CRISIL GR&A - Opportunities with EM Private Equity

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Suprabha Dikshatha speaks on ‘Opportunities with EM Private Equity’ at the Super Returns US in boston.

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CRISIL GR&A - Opportunities with EM Private Equity

  1. 1. OPPORTUNITIES WITH Suprabha Dikshatha Global Head of Financial Research CRISIL GLOBAL RESEARCH & ANALYTICS EM PRIVATE EQUITY June 2014
  2. 2. Opportunities with EM Private Equity EM Private Equity — Trends and Takeaways 2  EM PE under stress on the back of high dry powder, low deal activity and less than impressive returns  LPs stay committed to emerging markets – share in portfolio expected to escalate from 10% to 15% in 2 years  Asset Allocation rather than fund manager selection will turn key as returns of top and bottom quartile performers converge 2013 Snapshot GPs Managing the Challenge The Silver Lining Trend to Watch for LPs  GPs sourcing opportunities in newer regions and sectors and are finding newer ways of money making by leveraging local market knowledge
  3. 3. Opportunities with EM Private Equity Top Trends in EM Private Equity Fundraising EM funds to face tough times on the back of DM resurgence and high dry power 3 “Our very survival depends on our ability to stay awake, to adjust to new ideas, to remain vigilant and to face the challenge of change.” - Martin Luther King Jr.
  4. 4. Opportunities with EM Private Equity Fundraising Turns Tougher for EM Funds 4 Renewed competition from DM dampens interest for EM funds Global fundraising by region across years Source: EMPEA, Bloomberg Finance LP, Preqin 11% 21% 18% 21% 12% 14% 0% 5% 10% 15% 20% 25% 0 50 100 150 200 250 300 350 2009 2010 2011 2012 2013 2014 Q1 USDbn United States Global ex-US DM Emerging Markets EM as % of Global Total (RHS) +42% -19%
  5. 5. Opportunities with EM Private Equity High Dry Powder Levels are a Limiting Factor 5 Dry Powder for EM at over 5 times the current level of investments Dry powder as a proportion of yearly investments across regions Source: EMPEA, Bloomberg Finance LP, Preqin 100 120 140 160 180 200 220 240 0x 2x 4x 6x 8x 10x 12x 14x 2009 2010 2011 2012 2013 USDbn Asamultipleofdealvalue Dry powder: Asia and RoW (RHS) North America Europe Asia and RoW
  6. 6. Opportunities with EM Private Equity Growth and Venture Funds Defy Tough Environment 6 Strongly expanding EM middle-class fuels interest Number of EM PE fund issues* by fund type Number of DM PE fund issues* by fund type * By vintage year of funds; 2014 until end of Apr-2014 Source: Bloomberg Finance LP, Preqin 0% 20% 40% 60% 80% 100% 2009 2010 2011 2012 2013 2014 YTD Buyout Coinvestment Debt Fund Of Funds Growth Real Assets Real Estate Secondary Venture 0% 20% 40% 60% 80% 100% 2009 2010 2011 2012 2013 2014 YTD Buyout Coinvestment Debt Fund Of Funds Growth Real Assets Real Estate Secondary Venture
  7. 7. Opportunities with EM Private Equity Newer Regions Like MENA Receiving Greater Attention 7 Investors in search of regions with strong beta potential Number of EM PE fund issues* by region focus Value of EM PE fund issues* by region (2014 YTD) * By vintage year of funds; 2014 until end of Apr-2014 Source: Bloomberg Finance LP, Preqin 0% 20% 40% 60% 80% 100% 2009 2010 2011 2012 2013 2014 YTD Any Asia Pacific Emerging Eastern Europe Latin America and Caribbean Middle East and Africa Combo Asia Pacific Emerging 36% Eastern Europe 18% Latin America 4% Middle East and Africa 42% Asia Pacific Emerging Eastern Europe Latin America Middle East and Africa
