LP Outlook for Emerging Markets: LP Survey Results€¦ · 11/04/2012 · Today’s Agenda • Panelist Introductions • Trends in Commitments and Allocations • Returns Expectations

An EMPEA Professional Development Webcast

LP Outlook for Emerging Markets:Preview of EMPEA’s 2012 LP Survey Results

An EMPEA Professional Development Webcast with Capital Dynamics, Lockheed Martin and Pantheon

LP Outlook for Emerging Markets: Preview of EMPEA’s 2012 LP Survey Results An EMPEA Professional Development Webcast – 11 April 2012

EMPEA Upcoming Events

Save the Dates!

• Upcoming Webcast ‐ June 2012: Emerging Markets Private Equity Fund Structuring,

Oversight and Administrative Matters with Citi Private Equity Services

• 14‐16 May 2012: IFC’s 14th Annual Global Private Equity Conference in association with

EMPEA – Washington, D.C.

• May 14th – 2nd Annual Institutional Investors‐Only Summit

M 14th IFC/EMPEA M b O l R ti• May 14th – IFC/EMPEA Members‐Only Reception

• May 15th – 16th: Main conference program

• May 17th – EMPEA’s Inaugural Fundraising Masterclass

• Qualified institutional investors receive complimentary registration

• 23‐24 October 2012: Capital Impact 2012 & the 4th Annual Private Equity in Africa


p p q y

Leadership Summit – London

2

Today’s Agenda

• Panelist Introductions

• Trends in Commitments and Allocations

• Returns Expectations

M k t Att ti d O tl k• Market Attractiveness and Outlook

• Challenges and Inhibitors to Investment

• Manager Selection

• 2011/2012 Survey Respondents• 2011/2012 Survey Respondents


3

Panelist Introductions

Moderator:Jennifer Choi, Vice President, Industry & External Affairs, EMPEA

Janusz Heath, Managing Director and Head of I t t M t E i M k tInvestment Management Emerging Markets, Capital Dynamics

Brian Lim, Partner, Pantheon

Maria Kozloski,Managing Director, Private Markets,


4

Lockheed Martin Investment Management Company

Trends in Commitments and Allocations

LPs expect to increase their new commitments to EM PE funds over the next two years.

LPs’ Anticipated Level of New Commitments to EM PE Over the Next 2 Years

48%

• 75% of LPs plan to increase the value of their new PE commitments in 2012/2013 versus commitments in 2010/201175%

48%Significantly higher

Slightly higher

2010/2011

• Only 8% of the LPs surveyed intend to decrease commitments

75% higher

27%

17%

About the same

Slightly lower

27%

5%3%Significantly lower


5

Source: 2012 EMPEA Global Limited Partners Survey. Excludes Development Finance Institutions and EM‐dedicated funds‐of‐funds.


LPs’ Anticipated Level of New Commitments to EM PE Funds over the Next Two Years

The proportion of respondents expecting to increase commitments to EM PE funds is steadily rising.

LPs Anticipated Level of New Commitments to EM PE Funds over the Next Two Years

80%

100%

40%

60%

Respon

dents

0%

20%

% of

2009 Survey 2010 Survey 2011 Survey 2012 Survey

Increase No Change Planned Decrease


6



EM PE’s Share of Total PE Allocation –Now Versus Share in Two Years’ Time

The majority of LPs expect EMs’ proportion of their total PE allocations to grow to 16% or more in two years’ time.

30%

35%

40%

20%

25%

30%

espo

nden

ts

5%

10%

15%

% of R

0%1‐5% 6‐10% 11‐15% 16‐20% >20%

2012 2014E


7



Investors’ Projected Investment Strategy for Developed Markets, by Institution Type

Most LPs plan to maintain or decrease their investment to developed markets PE—Asia‐based LPs are the exception.

33% 33% 33%ROW

j gy p , y yp

13% 70% 17%North America

Decrease investment

18%

18%

36%

53%

45%

29%

Asia‐Pacific

Europe Maintain current

Expand investment

18% 36% 45%

0% 20% 40% 60% 80% 100%

s a ac c

% of Respondents


8

Source: 2012 EMPEA Global Limited Partners Survey. Note: Does not include LPs with no plans to invest in Developed Markets. Excludes Development Finance Institutions and EM‐dedicated funds of funds.


