The Great Wall of Capital

I frequently wonder, “Does it makes sense to think of EM PE as an industry anymore?”

Two recent research releases — one pertaining to fundraising and one to investment — led me to ponder this question anew.

On the fundraising side, EMPEA Industry Statistics show PE / VC funds targeting Emerging Asia have raised $152 billion over the last three years. Of that:

  • China-dedicated funds have earmarked $70B (N.B. this excludes government guidance funds);
  • Pan-Asia / regional funds have captured $57B; and,
  • Country-dedicated or sub-regional funds constitute the remaining $25B.

During the same period, funds targeting all other EM regions raised only $19B (see below).

Screen Shot 2019-03-11 at 1.14.10 PM

Last year was a blowout, with nearly $70B raised for Asia-focused PE / VC funds, with a paltry $7B raised across all other EM regions (see below).

Screen Shot 2019-03-11 at 1.14.31 PM

Asia has gone from capturing 65% of EM PE fundraising in 2012 to 91% in 2018.

Does it make sense to think of a unified industry when there’s an abundance of capital commitments in Asia, and scarcity everywhere else?

And what are these people who are throwing money at China thinking? (~75% of capital has gone to USD funds over the last three years).

This gets to point two. Bain’s Global Private Equity Report 2019 reveals that $81B was invested in Chinese start-ups in 2018 (32% of global VC capital invested).

Yet, EMPEA’s stats show only $28B in PE / VC investment in China for the year.

A gap of $53B is enormous. It may be down to methodology, but I suspect a large part of that gap is due to the wide array of non-financial investors deploying capital in the tech ecosystem (we talked about this in Sep ’17).

If, in fact, EM PE / VC funds aren’t driving the bulk of the activity in China’s new-economy businesses, then what does that tell us about the asset class as a vehicle for accessing private markets opportunities?

One thing it tells us is that the tent is getting bigger. The universe of players and strategies for EM private markets is expanding, such that it’s difficult to shoehorn the multiplicity of actors into the confines of an industry. (See, for example, our newsletter from last May).

But more to the point, I think it suggests that LPs should reconsider whether traditional asset allocation buckets are an appropriate framework for thinking about long-term investments in EM.

What do you think?

Alla prossima,


Очень Плохие Новости

Look, I know nothing about the incarceration of Mike Calvey and his colleagues from Baring Vostok beyond what I’ve read in the press. But I take Mike’s statements about his arrest being a well-connected businessman’s ploy to gain leverage in an arbitration dispute in London at face value.

interviewed Mike six years ago, and initially, I held out hope that his view on the ability to do business in the market might be vindicated — that independent courts would adjudicate a commercial dispute in a “non-strategic” sector, and that he wouldn’t be locked in a cell for seemingly capricious reasons. But, increasingly, it appears like a garden-variety case of state capture.


China’s Private Sector

In case you haven’t been paying attention to the evolution of China’s political economy, the FT’s Henny Sender wrote two excellent articles last month that merit your consideration:

Marinate on the following quotes:

Chinese entrepreneurs will privately admit that a bigger motivation for them to sell their businesses [to PE firms] now is the loss of confidence in their own government.

The country’s entrepreneurs have never felt more threatened.

In President Xi Jinping’s China there is no such thing as a truly private company. No corporate entity can say no to Beijing, whether its ownership is in the hands of official or nominally private entities.

What are the actions of the country’s entrepreneurs telling us?

Also, Henny cites a JPMorgan statistic that reveals China’s balance of payments data can’t account for $46B in capital flight outflows per quarter since 2016, “suggesting wealthy Chinese are still finding ways to evade [capital control] restrictions.”

Ruchir Sharma, Head of Emerging Markets and Chief Global Macro Strategist at Morgan Stanley, once shared the helpful heuristic, “follow the locals.” If elites are seeking to get their funds out of the country, what does that tell us?

Reminder: China-dedicated PE / VC funds have raised $70B over the last three years.

P.S. According to the aforementioned Bain & Co. report, Internet / tech companies have been the principal driver of PE growth in Greater China (see below).

Screen Shot 2019-03-11 at 1.15.10 PM

P.P.S. Bain & Co. say the median EBITDA multiple for deals in China’s new-economy companies is 31x. Not a typo.



John Authers had a delightful newsletter that touched upon Factfulness, the last testament of Hans Rosling, the energetic man who used bubble charts to smash preconceptions about the state of the world. John’s punchline is that everyone should probably invest more in EM. (*saved you a click*)

I was so taken by John’s write-up that I immediately purchased a copy of Factfulness and read it in a day. It’s quite fun!

Hans shared 10 “Factfulness Rules of Thumb” to help make sense of the world and its figures. And lo and behold, when I received a copy of KKR’s Annual Letter, I saw: (i) ~50 million retirees and pensioners have exposure to the firm’s investments; and, (ii) it generated ~$1.1 billion in management fees in 2018.

And then I thought: FACTFULNESS RULE #5! Lonely numbers are impressive, so get them in proportion!

Amazing. Using simplifying assumptions, on average, each pensioner is paying KKR $22 each year to manage a sliver of their retirement savings.


From the Bookshelf

Consider now an old man who complains
Excessively about his death to come.
Nature would justly cry out louder still
And say in bitter words, ‘Away, you rogue,
With all these tears and stop this sniveling.
All life’s rewards you have reaped and now you’re withered,
But since you always want what you have not got
And never are content with that you have,
Your life has been unfulfilled, ungratifying,
And death stands by you unexpectedly
Before the feast is finished and you are full.
Come now, remember you’re no longer young
And be content to go; thus it must be.’
She would be right, I think, to act like this,
Right to rebuke him and find fault with him.
For the old order always by the new
Thrust out gives way; and one thing must from another
Be made afresh; and no one ever falls
Into the deep pit and black Tartarus.

— Lucretius, On the Nature of the Universe (Oxford World’s Classics: 2008)

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