CRISIL GR&A - Opportunities with EM Private Equity

OPPORTUNITIES WITH

Suprabha Dikshatha

Global Head of Financial Research

CRISIL GLOBAL RESEARCH & ANALYTICS

EM PRIVATE EQUITY

June 2014

Opportunities with EM Private Equity

EM Private Equity — Trends and Takeaways

2

EM PE under stress on the back of high dry powder, low deal activity and

less than impressive returns

LPs stay committed to emerging markets – share in portfolio expected to

escalate from 10% to 15% in 2 years

Asset Allocation rather than fund manager selection will turn key as

returns of top and bottom quartile performers converge

2013 Snapshot

GPs Managing

the Challenge

The Silver

Lining

Trend to Watch

for LPs

GPs sourcing opportunities in newer regions and sectors and are finding

newer ways of money making by leveraging local market knowledge


Top Trends in EM Private Equity

Fundraising

EM funds to face tough times on the back of DM resurgence and

high dry power

3

“Our very survival depends on our ability to stay awake, to adjust to new

ideas, to remain vigilant and to face the challenge of change.”

- Martin Luther King Jr.


Fundraising Turns Tougher for EM Funds

4

Renewed competition from DM dampens interest for EM funds

Global fundraising by region across years

Source: EMPEA, Bloomberg Finance LP, Preqin

11%

21%

18%

21%

12%

14%

0%

5%

10%

15%

20%

25%

0

50

100

150

200

250

300

350

2009 2010 2011 2012 2013 2014 Q1

US

D b

n

United States Global ex-US DM Emerging Markets EM as % of Global Total (RHS)

+42%

-19%


High Dry Powder Levels are a Limiting Factor

5

Dry Powder for EM at over 5 times the current level of investments

Dry powder as a proportion of yearly investments across regions

Source: EMPEA, Bloomberg Finance LP, Preqin

100

120

140

160

180

200

220

240

0x

2x

4x

6x

8x

10x

12x

14x

2009 2010 2011 2012 2013

US

D b

n

As a

mu

ltip

le o

f d

eal

valu

e

Dry powder: Asia and RoW (RHS) North America Europe Asia and RoW


Growth and Venture Funds Defy Tough Environment

6

Strongly expanding EM middle-class fuels interest

Number of EM PE fund issues* by fund type Number of DM PE fund issues* by fund type

* By vintage year of funds; 2014 until end of Apr-2014

Source: Bloomberg Finance LP, Preqin

0%

20%

40%

60%

80%

100%

2009 2010 2011 2012 2013 2014 YTD

Buyout Coinvestment Debt

Fund Of Funds Growth Real Assets

Real Estate Secondary Venture

0%

20%

40%

60%

80%

100%

2009 2010 2011 2012 2013 2014 YTD

Buyout Coinvestment Debt

Fund Of Funds Growth Real Assets

Real Estate Secondary Venture


Newer Regions Like MENA Receiving Greater

Attention

7

Investors in search of regions with strong beta potential

Number of EM PE fund issues* by region focus Value of EM PE fund issues* by region (2014 YTD)

* By vintage year of funds; 2014 until end of Apr-2014


0%

20%

40%

60%

80%

100%

2009 2010 2011 2012 2013 2014 YTD

Any Asia Pacific Emerging

Eastern Europe Latin America and Caribbean

Middle East and Africa Combo

Asia Pacific Emerging

36%

Eastern Europe

18%

Latin America

4%

Middle East and Africa

42%

Asia Pacific Emerging Eastern Europe

Latin America Middle East and Africa


Mid-sized Funds are getting Squeezed-out

8

Trend well in-line with observations across the globe

Number of EM fund issues* by fund size (USD) Proportion of fund issues* in EM and DM with

fundraising size between $250mn – $1bn

* Excludes Venture funds; By vintage year of funds; 2014 until end of Apr-2014


0%

20%

40%

60%

80%

100%

2009 2010 2011 2012 2013 2014 YTD

<100mn 100-250mn 250-500mn

500mn-1bn >1bn

10%

15%

20%

25%

30%

35%

40%

2009 2010 2011 2012 2013 2014

EM DM



Deal Making

2013 revival in EM being less robust than in DM casts shadow on

future deals

9

“It is often in the darkest skies that we see the brightest stars.”