Investors’ Proportion of Current PE Allocation Targeted at EM PE

EMs’ share of PE allocations has been rising year on year.

80%

100%

p g

6‐10% 11‐15% 11‐15%40%

60%

espo

nden

ts

Median Allocation % to EM

20%

40%

% Re

0%2010 Survey 2011 Survey 2012 Survey

1‐5% 6‐10% 11‐15% 16‐20% More than 20%


9



EM PE Fundraising as % of Global Total, 2004‐2011

Global fundraising patterns mirror the shift taking place in LPs’ allocations to PE.

15%15%

g

g % ,

8%

10%11%

9%

11%

10%

PE Fun

draising

4%

8%7%

5%

Total G

loba

l P

0%2004 2005 2006 2007 2008 2009 2010 2011

% of T


10

Source: Emerging Markets Private Equity Association. Data as of 31 December 2011.


LPs’ Reasons for Accelerating New Commitments to EM PE Funds in 2012/2013, by Current Exposure

LPs with more exposure to EM PE note the improving risk‐return profile, newer investors are focused on building portfolios.

g / , y p

52%

45%

61%

Increasing total global PE portfolio, including EM PE

Greater exposure to high growth markets

36%

32%

56%

45%

61%

45%

Skills/Experience of EM GPs improving

EM risk‐return improved vs developed markets

56%

44%

36%

13%

26%

Early stages of building an EM PE portfolio

Portfolio diversification

0% 20% 40% 60% 80%

% RespondentsMore Exposure Less Exposure

S 2012 A Gl b l Li i d S l d l i I i i d d di d f d f f d “


11

Source: 2012 EMPEA Global Limited Partners Survey. Excludes Development Finance Institutions and EM‐dedicated funds‐of‐funds. “More exposure” defined as LPs with institutional PE exposure to at least 11 or more EM PE funds and three or more emerging market geographies.

Returns Expectations

LPs’ Annual Net Return Expectations from PE Portfolios Next 3‐5 Years

LPs continue to believe that EMs’ faster growth will translate to higher returns than in developed markets.

Net returns less than 16%28%

80%

100%

74%60%

spon

dents

Net returns of 16%+

26%

72%

20%

40%

% Res

26%

0%Developed PE Markets Emerging Markets


12

Source: 2012 EMPEA Global Limited Partners Survey.


Ranking of Net Return Expectations From 2011 Vintage Funds

LPs are most bullish about their Asian and Latin American funds.

Ranking Market % LPs Expecting 16%+ Net Returns

1 China 76%

Highest Return

Expectations

2 Southeast Asia 71%

3 Latin America 65%

4 Brazil 64%

5 Turkey 61%

6 India 56%

7 Sub‐Saharan Africa 50%

8 Russia/CIS 49%

9 MENA 44%

10 CEE 32%

Lowest Return

Expectations


13



Net Returns Expectations of 16% or More, by Current Exposure

LPs with exposure are generally more optimistic about returns within that geography.Net Returns Expectations of 16% or More, by Current Exposure

90%

73% 73% 72%74%80%

100%

73% 73% 72%

63%57% 57% 57%

50%

74%

58% 60%54%

49% 46%41%

46%60%

80%

espo

nden

ts

41%

15%20%

40%

% of R

e

0%China Brazil Emerging

mktsLatAm (ex. Brazil)

India Russia MENA Sub‐Sah. Africa

Cent./East. Eur.

Exposure No exposure


14



EM PE has outperformed both developed markets PE and listed markets over a 3‐ and 5‐year period.Comparative End‐to‐End Returns by Region as of 30 September 2011

9

12 1214 13

t

Comparative End to End Returns by Region as of 30 September 2011

75

78

3

8

%IRR, ne

‐16

1 1

‐1

Emerging Markets PE & VC MSCI Emerging Markets US PE Western Europe PE S&P 500

One Year Three Year Five Year


15

Source: Cambridge Associates LLC Proprietary Index: pooled end‐to‐end returns, net of fees, expenses and carried interest. 30 September 2011.