  8. 8. Opportunities with EM Private Equity Mid-sized Funds are getting Squeezed-out 8 Trend well in-line with observations across the globe Number of EM fund issues* by fund size (USD) Proportion of fund issues* in EM and DM with fundraising size between $250mn – $1bn * Excludes Venture funds; By vintage year of funds; 2014 until end of Apr-2014 Source: Bloomberg Finance LP, Preqin 0% 20% 40% 60% 80% 100% 2009 2010 2011 2012 2013 2014 YTD <100mn 100-250mn 250-500mn 500mn-1bn >1bn 10% 15% 20% 25% 30% 35% 40% 2009 2010 2011 2012 2013 2014 EM DM
  9. 9. Opportunities with EM Private Equity Top Trends in EM Private Equity Deal Making 2013 revival in EM being less robust than in DM casts shadow on future deals 9 “It is often in the darkest skies that we see the brightest stars.” - Richard Evans
  10. 10. Opportunities with EM Private Equity Total Value of Deals Over 50% Below Recent Peaks 10 Add-on finds greater interest in DM than in EM Number of EM buyout deals* by deal type Number of DM buyout deals* by deal type * Excludes deals with value <$10mn; 2014 until end of Apr-2014 Source: Bloomberg Finance LP, Preqin 0 10 20 30 40 50 60 70 0 50 100 150 200 250 300 350 400 450 2009 2010 2011 2012 2013 2014 YTD # of deals Value (USD bn, RHS) 0 50 100 150 200 250 300 350 400 450 0 200 400 600 800 1000 1200 1400 1600 1800 2000 2009 2010 2011 2012 2013 2014 YTD # of deals Value (USD bn, RHS)
  11. 11. Opportunities with EM Private Equity Growth and PIPE Deals Rule EM 11 Deal count and value on receding mode over the past two years EM deal count and deal value* DM deal count and deal value* * By investment year; excludes deals with value <$10mn; 2014 until end of Apr-2014 Source: Bloomberg Finance LP, Preqin 0% 20% 40% 60% 80% 100% 2009 2010 2011 2012 2013 2014 YTD Add-on Control Buyout Distressed Debt Growth Capital Merger PIPE Public To Private Recapitalisation Others 0% 20% 40% 60% 80% 100% 2009 2010 2011 2012 2013 2014 YTD Add-on Control Buyout Distressed Debt Growth Capital Merger PIPE Public To Private Recapitalisation Others
  12. 12. Opportunities with EM Private Equity Non-BRIC Regions Turning More Attractive 12 China and India collectively account for 40% of total deals Breakdown of number of EM deals* by country Breakdown of total value of EM deals* by country * By investment year; excludes deals with value <$10mn; 2014 until end of Apr-2014 Source: Bloomberg Finance LP, EMPEA, Preqin 0% 20% 40% 60% 80% 100% 2009 2010 2011 2012 2013 2014 YTD China India Brazil Russia Israel South Korea Poland South Africa Others 0% 20% 40% 60% 80% 100% 2009 2010 2011 2012 2013 2014 YTD China India Brazil Russia Israel South Korea Poland South Africa Others
  13. 13. Opportunities with EM Private Equity Consumption than Investment Growth to Drive Deals 13 Tech, Telecom and Consumer account for over 55% of deals Breakdown of number of EM deals* by sector Breakdown of number of DM deals* by sector * By investment year; excludes deals with value <$10mn; 2014 until end of Apr-2014 Source: Bloomberg Finance LP, Preqin 0% 20% 40% 60% 80% 100% 2009 2010 2011 2012 2013 2014 YTD Basic Materials Consumer Discretionary Consumer Staples Energy Financials Health Care Industrials Technology Telecommunication Utilities Others 0% 20% 40% 60% 80% 100% 2009 2010 2011 2012 2013 2014 YTD Basic Materials Consumer Discretionary Consumer Staples Energy Financials Health Care Industrials Technology Telecommunication Utilities Others