- Richard Evans


Total Value of Deals Over 50% Below Recent Peaks

10

Add-on finds greater interest in DM than in EM

Number of EM buyout deals* by deal type Number of DM buyout deals* by deal type

* Excludes deals with value <$10mn; 2014 until end of Apr-2014


0

10

20

30

40

50

60

70

0

50

100

150

200

250

300

350

400

450

2009 2010 2011 2012 2013 2014YTD

# of deals Value (USD bn, RHS)

0

50

100

150

200

250

300

350

400

450

0

200

400

600

800

1000

1200

1400

1600

1800

2000

2009 2010 2011 2012 2013 2014YTD

# of deals Value (USD bn, RHS)


Growth and PIPE Deals Rule EM

11

Deal count and value on receding mode over the past two years

EM deal count and deal value* DM deal count and deal value*

* By investment year; excludes deals with value <$10mn; 2014 until end of Apr-2014


0%

20%

40%

60%

80%

100%

2009 2010 2011 2012 2013 2014 YTD

Add-on Control Buyout Distressed Debt

Growth Capital Merger PIPE

Public To Private Recapitalisation Others

0%

20%

40%

60%

80%

100%

2009 2010 2011 2012 2013 2014 YTD

Add-on Control Buyout Distressed Debt

Growth Capital Merger PIPE

Public To Private Recapitalisation Others


Non-BRIC Regions Turning More Attractive

12

China and India collectively account for 40% of total deals

Breakdown of number of EM deals* by country Breakdown of total value of EM deals* by country


Source: Bloomberg Finance LP, EMPEA, Preqin

0%

20%

40%

60%

80%

100%

2009 2010 2011 2012 2013 2014 YTD

China India Brazil

Russia Israel South Korea

Poland South Africa Others

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

2009

2010

2011

2012

2013

2014YTD

China India Brazil

Russia Israel South Korea

Poland South Africa Others


Consumption than Investment Growth to Drive Deals

13

Tech, Telecom and Consumer account for over 55% of deals

Breakdown of number of EM deals* by sector Breakdown of number of DM deals* by sector



0%

20%

40%

60%

80%

100%

2009 2010 2011 2012 2013 2014 YTD

Basic Materials Consumer Discretionary

Consumer Staples Energy

Financials Health Care

Industrials Technology

Telecommunication Utilities

Others

0%

20%

40%

60%

80%

100%

2009 2010 2011 2012 2013 2014 YTD

Basic Materials Consumer Discretionary

Consumer Staples Energy

Financials Health Care

Industrials Technology

Telecommunication Utilities

Others


Deal Multiples Have Risen in Recent Times

14

EM multiples however remain lower than DM, in line with public equities

EBITDA multiple of EM and DM deals* over time P/E multiple of EM and US public equity markets

* By investment year; Multiple weighted by EBITDA; excludes deals with value <$10mn; 2014 until end of Apr-2014

Source: Bloomberg Finance LP, S&P Capital IQ

5x

10x

15x

20x

25x

30x

35x

Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14

MSCI EM

S&P 500 Index

MSCI EAFE

0x

2x

4x

6x

8x

10x

12x

2009 2010 2011 2012 2013 2014 YTD

EM Private Equity

US Private Equity

Global ex-US DM Private Equity



Exits

Environment for exits stays poor in contrast to a sedate revival

in DM

15

“Punctuality is not just limited to arriving at a place at right time, it is also

about taking actions at right time.”

- Amit Kalantri


Holding Period of Investments on The Rise

16

Over 60% of portfolio companies in EM funds now over 3 years’ old

Average holding period (in years) of EM deals* Proportion of PE fund portfolio constituents with

average age over 3 years in EM and DM

* By exit year; 2014 until end of Apr-2014


0

1

2

3

4

5

6

2009 2010 2011 2012 2013 2014 YTD

Average Median

0%

10%

20%

30%

40%

50%

60%

70%

2009 2010 2011 2012 2013 2014 YTD

EM DM


Sale to GP Growing in EM in Line with

17

Poor IPOs and pressure to exit providing additional impetus

Breakdown of number of EM exits* by exit type Breakdown of number of DM exits* by exit type

* By exit year; 2014 until end of Apr-2014


0%

20%

40%

60%

80%

100%

2009 2010 2011 2012 2013 2014 YTD

IPO Merger

Private Placement Recapitalisation

Restructuring Sale to GP

Sale to Management Trade Sale

Unspecified Exit

0%

20%

40%

60%

80%

100%

2009 2010 2011 2012 2013 2014 YTD

IPO Merger

Private Placement Recapitalisation

Restructuring Sale to GP

Sale to Management Trade Sale

Unspecified Exit



Performance

Long-term poor performance continues. EM PE may be better than

EM equities

18

“Don't tell me about your effort. Show me your results.”