Market Attractiveness and Outlook

Latin America and Brazil lead as most attractive markets for GP investment. Attractiveness for GP Investment Over the Next 12 Months—LP Views

Brazil

Latin America (ex. Brazil)

Attractiveness for GP Investment Over the Next 12 Months LP Views

Turkey

India

Southeast Asia

China

MENA

Central/Eastern Europe

Sub‐Saharan Africa

Turkey

Russia/CIS

% of Respondents

Unattractive Attractive Very attractive


16



Attractiveness for GP Investment Over the Next 12 Months—LP Views

LPs See Latin America (ex. Brazil) and Sub‐Saharan Africa as increasingly attractive, India and CEE, once among Top 3, have slipped.Attractiveness for GP Investment Over the Next 12 Months LP Views

Overall Ranking

2012 2011 2010

Latin America (ex. Brazil) 1 4 5Latin America (ex. Brazil) 1 4 5

Brazil 2 1 2

China 3 2= 1

Other Emerging Asia 4 2= 4

Sub‐Saharan Africa 5 7 8

India 6 5 3

Turkey 7 6 N/A

Russia/CIS 8 10 10

MENA 9 9 9

Central & Eastern Europe 10 8 6


17

Source: 2012 EMPEA Global Limited Partners Survey. EMPEA/Coller Capital EM PE Survey (2010, 2011). Turkey replaced South Africa in 2011 Survey.


Market Attractiveness Rankings, Greatest Shifts 2008‐2012

Latin America ex. Brazil and Central & Eastern Europe Have Shifted the Most in Perceived Attractiveness in LPs’ Eyes.

120122011201020092008 More Attractive

Market Attractiveness Rankings, Greatest Shifts 2008 2012

2

3

4Latin America (ex. Brazil)

5

6

7

Ranking

Brazil


India

8

9

10

Central & Eastern Europe

Less Attractive


18

Less AttractiveSource: 2012 EMPEA Global Limited Partners Survey.


LPs’ Planned Changes to EM PE Investment Strategy Over the Next 2 Years

Brazil will see the largest increase in new investors in the next two years, followed by Sub‐Saharan Africa.LPs Planned Changes to EM PE Investment Strategy Over the Next 2 Years

41%

38%

12%

16%

Southeast Asia


29%

26%

24%

14%

18%

28%

Turkey

China

Brazil

11%

16%

20%

17%

20%

21%

/

MENA

India


11%

11%

10%

13%

Russia/CIS


% Respondents

Expand Investment Begin Investing


19

Expand Investment Begin InvestingSource: 2012 EMPEA Global Limited Partners Survey.

Challenges and Inhibitors to Investment

Factors Likely to Deter LPs From Entering Select Markets

Political and regulatory risk are deterring LPs from entering some less penetrated markets.

Limited Number of

established GPs

Oversupply of funds/too competitive

Scale of Opportunity to

invest is too smallEntry valuations are

too highWeak exit

environments

Challenging regulatory/tax issues Political Risk

Factors Likely to Deter LPs From Entering Select Markets

China 6.3% 6.3% 0.0% 0.0% 6.3% 31.3% 31.3%

India 13.3% 20.0% 6.7% 33.3% 13.3% 20.0% 20.0%

Southeast Asia 13.3% 0.0% 20.0% 6.7% 13.3% 20.0% 6.7%

Russia/CIS 20.0% 0.0% 12.5% 2.5% 15.0% 50.0% 72.5%

Turkey 32.1% 7.1% 21.4% 7.1% 10.7% 17.9% 25.0%

Cent./East. Eur. 20.8% 4.2% 25.0% 8.3% 8.3% 12.5% 25.0%

Brazil 13.3% 26.7% 0.0% 6.7% 0.0% 0.0% 6.7%

LatAm (ex. Brazil) 29.4% 0.0% 11.8% 5.9% 23.5% 17.6% 29.4%

MENA 34.1% 2.4% 31.7% 4.9% 24.4% 36.6% 63.4%

Sub‐Saharan Africa 50.0% 0.0% 40.6% 3.1% 28.1% 37.5% 65.6%


20

Source: 2012 EMPEA Global Limited Partners Survey. Note: reflects percentage of respondents answering per region.

