the 2005-07 vintages, and it is exactly those which are now coming to maturity and delivering to LPs. But the LP commitments in those years were also reflections of the new appreciation that Asia and other emerging markets could be worth institutional interest, and the LPs courageous and forward-looking enough to initiate emerging markets commitment programs then are the ones who are reaping the benefits now.

Compare this, though, to Cambridge Associates’ concurrent report on its Global ex US Developed Markets Private Equity and Venture Capital Index. Even allowing for some contribution from Japan in this index, total distributions for 2011 topped $43 billion. Only once in the past seven years (2009) did distributions on this index drop below the emerging markets’ all-time high last year. Despite all the positive news, Asia still has plenty to prove.