- Tim Fargo

Opportunities with EM Private Equity 19

Returns consistently weaker than DM PE

* Performance by vintage year; Performance as at end of April 2014

# Performance as at end of Q3 2013

Source: Cambridge Associates

EM PE Net IRRs* have lagged its DM peers

especially the US

…as also reflected in recent underperformance#

vs. DM PE

-10

0

10

20

30

40

50

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

Net

IRR

(%

)

CA Global ex-US DM PE Index

CA US PE Index

CA Global EM PE & VC index

0%

4%

8%

12%

16%

20%

1-Year 3-Year 5-Year 10 Year 15 Year

CA Global EM PE & VC index

CA US PE Index

CA Global ex-US DM PE Index

EM PE Returns on A Structural Decline


* Based on analysis since 1990


Source: Cambridge Associates, Bloomberg Finance LP

In the short-to-medium term, EM PE has

out-performed EM equities# in absolute terms…

…and manages nearly as many positive quarters* as

peers

From a risk perspective, EM PE scores* over EM

equities comprehensively in terms of max drawdown… …and carries lower co-efficient of variation* vs equities

On a risk-adjusted basis, on an attractive footing vs. EM equities

0%

5%

10%

15%


CA Global EM PE & VC index MSCI Emerging Markets Index

0%

15%

30%

45%

60%

75%

90%

EM PE US PE Global ex-US DM

PE

MSCI EM S&P 500 MSCIEAFE

MSCIWorld

-60%

-50%

-40%

-30%

-20%

-10%

0%

EM PE US PE Global ex-US DM

PE


MSCIWorld

0

1

2

3

4

5

6

EM PE US PE Global ex-US DM PE


MSCIWorld

EM PE Still Scores Over EM Equities


EM PE Fares Favorably Across Asset

Classes

21

Provides consistent positive returns across time frames


Source: Bloomberg Finance LP, Cambridge Associates

Annualized performance# of EM and DM PE versus other competing asset classes

-10%

-5%

0%

5%

10%

15%

20%

25%


Emerging Markets PE US PE MSCI EM MSCI World

Russell 3000 JPM EM Bond Index BofA ML Government Bond Index BofA ML Corp. IG Bond Index

S&P GSCI Commodity Index HFRI Hedge fund Index S&P Global Property Index

EM PE Fares Favorably Across Asset Classes


Trend is more evident across deals than among funds

* Based on analysis since 1990; excludes Venture funds; Performance as at end of April 2014 # Based on complete exits since 2004


Net IRR* of EM- and DM-focused PE funds by fund

size (in %)

Net IRR# of EM deals by deal size (in quintiles)

based on complete exits (in %)

6.0

6.5

7.0

7.5

8.0

8.5

9.0

9.5

10.0

<100mn 100-250mn 250-500mn 500mn-1bn >1bn

Median EM Median DM

0%

10%

20%

30%

40%

50%

60%

Bottomquintile

2 3 4 Top quintile

Smaller-sized Funds, Deals Offer Better Returns


Late-stage funds best bet among venture funds

* Based on analysis since 1990 # Based on complete exits since 2004


Median Net IRR# of deals by buyout activity Median Net IRR* of venture funds by strategy

0%

10%

20%

30%

40%

50%

60%

Control Buyout Growth Capital PIPE Recapitalisation

Median IRR Risk adjusted returns

0%

1%

2%

3%

4%

5%

6%

7%

Early Stage Late Stage Multi Stage

Median-EM Median-DM

PIPE Deals Score on A Risk-adjusted Basis


EM Private Equity: Key Takeaways

24

“Our lives are defined by opportunities, even the ones we miss.”