Challenges and Inhibitors to Investment

LPs’ Key Concerns When Committing to an EM PE Fund

LPs are most worried about manager instability, less so macro issues such as FX risk.

Talent gap at the investee level (i.e., portfolio company management)

Management team instability (i.e., turnover)

LPs Key Concerns When Committing to an EM PE Fund

Overhang (i.e., surplus of uninvested capital)

Risks related to corruption or integrity issues

Quality of reporting from EM PE managers

Inflation

FX risk

0% 10% 20% 30% 40% 50% 60%

Quality of reporting from EM PE managers

% of Respondents

k d 2 C


21

Ranked #1 or #2 ConcernSource: 2012 EMPEA Global Limited Partners Survey.

Manager Selection

Desirable Factors When Committing to an EM PE fund

Being a “Known Quantity” carries more weight than does brand alone.

Desirable Factors When Committing to an EM PE fund

Previous experience with manager

Previous experience with manager in that …

Wholly independent

Previous awareness of manager

Affiliation with global firm or "brand"

Affiliation with a local or regional firm or …

0% 25% 50% 75% 100%% of Respondents

Somewhat Desirable Highly Desirable


22


Manager Selection

Important Factors in Evaluating Manager

LPs are seeking operational expertise and GP willingness to make a higher commitment.Important Factors in Evaluating Manager

Amount of GP commitment to fund

Operational expertise in target sectors

Distribution of carry among team

Length of working relationship among GP team

Participation by known or respected LPs

Active management of and reporting on ESG risks

0% 20% 40% 60% 80% 100%

Participation by an anchor investor

% of Respondents


23

Important Very ImportantSource: 2012 EMPEA Global Limited Partners Survey.

Manager Selection

Preferred Fund Commitment from an EM GP, by Institution Type

Pension Funds are seeking the highest GP fund commitments.

Endowment/Foundation

Pension Fund

Preferred Fund Commitment from an EM GP, by Institution Type

Fund of Funds

Endowment/FoundationLess than 1%

1‐2%

2%

h %

0% 20% 40% 60% 80% 100%

Development Finance Institution (DFI)

% of Respondents

More than 2%

% of Respondents


24


Manager Selection

More than half of LPs are now seeking GP commitments of more than 2% of the fundPreferred Fund Commitment from an EM GP

Less than 1%

Preferred Fund Commitment from an EM GP

1‐2%

2%

More than 2%

2%


25

Source: 2012 EMPEA Global Limited Partners Survey. Excludes Development Finance Institutions.

d h h l h l

Manager Selection

ESG considerations weigh most heavily in the manager selection decisions of European LPs

LPs’ Approach to ESG Considerations in Fund Manager Selection by Location

41%22%

42%80%

100%

nts

LPs Approach to ESG Considerations in Fund Manager Selection, by Location

59%78%

58%40%

60%

of Respo

nden

0%

20%

North American LPs (2012)

European LPs (2012) ROW LPs (2012)

%

(2012)

Our mandate is restricted or materially impacted by ESG considerations

ESG considerations play a minor or negligible role


26


2011/2012 Survey Respondents

106 investors participated in the survey representative of the LP community in:‐investor location‐type of investing organization

l d ( )

k/

Respondents by Institution Type

‐total assets under management (AUM)

Respondents by RegionUnder

Respondents by PE AUMBank/Asset Manager

5%

Development Other2% Pension Fund

Asia‐Pacific13%

ROW13%

$100 million 7%

$100‐$499

$5 billion+ 24%

Finance Institution

(DFI)20%

Endowment/Gov’t Owned

O 7%

Insurance Company

3%

Pension Fund17%

Europe35%

North America39%

$499 million 28%

$1‐$4.9 billion35%Endowment/

Foundation17%

Fund of funds29%

Org. 7%$500‐$999 million7%

35%


27


EMPEA Webcast SeriesLaunched in 2008, EMPEA has hosted over 25 webcasts to date drawing more than 2,800 participants from 70 , g , p pcountries and more than 525 unique firms.