  14. 14. Opportunities with EM Private Equity Deal Multiples Have Risen in Recent Times 14 EM multiples however remain lower than DM, in line with public equities EBITDA multiple of EM and DM deals* over time P/E multiple of EM and US public equity markets * By investment year; Multiple weighted by EBITDA; excludes deals with value <$10mn; 2014 until end of Apr-2014 Source: Bloomberg Finance LP, S&P Capital IQ 5x 10x 15x 20x 25x 30x 35x Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 MSCI EM S&P 500 Index MSCI EAFE 0x 2x 4x 6x 8x 10x 12x 2009 2010 2011 2012 2013 2014 YTD EM Private Equity US Private Equity Global ex-US DM Private Equity
  15. 15. Opportunities with EM Private Equity Top Trends in EM Private Equity Exits Environment for exits stays poor in contrast to a sedate revival in DM 15 “Punctuality is not just limited to arriving at a place at right time, it is also about taking actions at right time.” - Amit Kalantri
  16. 16. Opportunities with EM Private Equity Holding Period of Investments on The Rise 16 Over 60% of portfolio companies in EM funds now over 3 years’ old Average holding period (in years) of EM deals* Proportion of PE fund portfolio constituents with average age over 3 years in EM and DM * By exit year; 2014 until end of Apr-2014 Source: Bloomberg Finance LP, Preqin 0 1 2 3 4 5 6 2009 2010 2011 2012 2013 2014 YTD Average Median 0% 10% 20% 30% 40% 50% 60% 70% 2009 2010 2011 2012 2013 2014 YTD EM DM
  17. 17. Opportunities with EM Private Equity Sale to GP Growing in EM in Line with 17 Poor IPOs and pressure to exit providing additional impetus Breakdown of number of EM exits* by exit type Breakdown of number of DM exits* by exit type * By exit year; 2014 until end of Apr-2014 Source: Bloomberg Finance LP, Preqin 0% 20% 40% 60% 80% 100% 2009 2010 2011 2012 2013 2014 YTD IPO Merger Private Placement Recapitalisation Restructuring Sale to GP Sale to Management Trade Sale Unspecified Exit 0% 20% 40% 60% 80% 100% 2009 2010 2011 2012 2013 2014 YTD IPO Merger Private Placement Recapitalisation Restructuring Sale to GP Sale to Management Trade Sale Unspecified Exit
  18. 18. Opportunities with EM Private Equity Top Trends in EM Private Equity Performance Long-term poor performance continues. EM PE may be better than EM equities 18 “Don't tell me about your effort. Show me your results.” - Tim Fargo
  19. 19. Opportunities with EM Private Equity 19 Returns consistently weaker than DM PE * Performance by vintage year; Performance as at end of April 2014 # Performance as at end of Q3 2013 Source: Cambridge Associates EM PE Net IRRs* have lagged its DM peers especially the US …as also reflected in recent underperformance# vs. DM PE -10 0 10 20 30 40 50 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 NetIRR(%) CA Global ex-US DM PE Index CA US PE Index CA Global EM PE & VC index 0% 4% 8% 12% 16% 20% 1-Year 3-Year 5-Year 10 Year 15 Year CA Global EM PE & VC index CA US PE Index CA Global ex-US DM PE Index EM PE Returns on A Structural Decline
  20. 20. Opportunities with EM Private Equity 20 * Based on analysis since 1990 # Performance as at end of Q3 2013 Source: Cambridge Associates, Bloomberg Finance LP In the short-to-medium term, EM PE has out-performed EM equities# in absolute terms… …and manages nearly as many positive quarters* as peers From a risk perspective, EM PE scores* over EM equities comprehensively in terms of max drawdown… …and carries lower co-efficient of variation* vs equities On a risk-adjusted basis, on an attractive footing vs. EM equities 0% 5% 10% 15% 1-Year 3-Year 5-Year 10 Year 15 Year CA Global EM PE & VC index MSCI Emerging Markets Index 0% 15% 30% 45% 60% 75% 90% EM PE US PE Global ex- US DM PE MSCI EM S&P 500 MSCI EAFE MSCI World -60% -50% -40% -30% -20% -10% 0% EM PE US PE Global ex- US DM PE MSCI EM S&P 500 MSCI EAFE MSCI World 0 1 2 3 4 5 6 EM PE US PE Global ex- US DM PE MSCI EM S&P 500 MSCI EAFE MSCI World EM PE Still Scores Over EM Equities