- Eric Roth

Key Takeaways for GPs

Need to find niche opportunities in fundraising, deal making and

return generation


Most LPs looking to increase commitments

* Excludes development finance institutions and EM-focused fund-of-funds

Source: EMPEA

Anticipated level of new commitments to EM PE

funds over the next 2 years*

Proportion of LPs with PE return expectation >16%

across developed and emerging markets

0%

20%

40%

60%

80%

100%

2009 2010 2011 2012 2013 2014

Higher About the same Lower

0%

20%

40%

60%

80%

100%

2009 2010 2011 2012 2013 2014

Developed Markets Emerging Markets

LPs Remain Firmly Committed to EM PE


Lat-Am (ex-Brazil), SE Asia and Sub-Saharan Africa are the favorites

* Turkey was not included in the 2009 and 2010 survey, while South-East Asia was not part of the 2009 survey

Source: EMPEA

Attractiveness rank of Emerging Markets for GP Investment over the next 2 years – LP Views

Region 2009 2010 2011 2012 2013 2014

Latin America (ex. Brazil) 5 5 4 1 3 1

Southeast Asia* NA 4 2 4 2 2

Sub-Saharan Africa 6 8 7 5 1 3

China 1 1 2 3 4 4

Brazil 2 2 1 2 6 5

Middle East and North Africa 8 9 9 9 10 6

Central and Eastern Europe 4 6 8 10 7 7

India 3 3 5 6 9 8

Russia/CIS 9 10 10 8 8 9

Turkey* NA NA 6 7 5 10

LPs Chasing Growth Avenues in New Regions


MENA, SE Asia and Sub-Saharan Africa appear attractive

* Size of the bubble is proportional to GDP 2013 of the respective country in US$ terms

Source: IMF, Bloomberg Finance LP, EMPEA

Scatter bubble* of expected 5Y GDP CAGR against PE penetration levels across key regions

Israel

US

UK

0.50% 0.70% 0.90% 1.10% 1.30% 1.50% 1.70% 1.90%

Sub-Saharan Africa (ex-SA)

Russia/CIS

S Korea

Lat-Am (ex Brazil)

India

SE Asia

China

Brazil

CEE

S Africa

MENA

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

-0.05% 0.00% 0.05% 0.10% 0.15% 0.20% 0.25% 0.30%

5Y

GD

P G

row

th

PE Deals as a % of GDP - 2013

Newer Regions Under-penetrated


Opens up more attractive return opportunities

* Based on deal data from 2009; excludes deals with value <$10mn

Source: S&P Capital IQ

Median EBITDA multiple of deals* in major EM countries along with the universe median

Deals in Newer Regions at Lower Multiples

4x

6x

8x

10x

12x

14x

Turkey CEE China Taiwan India South Korea Brazil SoutheastAsia

Russia Lat-Am (exBrazil)

Sub-SaharanAfrica

MENA


Opportunities with EM PE – GP Takeaways

30

Funds with focus on newer regions to attract greater LP Interest

Mid size funds might find the near term challenging

Deal multiples and average holding period to stay elevated

Investments in established companies better than early stage companies

Beta driven returns largely a thing of the past, at least in the BRIC

Significant opportunities remain; Exploiting inefficiencies key to alpha

Fundraising

Deal Making

Return

Generation

Bottom Line

Deals in sectors closely associated with consumer story a better bet

Smaller size deals to turn order of the day; BRIC to offer big-ticket deals


“Results fuel belief which causes us to take more action and get more

results.”

- Todd Stocker

EM Private Equity: Key Takeaways

Key Takeaways for LPs

Asset Allocation turning more critical than fund manager selection


Differential between global and local players has also vanished

* By vintage year

Source: Bloomberg Finance LP, Cambridge Associates

Difference between top quartile and bottom

quartile fund* performers by MOIC – EM vs. DM

Net IRR (in %)* of EM funds by fund manager

domicile group

0.0

0.5

1.0

1.5

2.0

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

EM PE US PE Global ex-US DM PE

-5

0

5

10

15

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

Net

IRR

(%

)

Local Global

Gap Between Winners and Losers Receding


Opportunities with EM Private Equity – Q & A

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CRISIL GR&A - Opportunities with EM Private Equity

Economy & Finance

Transcript of CRISIL GR&A - Opportunities with EM Private Equity