Webcast Topics have included:

• Anti‐Corruption Policies: What Every EM PE Practitioner Should Know

• Investment Spotlights: Emerging Europe & Mexico• Investment Spotlights: Emerging Europe & Mexico

• Changing Landscape of EM PE Fund Formation

• The MENA Region: An Overview and Update

• The Impact of the AIFM Directive on PE and VC in Emerging Markets

• Private Equity in North Africa: What Every LP Must KnowPrivate Equity in North Africa: What Every LP Must Know

• The Impact of the Dodd‐Frank Act on Investment Adviser Regulation in the U.S.

• Private Equity Investing in the Middle East, North Africa and South Asia

• Evolving Key Terms & Conditions in Today’s EM PE

• Managing Environmental and Social Risks and Opportunities

• How Will the ILPA Principles Shape GP‐LP Relationships in Emerging Markets?

• Catching the Rising Tide of Chinese RMB Funds

• Strategies to Address and Prevent LP Defaults• Strategies to Address and Prevent LP Defaults

• Broken BRICs (a four‐part series)

• Role of the Secondaries Industry in Emerging Markets Private Equity

• Corporate Governance in Emerging Markets Private Equity

• Marketing Your Fund to LPs in Today’s Market Conditions


g y

• Risk Management in Emerging Markets Private Equity

• Recruiting and Talent Management in Emerging Markets Private Equity

28

EMPEA Contact Information

For follow‐up questions on this or other webcasts, please contact Shannon Stroud at [email protected] or +1.202.333.8171.

Please also visit www.empea.net for further information.


29

Appendix

EM PE as Percent of Current PE Allocation

Investors’ Proportion of Current PE Allocation Targeted at EM PE, by Institution Type

80%

100%

Investors Proportion of Current PE Allocation Targeted at EM PE, by Institution Type

60%

80%

espo

nden

ts


20%

40%

% of R

e

0%Development

Finance Institutions

Endowments/ Foundation

Funds of Funds Government‐owned

Organizations

Pension Funds


Institutions Organizations0% 1‐5% 6‐10% 11‐15% 16‐20% 21‐30% More than 30%

30


Appendix

Pension Funds’ Proportion of Current PE Allocation Targeted at EM PE

Pension Funds Allocating a Growing Percent of PE Allocation to EMs

80%

100%

p g

11‐15%

6‐10%Less than 6% 6‐10%40%

60%

espo

nden

ts


20%

40%

% Re

0%2010 Survey 2011 Survey 2012 Survey

Less than 6% 6‐10% 11‐15% 16% or more


31

Source: 2012 EMPEA Global Limited Partners Survey; EMPEA/Coller Capital EM PE Survey (2010, 2011).

Appendix

Desire for exposure to faster growing markets is the leading motivation for increased EM PE commitments overall.LPs’ motivations for accelerating new commitments to EM PE funds in 2012/2013LPs motivations for accelerating new commitments to EM PE funds in 2012/2013

57%Greater exposure to high growth markets

48%

50%

EM risk‐return improved vs developed markets

Increasing total global PE portfolio, including EM PE

34%

41%

Portfolio diversification

Skills/Experience of EM GPs improving

32%

0% 20% 40% 60% 80%

Early stages of building an EM PE portfolio

% Respondents


32

% RespondentsSource: 2012 EMPEA Global Limited Partners Survey. Excludes Development Finance Institutions and EM‐dedicated funds‐of‐funds.

Appendix

LPs’ Annual Net Return Expectations from PE Portfolios Next 3‐5 Years, 2009‐2012

High performance expectations for EM PE ‐ Year on year

LPs Annual Net Return Expectations from PE Portfolios Next 3 5 Years, 2009 2012

Net returns less than 16%46%23% 23% 28%

80%

100%

46%46%

60%

80%

onde

nts

Net returns of 16%+54%

33%

77% 77%

54%

72%40%

% of R

esp

0%

20%


33

2009 2010 2011 2012


Appendix

Distribution of net return expectations from 2011 vintage funds for select markets