  21. 21. Opportunities with EM Private Equity EM PE Fares Favorably Across Asset Classes 21 Provides consistent positive returns across time frames # Performance as at end of Q3 2013 Source: Bloomberg Finance LP, Cambridge Associates Annualized performance# of EM and DM PE versus other competing asset classes -10% -5% 0% 5% 10% 15% 20% 25% 1-Year 3-Year 5-Year 10 Year 15 Year Emerging Markets PE US PE MSCI EM MSCI World Russell 3000 JPM EM Bond Index BofA ML Government Bond Index BofA ML Corp. IG Bond Index S&P GSCI Commodity Index HFRI Hedge fund Index S&P Global Property Index EM PE Fares Favorably Across Asset Classes
  22. 22. Opportunities with EM Private Equity 22 Trend is more evident across deals than among funds * Based on analysis since 1990; excludes Venture funds; Performance as at end of April 2014 # Based on complete exits since 2004 Source: Bloomberg Finance LP, Preqin Net IRR* of EM- and DM-focused PE funds by fund size (in %) Net IRR# of EM deals by deal size (in quintiles) based on complete exits (in %) 6.0 6.5 7.0 7.5 8.0 8.5 9.0 9.5 10.0 <100mn 100-250mn 250-500mn 500mn-1bn >1bn Median EM Median DM 0% 10% 20% 30% 40% 50% 60% Bottom quintile 2 3 4 Top quintile Smaller-sized Funds, Deals Offer Better Returns
  23. 23. Opportunities with EM Private Equity 23 Late-stage funds best bet among venture funds * Based on analysis since 1990 # Based on complete exits since 2004 Source: Bloomberg Finance LP, Preqin Median Net IRR# of deals by buyout activity Median Net IRR* of venture funds by strategy 0% 10% 20% 30% 40% 50% 60% Control Buyout Growth Capital PIPE Recapitalisation Median IRR Risk adjusted returns 0% 1% 2% 3% 4% 5% 6% 7% Early Stage Late Stage Multi Stage Median-EM Median-DM PIPE Deals Score on A Risk-adjusted Basis
  24. 24. Opportunities with EM Private Equity EM Private Equity: Key Takeaways 24 “Our lives are defined by opportunities, even the ones we miss.” - Eric Roth Key Takeaways for GPs Need to find niche opportunities in fundraising, deal making and return generation
  25. 25. Opportunities with EM Private Equity 25 Most LPs looking to increase commitments * Excludes development finance institutions and EM-focused fund-of-funds Source: EMPEA Anticipated level of new commitments to EM PE funds over the next 2 years* Proportion of LPs with PE return expectation >16% across developed and emerging markets 0% 20% 40% 60% 80% 100% 2009 2010 2011 2012 2013 2014 Higher About the same Lower 0% 20% 40% 60% 80% 100% 2009 2010 2011 2012 2013 2014 Developed Markets Emerging Markets LPs Remain Firmly Committed to EM PE
  26. 26. Opportunities with EM Private Equity 26 Lat-Am (ex-Brazil), SE Asia and Sub-Saharan Africa are the favorites * Turkey was not included in the 2009 and 2010 survey, while South-East Asia was not part of the 2009 survey Source: EMPEA Attractiveness rank of Emerging Markets for GP Investment over the next 2 years – LP Views Region 2009 2010 2011 2012 2013 2014 Latin America (ex. Brazil) 5 5 4 1 3 1 Southeast Asia* NA 4 2 4 2 2 Sub-Saharan Africa 6 8 7 5 1 3 China 1 1 2 3 4 4 Brazil 2 2 1 2 6 5 Middle East and North Africa 8 9 9 9 10 6 Central and Eastern Europe 4 6 8 10 7 7 India 3 3 5 6 9 8 Russia/CIS 9 10 10 8 8 9 Turkey* NA NA 6 7 5 10 LPs Chasing Growth Avenues in New Regions
