By Peter Apps
LONDON, April 23 (Reuters) - Private equity deals in
established Western economies have almost dried up due to the
credit crunch but in emerging markets, billions still flow,
including increasing amounts to more exotic frontier areas.
The U.S. mortgage meltdown has left Western banks less
willing to lend, stifling the private equity market in developed
economies. But private capital flows into the emerging world are
likely to be more resilient because they often involve
comparatively less bank leverage.
Chinese and Indian stocks have been battered this year, and
some investors view these markets as overcrowded and possibly
due for a correction. Therefore less popular markets from Angola
to Indonesia look set to draw their attention.
The Emerging Markets Venture Capital Association (EMVCA)
expects the emerging world's share in private equity deals this
year to rise beyond the 10 percent it got in 2007, even if
global private equity growth slows.
Private equity in the emerging markets amounted to about $57
billion last year, against a global total of $500-517 billion,
it said.
Industry observers also say bank financing in emerging market
private equity comes mainly from local banks and alternative
funding sources less exposed to the global liquidity crunch.
"If you're dependent on a bank like Citigroup for lending,
it just isn't happening," said Sanjeev Kumar, director of
private equity firm Delamere and Owl, whose $2 billion private
equity portfolio taps institutions and high net worth
individuals in the Middle East and North Africa.
"In emerging markets things are still happening... But
everyone is in India and China and the deals are drying up. It's
harder to make money there now."
Delamere and Owl has holdings in companies across Asia and
Africa, and is still cutting deals to take stakes in firms
across the region from Zambia to Ivory Coast.
CHINA, INDIA TOP
Funds and capital raised for emerging private equity
increased around 78 percent in 2007, says EMVCA research
director Jennifer Choi.
"I don't know if we can continue that kind of amazing
growth," she said, adding that sovereign wealth funds from
richer emerging economies were also moving into private equity.
Choi said Asia dominated, with China top followed by India,
then central European countries aiming to join the euro zone
such as Poland, the Czech Republic and Slovakia.
Favourite sectors include oil, gas and mineral firms,
telecoms and banking.
Data from Thomson Reuters shows private equity emerging
markets mergers and acquisitions were little changed in the
first quarter of 2008 against the same period last year, valued
at some $8.3 billion against $8.4 billion last year.
Established private equity funds and firms that until
recently were focused solely on a developed markets are now
almost all looking further afield.
London-listed private equity group Candover <CDI.L>,
previously entirely Western focused, has just opened a Hong Kong
office to target India and China. It is following fellow private
equity houses Carlyle Group and Warburg Pincus which have been
in Asia for more than a decade but are also expanding.
CHINA COMPETITION ON FRONTIER
"We have invested $12 billion outside the U.S., the bulk of
that in India and China," said Dalip Pathak, a managing director
at Warburg Pincus.
Beyond the crowded conventional emerging markets, some see
stronger growth in less developed countries, where a private
equity deal with a local company may be one of the few ways to
access economies without conventional bond, foreign-exchange or
stock markets.
They are also often seen as most decoupled from established
Western economies and therefore more immune to a downturn.
Templeton Asset Management fund manager Mark Mobius told
Reuters last week he was in talks for private equity investments
in Iraq as he raised $300 million targeted mainly at more
conventional emerging markets such as China, Brazil and India.
Africa is also expected to claim a bigger share, with a
string of funds putting several billion dollars into the world's
poorest continent, drawn by resource-rich countries such as
Angola and Nigeria.
But they face increasing competition from emerging Asian
investors, including Chinese government-linked firms that are
sometimes pricing out Western private equity houses by accepting
massively lower profit margins.
"The Chinese go in there and take the major risk," Delamere
and Owl's Kumar said. "It's Chinese government cash and ... they
just want the natural resources. If they do okay we know it's
not so bad and we can go in there too."
(additional reporting by Sebastian Tong and Mathieu Robbins;
editing by David Stamp)
