It has been five months since we released our first research piece, Is Emerging Markets Private Equity Dying?, and though Portico is still in its infancy, we’re excited about the doors this study continues to open, and the conversations we’ve been having with firms across geographic and market cap segments.
Two recent developments suggest that the trends highlighted in Is EM PE Dying? are unlikely to reverse anytime soon:
- Fundraising data from EMPEA show that the number of final closes for funds <$250m in size continues to decline; meanwhile, capital raised for EM VC and private credit funds has reached all-time highs.
- Apparently IFC is looking to commit up to $25m to Carlyle’s fifth Asia growth fund, underlining the trend of DFIs supporting established fund managers (that probably should have graduated from DFI capital).
Keep your eyes peeled for Portico’s forthcoming Middle Market Survey. We’d truly value your input. For those suffering survey fatigue, there will be a prize drawing for a Year in Books Subscription from the delightful booksellers at Heywood Hill in Mayfair.
Coming to Southeast Asia in May
I’ll be traveling through Southeast Asia next month, with stops planned for Singapore, Jakarta, and HCMC. I’m looking forward to (re-)connecting with several firms, and to kicking the tires on a hypothesis that the region presents a qualitatively different opportunity set than was on offer five years ago. Back then, investors got bulled up on the region, but had questions about the investable market. Have things changed? (It’s a small sample, but Cambridge Associates Benchmark data show TVPI of 1.07 for 2010-13 vintage Southeast Asia funds).
I’m particularly excited about the visit to Vietnam, where there have been some big deals taking place, including:
- KKR’s $150m transaction in Masan Nutri-Science, continuing the firm’s quality food thesis (seen with its Modern Dairy and COFCO Meat deals in China);
- VinaCapital’s joint venture with Warburg Pincus to create a hospitality JV (valued at up to $300m); and,
- TPG’s intention to acquire a stake in Vietnam Australia International School, providing a potential liquidity event for Mekong Capital.
If you’re in the region, I’d love to meet with you. Drop me a line and I’ll try to find a time that works for you!
Deal Flow in Africa
AVCA and EY released their latest study on exits in Africa, and the data point that jumps off the screen is the rapid growth of secondary buyouts as an exit channel, which hit *17* last year. There haven’t been more than 7 secondary buyouts / year going back to 2007.
The other dynamic at play—and I haven’t pulled data on this, so it’s just an impression—is a steady drumbeat of GPs co-investing in deals on the continent. Taken together, these two dynamics suggest that deal flow may very well be an issue in Africa (at least for firms managing traditional 10-year, closed-end structures).
But at the same time, the clear growth in secondary buyouts and (suspected) increase in GP co-invests may not necessarily be a bad thing. We could be witnessing a phenomenon similar to tier one PE / VC in the United States, where sequences / consortia of private capital investors scale up winner-take-most (if not all) platforms, or build out category leaders with decent moats. Time will tell!
The Gift that Keeps on Giving in Eastern Europe
Speaking of secondary buyouts and private capital building category leaders, Zabka Polska—operator of convenience stores, Freshmarkets, and supermarkets—has been sold to a PE buyer once again. Over the last 17 years, Zabka has changed hands from:
PineBridge Investments ➠ Penta Investments ➠ Mid Europa ➠ CVC
The company’s growth over the last two decades is truly astonishing. For its part, Mid Europa reportedly fetched €1.1B after growing Zabka’s top- and bottom-lines 3x and 4x, respectively, and opening 500 stores / year. Na zdrowie!
Consumer Sentiment in Latin America
It’s not a good idea to try to call tops or bottoms—so I won’t—but one of the data streams I’ve been monitoring with interest is consumer sentiment in Brazil and Mexico. Given the political and economic turmoil in the former, and the fact that average manufacturing wages have been flat for a decade in the latter, it’s little surprise that consumers in these countries have been gloomy for five years running.
And yet, since the beginning of 2015, there has been a marked divergence in retail sales volumes across these two markets. Brazilian retail sales have declined in line with a contraction in consumer lending. By contrast, Mexican retail sales have been on a tear, fueled, in part, by a rapid expansion in household credit.
Brazilian consumer confidence is recovering, as are retail sales, and consumer credit growth remains restrained. Though the politics are slippery, it appears like a bottoming process is at hand. Mexico’s debt-fueled consumption binge, however, gives one pause. It’s hard to look at the chart below without contemplating a parallel to the morning after a night out in La Condesa, having imbibed too much mezcal and consumed too few tacos.
From the Bookshelf
Earlier this year, I read Carroll Quigley’s Evolution of Civilizations (1961). One of Quigley’s core arguments is that societies create instruments to meet basic human needs (e.g., security, the accumulation of wealth and savings, etc.), but these instruments evolve into institutions, which over time become less effective at achieving their original purposes.
When discussing the interwar period (1919-39), Quigley makes an insightful point about the evolution of the economic system that seems germane to today’s debates about secular stagnation.
The purpose of any economic system is to produce, distribute, and consume goods … As [the economic system] became institutionalized, profits became an end in themselves to the jeopardy of production, distribution, and consumption.
The rub is that the expansion of profit margins through higher prices and lower costs of production ultimately reduced consumption, and increased wealth inequality. Quigley continues:
Such an inequitable distribution of wealth was a very excellent thing as long as lack of capital was prevalent in the economic system, but such a maldistribution of income ceases to be an advantage as soon as the productive system has developed out of all proportion to the processes of distribution and of consumption.To some extent this situation was made worse by the growing separation … between ownership and control of corporations, since this led to an increased accumulation of undistributed profits held by the corporations in control of the management rather than distributed as dividends to the owners. Such undistributed profits became savings with no possibility of serving as consumer purchasing power … Increasing proportions of the national income were going to those persons in the community who would be likely to save and decreasing proportions were going to those persons in the community who would spend their incomes for consumers’ goods.
As someone who genuinely believes in long-term investment, the passage above left me wondering whether this world awash in capital—one in which U.S. after-tax corporate profits (net dividends) amount to $982 billion (see below) and the pension assets of 22 countries total $36.4 trillion—is one that consigns us all to Keynes’s paradox of thrift.
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