  27. 27. Opportunities with EM Private Equity 27 MENA, SE Asia and Sub-Saharan Africa appear attractive * Size of the bubble is proportional to GDP 2013 of the respective country in US$ terms Source: IMF, Bloomberg Finance LP, EMPEA Scatter bubble* of expected 5Y GDP CAGR against PE penetration levels across key regions Israel US UK 0.50% 0.70% 0.90% 1.10% 1.30% 1.50% 1.70% 1.90% Sub-Saharan Africa (ex-SA) Russia/CIS S Korea Lat-Am (ex Brazil) India SE Asia China Brazil CEE S Africa MENA 0% 1% 2% 3% 4% 5% 6% 7% 8% 9% -0.05% 0.00% 0.05% 0.10% 0.15% 0.20% 0.25% 0.30% 5YGDPGrowth PE Deals as a % of GDP - 2013 Newer Regions Under-penetrated
  28. 28. Opportunities with EM Private Equity 28 MENA, SE Asia and Sub-Saharan Africa appear attractive * Size of the bubble is proportional to GDP 2013 of the respective country in US$ terms Source: IMF, Bloomberg Finance LP, EMPEA Scatter bubble* of expected 5Y GDP CAGR against PE penetration levels across key regions Israel US UK 0.50% 0.70% 0.90% 1.10% 1.30% 1.50% 1.70% 1.90% Sub-Saharan Africa (ex-SA) Russia/CIS S Korea Lat-Am (ex Brazil) India SE Asia China Brazil CEE S Africa MENA 0% 1% 2% 3% 4% 5% 6% 7% 8% 9% -0.05% 0.00% 0.05% 0.10% 0.15% 0.20% 0.25% 0.30% 5YGDPGrowth PE Deals as a % of GDP - 2013 Newer Regions Under-penetrated
  29. 29. Opportunities with EM Private Equity 29 Opens up more attractive return opportunities * Based on deal data from 2009; excludes deals with value <$10mn Source: S&P Capital IQ Median EBITDA multiple of deals* in major EM countries along with the universe median Deals in Newer Regions at Lower Multiples 4x 6x 8x 10x 12x 14x Turkey CEE China Taiwan India South Korea Brazil Southeast Asia Russia Lat-Am (ex Brazil) Sub-Saharan Africa MENA
  30. 30. Opportunities with EM Private Equity Opportunities with EM PE – GP Takeaways 30  Funds with focus on newer regions to attract greater LP Interest  Mid size funds might find the near term challenging  Deal multiples and average holding period to stay elevated  Investments in established companies better than early stage companies  Beta driven returns largely a thing of the past, at least in the BRIC  Significant opportunities remain; Exploiting inefficiencies key to alpha Fundraising Deal Making Return Generation Bottom Line  Deals in sectors closely associated with consumer story a better bet  Smaller size deals to turn order of the day; BRIC to offer big-ticket deals
  31. 31. Opportunities with EM Private Equity 31 “Results fuel belief which causes us to take more action and get more results.” - Todd Stocker EM Private Equity: Key Takeaways Key Takeaways for LPs Asset Allocation turning more critical than fund manager selection
  32. 32. Opportunities with EM Private Equity 32 Differential between global and local players has also vanished * By vintage year Source: Bloomberg Finance LP, Cambridge Associates Difference between top quartile and bottom quartile fund* performers by MOIC – EM vs. DM Net IRR (in %)* of EM funds by fund manager domicile group 0.0 0.5 1.0 1.5 2.0 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 EM PE US PE Global ex-US DM PE -5 0 5 10 15 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 NetIRR(%) Local Global Gap Between Winners and Losers Receding
  33. 33. Opportunities with EM Private Equity 33 Opportunities with EM Private Equity – Q & A
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