LP interview: Germany's DEG

Few European investors can claim to have a history in Asia as long as DEG, whose unabbreviated name translates to German Investment Corporation. As the emerging markets arm of KfW, Germany's government-backed development bank, DEG has been investing in the region since its launch 1962.

"Private equity has been an important part of our investments for decades," says Marcus Bracht, vice president at DEG's representative office in Singapore. "The original idea was to promote the private sector by mainly assisting German medium-sized companies with their investments in developing countries."

Bracht explains that historically the group's investments were mainly in debt finance. It later branched out into equity and mezzanine financing. From 1990 onwards much of this activity had naturally been focused in Eastern Europe, as countries of the former Soviet Union transitioned from planned to market economies.

Today, however, Asia plays a much larger role across the whole of DEG's investment portfolio. The fund has five offices in Asia and the region accounted for more than 31% - or EUR2.4 billion ($2.6 billion) - of its portfolio in 2014. The second-largest region after Asia is Africa, which accounts for 24%, or EUR1.86 billion.

Early mover

DEG has been making sporadic PE investment in Asia, directly and through fund commitments, for decades. The earliest LP investment recorded by AVCJ Research, however, go back to around 1998 when DEG made commitments to the INR650 million ($10 million) Indian Auto Ancillary Fund managed by IL&FS Investment Managers. The auto components sector-focused fund generated an 18% gross return and a 2.1x multiple.

DEG did not set up a dedicated private equity group until 2004. Since then Bracht says the fund has seen a significant increase in its PE investments. Last year around 45% of DEG's new commitments were in risk capital finance. The majority of these are direct equity investments.

"The focus of DEG's investments has been on small and medium-sized companies and projects in emerging markets," says Bracht. "These companies are usually faced with a low capitalization and consequently have restricted access to long-term finance which they need to realize their expansion plans and modernizations."

First-time funds mostly need support from DFIs as a result of the still-challenging fundraising environment in most Asian countries. Our experience and cooperation with new, professional and like-minded fund managers is generally very positive and encourages us to continue with this strategy - Markus Bracht

Still, around one quarter of the risk capital activity took the form of commitments to private equity funds. DEG's fund program typically focuses on mid-cap funds, which may be generalist, sector-focused or dedicated to SME impact investing. Like many development finance institutions (DFIs), DEG often serves as a vital source of capital to first-time managers, or managers in frontier markets, who otherwise struggle to attract institutional investors.

"First-time funds mostly need support from DFIs as a result of the still-challenging fundraising environment in most Asian countries," says Bracht. "Our experience and cooperation with new, professional and like-minded fund managers is generally very positive and encourages us to continue with this strategy."

While the performance across DEG's private equity investments is quite broad - which is to be expected given the markets in which it invests - the asset class has met expectations.

"Portfolio diversification in terms of number of investments, industries and regions is an important factor in this success. Partner selection is also key to our due diligence and investment decisions," says Bracht. "Under regulatory, legal and cultural aspects, each market has its own challenges. However, our long experience in these markets allows us to deal with them."

A broader remit

China and India have been the largest Asian markets for DEG's PE investments to date, but in the last couple of years the group has become increasingly active in Southeast Asia, particularly Indonesia, Thailand, Vietnam and the Philippines.

DEG's fund commitments in the region over the past 24 months include Armstrong Asset Management Southeast Asia Clean Energy Fund, which reached a $164 million final close in November 2013, and CapAsia's ASEAN Infrastructure Fund III, which launched in 2013 with a $350 million target.

Meanwhile, recent direct investments in Southeast Asia include Indonesian pharma player Soho Global Health, which raised an undisclosed sum from DEG and Quadria Capital in January, and MAXpower Group, an Indonesian power plant developer. The company raised $12.5 million from a consortium of investors that included DEG, the Asian Development Bank, and the International Finance Corporation (IFC), among others, last year.

"Those early-stage markets benefit from an attractive economic growth and lower valuation expectations as an outcome of less competition among only a few investors," Bracht adds.

DEG plans to maintain a good geographical mix in Asia, but it will consider ramping up activity in countries like Cambodia, Laos and Myanmar. The group's two most recent fund commitments focus on the edges of South Asia: Zephy Partners' $42 million Emerald Sri Lanka Fund and Aavishkaar's recently launched $45 million Frontier Fund, which targets Indonesia, Bangladesh, Sri Lanka and Pakistan. DEG is anchor investor for the latter vehicle alongside Germany's Federal Ministry for Economic Cooperation and Development (BMZ).

"These markets are very much underpenetrated by private equity, but offer attractive investment opportunities and are part of our future markets strategy in Asia," says Bracht. "A sector, which we have a special focus on, is renewable energy and, looking forward, we think of intensifying investments in healthcare as well as in the insurance sector."

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• Topics
• LPs
• Fundraising
• German Investment and Development (DEG)
• LPs
• Fundraising
• Asia