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PE firms swap BRICs for SE Asia, Africa

Bangkok, Thailand.
Piriya Photography | Moment Open | Getty Images
Bangkok, Thailand.

Private equity investors have long looked to four large emerging markets for big returns: Brazil, Russia, India, and China. But the BRICs today don't quite fit the fast-growth that Goldman Sachs strategist Jim O'Neill described in the 2001 paper that coined the widely used acronym.

With each BRIC economy in some sort of trouble, private equity firms are increasingly putting their investment dollars to work in other less-developed markets—especially Southeast Asia and Sub-Saharan Africa—in hopes of better returns.

Money invested in non-BRIC emerging markets increased 18 percent in 2013, reaching a five-year high of $11 billion and representing 44 percent of total capital invested in emerging markets, according to a recent study by the Emerging Markets Private Equity Association. At the same time, total capital invested in the BRICs declined 20 percent between 2012 and 2013 and was 38 percent lower than in 2011.

"Investors are certainly looking beyond the BRICs, acknowledging that consumer driven growth is accelerating most in these new markets," said Aly Jeddy, partner at The Abraaj Group, a global private equity firm that runs $7.5 billion across more than 20 sector and country-specific funds. "Investors are increasingly as wary of BRICs hype as they are weary of the unattractive returns many of the funds in these markets have delivered."

To be sure, the BRICs are still a force. China, India and Brazil alone still accounted for more than 50 percent of total capital invested in emerging markets and more than 30 percent of all funds raised, according to the same EMPEA report. But the recent pullback in all funds raised from investors for emerging markets—from $45 billion in 2012 to $36 billion in 2013—was largely a result of fewer funds raised targeting China, India and Brazil.

No region has gotten more money outside the BRICs than Southeast Asia.

In 2013, fund managers invested a five-year high of $2.2 billion and raised $2.9 billion for the region, a six-year high. In 2011, so-called emerging Asia countries like Indonesia, Malaysia, the Philippines, Thailand and Vietnam received just 7 percent of emerging market private equity investment. That increased to 17 percent in 2012, and 23 percent in 2013.

PE funds put $15.7 billion to work over 573 deals last year, more than any other global region, according to EMPEA. The next largest were China ($6.7 billion in 256 deals) and India ($3.4 billion over 234 deals). Brazil took in $2.7 billion in 55 deals. Russia barely registered at $295 million in 33 deals.

Large Asia-focused funds that closed to new investment in 2013 include the $6 billion KKR Asia Fund II; the $3.5 million RRJ Capital Master Fund II; and the $2.67 billion MBK Partners III (the funds are not necessary focused on local emerging markets).

Africa rising

Sub-Saharan Africa is another fast-growing region, albeit less so than other emerging market destinations.

PE fund managers invested $1.6 billion in Sub-Saharan Africa over 2013, a 43 percent increase from 2012 and a five-year high, according to the EMPEA report.

The returns on private equity exits—when the PE firm sells or brings public one of their holding companies—were 20 percent higher on average in Africa versus North America between 2010 and 2012, according to a recent report by the African Private Equity and Venture Capital Association and Ernst & Young.

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"We absolutely believe in the potential for high returns in the non-BRIC growth markets," said Jeddy of Abraaj. "In our experience, it is possible to target and achieve three-times growth in individual businesses during our period of ownership."

The PE firm focuses on consumer-oriented businesses such as dairy, food retail, healthcare and financial services companies, as opposed to more popular natural resource-driven opportunities.

"Abraaj's focus is on helping the growing middle class in our markets achieve its consumptive aspiration," Jeddy said. "The sectors that interest us are food and healthcare and education and others like them that benefit from the young demographics and the rapid urbanization of our markets and do so regardless of the macro environment."

Despite the growth in non-BRIC emerging market private equity investing, the markets are relatively small and there are a limited number of good companies to buy or invest in.

"Most of the PE investments going to places like Africa are 'additional,'" said Harry Broadman of PricewaterhouseCoopers on money adding to BRIC investments, not necessarily replacing them. "The flow of PE investments to Africa, while increasing rapidly, is directed at smaller projects, engendered by the comparatively smaller size of most—but not all—African markets."

Broadman, who leads the accounting firm's emerging markets management consulting practice, said there are "probably" enough sizable deals to go around in the smaller markets for now. But he added that "the pace of interest is accelerating rapidly, so demand will likely exceed supply."

Broadman noted that investments are still predominantly being made in natural resources sectors such as energy and minerals, but that is "very rapidly changing" to include financial institutions, transportation, telecommunications, power, consumer and services plays.

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Besides Africa and Southeast Asia, Central and South American countries, excluding Brazil, also experienced increased investor interest. Investment in the region increased 67 percent from 2012, accord to the EMPEA report. Both Mexico and Chile hit five-year capital highs in 2013 of $405 million and $501 million, respectively.

More money is likely coming.

Virtually all private equity firm clients expect to increase their exposure to emerging markets over the next 24 months, according to a recent survey by the AVCA.

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