Over recent years, fund managers focusing on growth stage investments, which target unleveraged significant minority positions in profitable, maturing companies, have looked to emerging markets for potential investments. Preqin’s data shows that growth is the only fund type that has seen the number of funds surpass the levels witnessed in the boom period of 2007-2008. Emerging markets are stimulating environments, conducive for strong growth opportunities that can also provide an alternative to traditional markets for portfolio diversification. Emerging markets encompass countries in transition, such as China and India, which are attractive to investors due to the tremendous economic growth and development underway there, creating potential that can be translated into promising returns. Typically, these regions have undergone, or are in the process of undergoing, political and economic reforms, striving towards greater liberalization, privatization, international trade and foreign investment.
Preqin’s Fund Manager Profiles online service reveals that the US still leads the way in terms of the greatest number of firms actively managing growth funds. There are currently 116 firms based in the US that have raised private equity growth funds, up from 99 this time last year. China has the second highest number of firms managing growth funds with 89, while the UK (35), India (33) and Hong Kong (31) follow behind.
With regards to industry focus, consumer discretionary is the sector most commonly targeted, with 55% of growth firms looking to invest in companies in this space. Industrials, healthcare and information technology are the other industries that over half (51%) of firms focus on. In contrast to this, 67% of venture capital firms predominantly focus on the technology industry, which is typically not an industry targeted by a high proportion of growth fund managers due to the higher risks involved.
A breakdown of private equity growth firms that have raised a fund shows that 59% of them were raised by first-time fund managers. This figure is down from 61% in 2012, suggesting that first-time fund managers are finding it harder to raise capital from LPs.