Many investors have increasingly sought exposure to emerging markets due to their potential for rapid economic growth, and as a method for portfolio diversification. Fund of funds vehicles investing in emerging markets provide these benefits to LPs that lack experience within these regions, while mitigating risk.
Preqin’s Funds in Market database currently tracks 155 private equity funds of funds in market, of which 14 will look to invest in emerging markets. These funds are looking to raise over $2bn in aggregate capital, and will deploy funds across a range of emerging regions, including Africa and Latin America. One of the largest of these vehicles is Avanz Capital’s inaugural fund of funds vehicle, Avanz EM Partnerships Fund, which is the only first-time manager on the list. The vehicle is targeting a final close of $250mn, and will invest in a number of emerging markets, including South America, Sub-Saharan Africa, South Asia and ASEAN economies.
The majority of private equity fund of funds managers with an interest in emerging markets are represented by those based in North America (50%) or Europe (38%). This is unsurprising considering the breadth and depth of the private equity asset class in these developed economies, with fund managers more able to extend their investment focuses beyond their domestic markets. In comparison, Asia-based managers and those headquartered in other regions represent 8% each, reflecting the relative smaller size and level of development of the private equity industry within these geographies.
The chart above depicts the number of private equity funds of funds to reach final close historically, and highlights those within each year that are focused on opportunities in emerging markets. At their peak, 14 such fund of funds vehicles reached final close in both 2007 and 2008. However, this record number has not been reached since, as the aftermath of the financial crisis saw a reduction in the total number of all funds of funds raised, and therefore, a reduction in the total number of emerging market-focused vehicles. However, looking at the figures proportionately, we can see that in 2015 YTD, 16% of all funds of funds closed are targeting emerging markets – the highest proportion to date.