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PRIVATE EQUITY FUNDS PUSH IN FRONTIER MARKETS

Frontier Markets Capital Private Equity Paper

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Page 1: Frontier Markets Capital Private Equity Paper

PRIVATE EQUITY FUNDS PUSH IN FRONTIER MARKETS

Page 2: Frontier Markets Capital Private Equity Paper

• Furthermore, limited partners expect the proportion of their private equity allocations directed at emerging markets to increase from 11-15% today to 16-20% in two years.”

Asset allocation to Asia has risen from 5% to 23%. Note that India lone has seen its share grow from $1.9bln to $2.1bln. Big deals are coming in India with Apax Partners and iGate Corp. that bought a majority stake in Patni Computer Systems Ltd for $1.22 billion.

The second largest deal was a private equity-assisted buyout of Honda Motor Co. Ltd’s 26% stake in the joint venture Hero Honda Motors Ltd by Hero Corporate Service Ltd. Bain Capital and Government of Singapore Investment Corporation paid $838.59 million for this transaction.

PRIVATE EQUITY FUNDS INVESTMENT INFRONTIER MARKETS making sense of the recent trend

• KEmerging and frontier markets are seeing a lot of private equity investment lately. The big names are moving in with KKR announcing he will raise a Latin American fund in the coming years after Carlyle announced that it raised a $950Mln fund dedicated to the region. Preqin has recently published a study on private equity investing in emerging markets and the results are not surprising. “73% of private equity investors expect general partners to experience intense competition in China over the next year. Furthermore, limited partners expect the proportion of their private equity allocations directed at emerging markets to increase from 11-15% today to 16-20% in two years.” Asset allocation to Asia has risen from 5% to 23%. Note that India lone has seen its share grow from $1.9bln to $2.1bln.

• “We are participating in what I believe is an absolutely seminal 50-year transition,” Jonathan Bond, partner at emerging markets investor Actis, said during the opening panel of the Global Private Equity Conference, hosted by International Finance Corp. and the Emerging Markets Private Equity Association in Washington, D.C. Private Equity investors are facing a new world in which over-leveraged western companies are no more an option. Opportunities are now in challenging, unpredictable but highly profitable territories. Since the beginning of the year we have seen KKR, Carlyle, and other leaders of the private equity, deploy and teams and capital in Latin America, Asia and Africa. At Frontier Markets capital we believe there are real and significant investment opportunities in emerging markets, large and small.

Page 3: Frontier Markets Capital Private Equity Paper

• Another big deal was the purchase of a stake in HDFC Bank Ltd for $650 million by Carlyle Group. Keep in mind that a study last month by the Emerging Markets Private Equity Association and Coller Capital found that Brazil will be the most attractive emerging market country for private equity investors in the next 12 months.

Note: ”Among the roughly US$10.4 billion worth of PE funds attracted to emerging markets all over the world, around US$9.3 billion made its way to emerging Asia as its final destination, accounting for 93.3 percent to the total EMPE funds flow over the past three months.

Beating all its emerging Asian neighbors, China has become the largest EMPE fund raiser. It received funds amounting to US$5.7 billion, 6.7 times more than the US$858 million attracted by its neighbor India.”

Other emerging countries in Central and Eastern Europe, Commonwealth of Independent States, Latin America, Middle East, North Africa and Sub-Saharan Africa shared the rest of the EMPE funds with a value of US$1.1 billion.

The Latin America and Caribbean region, together with Sub-Saharan Africa, raised 83.9 percent of those funds, showing their development potential following emerging Asia.” It’s interesting to see how China remains the main fund raiser despite its inability to develop really interesting projects, India, Indonesia, Malaysia are the main creators of projects worth investing in.

The Chinese market seems immature and is becoming a fund storage market. PE contributed to a mere 0.16 percent to the country’s GDP in 2010, far from the close to 1% contribution in the US and the almost 1.5% in the UK.

For example, in Malaysia, private equity firms Carlyle and JC Flowers submitted first-round bids for a 25 percent stake in Malaysian lender RHB Capital , the stake being sold by Abu Dhabi Commercial Bank has a market value of $1.6 billion.

In China, the Qualified Foreign Limited Partners (QFLP) scheme, favor applicants with connections to government-backed funds and homegrown Chinese enterprises. Established in 2011, the QFLP permits licensed non-Chinese private equity firms to convert foreign currency into Renminbi for onshore investment in China.