Net returns expectations, by region, summary

Latin America

Southeast Asia

China

d

Turkey

Brazil

Latin America

G t th 16%

Russia CIS


India Greater than 16%

Less than 16%

0% 20% 40% 60% 80% 100%

CEE

MENA


34

% of Respondents


Appendix


Net returns expectations, by region, detailed


Southeast Asia

EM Markets Overall

China

India

Turkey

Brazil

Latin America

Less than 10%

11‐15 %

MENA

Russia CIS


India

16‐20%

Above 21%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Developed PE Markets

CEE

% f R d t


35

% of Respondents


Appendix

Even though Asian LPs believe EMs hold greater returns potential, portfolios are overweighted to developed markets

Ranking Market1 China

Ranking of Net Return Expectations From 2011 Vintage Funds Highest Return

Expectations

• Net return expectations among2 Other Emerging Asia

3 Sub-Saharan Africa

4 LatAm and the Caribbean

5 India

Net return expectations among Asian LPs are above 16% for emerging market‐focused 2011 vintage PE funds, and generally below 16% for funds focused on d l d k t5 India

6 MENA

7 Western Europe

8 United States

developed markets

9 South Korea

10 CEE and CIS

11 Australia and New Zealand

12 Japan

Lowest Return Expectations


p

36

Source: EMPEA Special Report: Asian LP Sentiment Toward PE.

N th A i d A i LP b li t l th t EM

Appendix

Distribution of net return expectations from 2011 vintage funds, emerging markets versus developed markets by LP Location

North American and Asian LPs believe more strongly that EM PE will outperform developed markets

Asia-Pacific

ROW

Emerging M k t

developed markets, by LP Location

North America

EuropeMarkets

Returns less than 16%Returns 16% or Greater

Asia-Pacific

ROW

Developed

Returns 16% or Greater

North America

Europe

pMarkets


% of Respondents

37


Appendix

Regional Trends – Latin America

LPs Planning to “Begin” or “Expand” CommitmentsLPs Viewing as “Attractive” or “Very Attractive” g g pg y

91%

92%2012 52%

52%2012

86%

98%2011

46%

48%2011

71%

%

201020%

48%

37%2010

92% 37%

Latin America (ex. Brazil) Brazil% of Respondents % of Respondents


38

( )


Appendix

LPs Viewing as “Attractive” or “Very Attractive” LPs Planning to “Begin” or “Expand” Commitments

Regional Trends – Sub‐Saharan Africa

LPs Viewing as Attractive or Very Attractive LPs Planning to Begin or Expand Commitments

62% 2012 41%201262% 2012 41%2012

67% 2011 38%2011

37% 2010 15%2010


39


% of Respondents % of Respondents

Appendix

Exposure maximums – not market or manager risk – are the leading constraint inhibiting investment in many markets

MENA


Respondents with “No Plans to Invest” claiming to be at “Maximum Recommended Exposure”


Turkey

Russia/CIS

B il

Latin America (ex‐Brazil)

India

Southeast Asia

0% 10% 20% 30% 40% 50% 60% 70%

China

Brazil


40


Appendix

Desired GP Commitment % by Geography

Desirable GP Commitment %, by those planning to Begin/Expand Investment in Market

China

Brazil


India


Southeast Asia

China

1‐2%

MENA

Russia

Turkey

India2%

More than 2%

0% 20% 40% 60% 80% 100%


MENA

% f R d t


41

% of Respondents


Appendix

Importance of ESG considerations, 2012 versus 2011

LPs Approach to ESG Considerations in Fund Manager Selection

80%

90%

100%

ESG considerations play a minor or negligible role in our fund selection

LPs Approach to ESG Considerations in Fund Manager Selection

40%

50%

60%

70%

Respon

dents process

Our investment mandate is unrestricted, but ESG considerations nonetheless play a material role in

10%

20%

30%

40%

% of

p your fund selection process

Our investment mandate is directly restricted by ESG considerations

0%2012 2011


42


Documents

LP Outlook for Emerging Markets: LP Survey Results€¦ · 11/04/2012 · Today’s Agenda • Panelist Introductions • Trends in Commitments and Allocations • Returns Expectations