Emerging private equity surviving crisis

Private equity continues to show signs of life in emerging markets despite drying up in the west, the manager of an emerging fund of funds said, but even in frontier African markets firms and funds are feeling the pinch.
CDC, wholly owned by the British government and investing in private equity mainly in South Asia and Africa, said it would continue to make new deals in spite of the crisis and believed higher growth in emerging markets would continue and deliver greater returns. CDC currently has net assets of $4 billion, having received its start-up funding from the British government in the 1990s and continually reinvested the proceeds, mainly in locally owned and run private equity funds.
"What we have seen recently - slightly to our surprise - is that transactions are still going on," CDC Chief Executive Richard Laing told the Reuters hedge fund and private equity summit in London.
"If the recession starts to turn, that will be a good time to invest. I am confident 2009 and 2010 will be vintage years for private equity because valuations have come down so much." He said CDC had invested around 470 million pounds last year and another 100 million in the first quarter of 2009, and expected to increase its investments towards the year-end.
In the short term, he said some of the local fund managers CDC was working with were holding back, finding that investee companies were demanding too high prices and had not yet adapted to the slump in valuations from the financial crisis. "It is taking time for them to accept that their businesses are not worth what they thought they were worth," he said. "So fund managers are holding back and waiting for that realisation. I think it will come this year."
While Western private equity deals have often been buyout with considerable amounts of leverage - now often unavailable - Laing said emerging private equity deals were more often cash-backed and expansion-based, and so had proved more resilient.
He said the fund had roughly 50 percent of its investments in Africa, mainly in South Africa, Nigeria and Egypt, with some 25 percent in South Asia and the rest spread across China, Southeast Asia and Latin America. The South Asian holdings were almost entirely concentrated in India, he said, with one fund in Pakistan. Sri Lanka and Bangladesh were both shallow markets and it had proved difficult to operate there, he said.
In Africa, he said the fund was increasingly targeting the East African economies of Kenya, Tanzania and Uganda as well as West African economies. Investments are spread across sectors including agriculture, infrastructure, manufacturing and financial services. "I am confident emerging markets will perform well because of growth," he said. "If you look at IMF growth forecasts, growth is coming down across the world. In the developed world, that puts us in recession but emerging markets are still growing, if slower than we would like."
However, he said, investee companies were feeling the pinch of falling demand, and were finding it increasingly difficult to access loans from local banks, even if the banks themselves were well-financed, due to increased caution.