Page 4: Frontier Markets Capital Private Equity Paper

• In Indonesia, Private equity firm Carlyle Group CYL.UL and Japanese brewer Suntory SUNTH.UL are leading a race to buy a 30 percent stake in Indonesian consumer firm GarudaFood worth over $200 million.

The second largest deal was a private equity-assisted buyout of Honda Motor Co. Ltd’s 26% stake in the joint venture Hero Honda Motors Ltd by Hero Corporate Service Ltd. Bain Capital and Government of Singapore Investment Corporation paid $838.59 million for this transaction.

In Indonesia, Reuters reported that Boy Garibaldi Thohir, the chief executive of the country second biggest coal miner Adaro Energy, has teamed up with a group of investors TPG Capital to buy a 45 percent stake in BFI Finance Indonesia worth about 164 million.

The purchase includes Jakarta-based private equity fund Northstar Equity Partners TPG was part of a consortium that invested in an Indonesian coal contractor late last year. Intense competition for deals in hot markets like China and India means global buyout shops like TPG, CVC, the Carlyle Group and Blackstone are increasingly pushing into fast-growing markets like Indonesia, Malaysia, the Philippines and Vietnam, as they hunt for investments.

PRIVATE EQUITY FUNDS INVESTMENT INFRONTIER MARKETS making sense of the recent trend

• Once approved, a firm may convert foreign currency, up to a quota permitted by its license, without approval by the State Administration of Foreign Exchange (SAFE). Authorities have expressly indicated in the guidelines that ties to Chinese government funds and state-owned enterprises are a plus…

Hemara Wikramanayake, the head of Macquarie Funds Group, went further, predicting a “century-long trend of growth from emerging markets.”

This a thought shared by Frontier Markets Capital.

Hong Kong is becoming the new IPO hub for Private Equity liquidity. The company was planning to only raise HK$200 million, Milan Station’s IPO was oversubscribed 2,180 times. Its shares surged by 77 percent at one point on its first day of trading on May 23, and closed with a gain of 65.8 percent.

In June PE firm is following the trend with the IPO of Samsonite on the Hong Kong Exchange.

Still in Asia, another sign of the market gaining activity is South Korea’s CJ Group and Japanese private-equity firm Unison Capital who are jointly bidding for Japanese food-additive maker Hayashibara.

Page 5: Frontier Markets Capital Private Equity Paper

The move for BFI, which finances car, motorcycle and heavy equipment purchases, is the latest investor deal to tap the fast-growing consumer market in Southeast Asia’s biggest economy.

In Vietnam Private Equity investors with a positive outlook for the coming year fell to 53 % in the second quarter from 81% last year, Grant Thornton said in a report today. The survey conducted in the second quarter of this year canvassed the opinions of over 800 decision makers based in Vietnam or those having a significant focus on Vietnam.

Vietnam’s economy may expand 6.5% this year, down from a 6.8% last year. Consumer prices rose 17.51 percent in April from a year earlier, the fastest pace in 28 months. The dong has been devalued four times in the last eighteen months, most recently in February.

“Sentiment has decreased toward Vietnam as a preferred destination,” Ken Atkinson, managing partner at Grant Thornton Vietnam, said in the study. “This is consistent with the uncertainty in Vietnam’s economy.”

Emerging markets food sector is extremely attractive right now. Investors and analysts salivated at the chance to get in on Latin America’s booming fast-food market. According to Euromonitor, between 2010 and 2014 the industry is expected to grow 19% in Argentina, 27% in Brazil, 26% in Chile and 31% in Colombia. And Arcos Dorados has leading market share in all of them.

The industry faces massive challenges in emerging markets, social unrest, strikes and revolutions, environmental liabilities, and regulation hurdles. The last in date is in Chile where regional environmental authorities rejected the construction of a $1.1 billion hydroelectric project linked to local private-equity fund Southern Cross. However, private equity deal making has proved resilient, even if fundraising volumes are still well below the levels witnessed up to 2009.

The last example of resilience in the market is in Africa where Kenya-base Insurance Company of East Africa (ICEA) has teamed up with Imara Securities, a Botswana investment group, and the Norwegian Investment Fund for Developing Countries (Norfund) to launch a new $100m private equity fund for SMEs in East and Central Africa.

Page 6: Frontier Markets Capital Private Equity Paper

• We think Africa has provided that and will continue to provide that, in part, because we feel that the supply and demand equation is still quite favorable for investors in Africa. “ With seven funds and over $1.8 billion under management, ECP is a leading private equity manager focused exclusively on Africa.

