LPs slow new commitments to emerging markets PE - survey

A further 38% plan to maintain their current pace of new investments - the same proportion as in the 2015 survey - while 22% said commitments will fall, up from 16%. The percentage of LPs anticipating a jump in new investments has declined in each of the last four years; the percentage expecting the dollar value of new commitments to stay the same has held steady at 35-39%.

Three dominant reasons were given for increasing fund investments: an expectation that emerging markets private equity will deliver higher returns relative to other investments; a need for greater portfolio diversification; and more comfort with the skills and experience of managers in emerging markets.

The median emerging markets private equity allocation of the 107 respondents is 11-15% and just over half do not expect this to change over the next two years. Meanwhile, 31% anticipate an increase and 13% are likely to reduce allocations. Banks, asset managers and insurance companies are most bullish about increasing their exposure, followed by pension funds.

Southeast Asia is seen as the most attractive market for GP investment in 2016, followed by India, Sub-Saharan Africa, Latin American excluding Brazil, and China. Southeast Asia has enjoyed consistent popularity - it ranked second in each of the last three years - but India has not. As recently as 2013, it was considered the second least attractive of the 10 emerging markets covered in the survey.

Consequently, Southeast Asia and India are the two markets in which LPs plan to begin or increase commitments over the next two years. China ranks fifth by this measure.

At the same time, there is an awareness that GPs in these markets haven't met performance expectations in the past. Asked to identify factors that would deter them from investing, historical performance ranked second out of 10 for Southeast Asia and third for India. Currency risk is the biggest factor in both markets, while high entry valuations and a weak exit environment are of particular concern in India and limited scale of the investment opportunity is an issue in Southeast Asia.

Weak exits were also flagged up as a deterrent to investing in China, although not as highly as political risk and a preference to get exposure to the market via other asset classes. For emerging markets generally, slowing or negative economic growth, currency volatility and past fund performance are the most widely cited challenges for emerging markets PE portfolios.

LPs continue to emerging markets funds to outperform developed markets, but the proportion anticipating a net return of 16% or more has fallen to 54% in 2016 from 72% in 2012. This tallies with a gradual fall in satisfaction with emerging markets performance: 70% of respondents said the asset class had met or exceeded expectations, compared to 78% in 2015, while 30% said their expectations had not been met, up from 25% last year.

For 2015 vintage funds alone, Asia is seen as most likely to outperform. More than half of respondents are looking for returns of 16% or more from China and India, while 47% expect similar performance from Southeast Asia. By comparison, only about one quarter of LPs think 2015 vintage US funds can achieve or exceed 16%.

EMPEA is an industry association for private capital in emerging markets. It has more than 300 member firms, comprising institutional investors, fund managers and industry advisors.

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• Topics
• Performance
• LPs
• GPs
• Emerging Markets Private Equity Association (EMPEA)
• Asia