Nigeria is still a difficult place to conduct business, a private equity firm, Helios Investment Partners, backed by George Soros and Madeleine Albright, is currently in a dispute with the Nigerian government over mobile phone towers in the country.

Helios Towers has filed a $250 million suit against Multi-Links and Telkom in Lagos, being the money accrued for the use of its telecommunication masts for the past three years.

Multi-Links, owned by South Africa’s Telkom, told Helios Towers that it is under no obligation to pay rent or a termination fee years after the masts were built. The company is about three years into its 10-year contract.

PRIVATE EQUITY FUNDS INVESTMENT INFRONTIER MARKETS making sense of the recent trend

• We stay in Africa. Teraco Data Environments, South Africa’s only provider of vendor neutral colocation data centres, announces the completion of a R158 million ‘Series C’ financing. The financing includes IFC, the Development Bank of Southern Africa, Treacle Private Equity, Pentangle Group and Marlow Capital.

Still in South Africa Brait, the largest private equity company said earnings fell 6 percent to 174.8 million rand ($26 million) in the year ended March. Total assets under management rose by 1 billion rand to 14.6 billion rand when compared to the year earlier.

Hurley Doddy, co-chief executive officer and founding partner of Emerging Capital Partners (ECP), declared in a recent interview for africa.com;

“I think both the experience of private equity firms like ECP and also the experience with foreign direct investment has shown that African returns are comparable to returns anywhere in the world and we think that that is going to continue. Investors should look for growth and for that growth to translate into good, risk-adjusted returns.

Page 7: Frontier Markets Capital Private Equity Paper

• TPG Capital’s sale of Turkish spirits company Mey Icki Sanayi ve Ticaret to spirits giant Diageo for $2.11bn in February is the most recent deal to be completed in the country. The EBRD and the European Investment Bank, and other multi-lateral institutions provide the majority of the funding.

According to Business week, Cukurova Holding AS, the Turkish company seeking to retain control of Turkcell Iletisim Hizmetleri AS., the country’s biggest mobile-phone operator, may sell assets to pay about 1.7 billion liras ($1.1 billion) in back taxes and fines.

Cukurova is in talks with private equity funds KKR & Co. and TPG Capital on the sale of as much as half of its entertainment and news television channel Show TV, according to a person familiar with the matter. Istanbul-based Cukurova would aim to retain control of the channel’s management after any sale.

• In Mauritius- Aloe Private Equity, seeks to raise as much as 350 million euros ($501 million) to invest in Asian companies developing environmental technologies. The company expects to close in the third quarter the first funding round for its Aloe Environment Fund III with capital commitments of about 100 million euros, according to Vivek Tandon, co-founder and general partner at Aloe.

According to Bloomberg, it expects to investment in eight to 10 companies in fields such as waste management, recycling, water and energy efficiency that want to expand into Asia, Tandon said in an interview yesterday.

In Eastern Europe, some deal activity recently with the Swedish private equity company Ratos AB buying the movie operations in Finland, Estonia, Latvia and Lithuania of the Finnish media company Sanoma Group for EUR 116 million.

In Turkey, crescent capital raised $100mln on its final target of €200m. Mediterra Capital Management, raised €100m at the first close of its own €250m fund. The last major fundraising was Actera Partners closing its buyout fund at €325m in December 2007. According to Preqin, there are six domestic buyout firms fundraising in Turkey, including Mediterra and Crescent, seeking an aggregate €1.1bn.

Page 8: Frontier Markets Capital Private Equity Paper

• Frontier Markets Capital and the Frontier Markets Capital Logo are registered trademarks of Frontier Markets Capital LLC.

Frontier Markets Capital LLC - 70th Street, New York City, NY 10023. ph +646 326 3346

• Today, Investments go both ways as China Development Bank is in talks to to buy a minority stake in San Francisco-based private equity fund TPG Holdings, but said the deal requires government approval.

In Italy it is Mandarin Capital Partners and Italian textile group Miroglio that have entered in a 40 million deal, part of a broader $700mln investment in Italy’s fashion sector.

Vancl, the Chinese online store, which has received backing from private equity and venture capital firms including IDG, SAIF Partners, Ceyuan Ventures and Qiming Venture Partners, is planning the largest Chinese Internet listing in the United States this year, the $1bln IPO is expected to hit the market in the fourth quarter.

Frontier Markets Capital is a New York based company specialized in Research and Consulting on Frontier Markets. Frontier Markets Capital serves Private companies, Financial Advisers, Private Equity General Partners and Limited Partners, Fund managers, and broker dealers as they envision to work in these risky but rewarding destinations..