The Evolution of

Private Equity in Emerging Markets

March 2018

DisclaimerThe information and opinions in these materials have been prepared by Portico Advisers, LLC (“Portico Advisers”) solely for informational and discussion purposes. Portico Advisers

does not undertake to update these materials and the opinions and conclusions contained herein may change without notice. These materials are provided on an “as is” basis. Portico

Advisers disclaims all warranties, express or implied, including, without limitation, the warranties of merchantability, fitness for a particular purpose, and non-infringement. These

materials are provided with the understanding that Portico Advisers is not rendering professional advice and services. Portico Advisers does not make any warranty that the information

in these materials is error-free, omission-free, complete, accurate, or reliable. Nothing contained in these materials is intended to constitute legal, tax, securities, or investment advice.

Past performance is not necessarily an indicator of future performance. These materials do not constitute a solicitation or any offer to buy or sell any security or financial instrument, or to

participate in any investment strategy. The logos, trademarks, and service marks contained herein are the property of their respective owners.

Copyright © by Portico Advisers, LLC 2018, all rights reserved.

2

215

13291 115 136

219 238 225263 271

60

54

3335

40

69 5554

80 7654

2635

38

35 3930

2636

0

100

200

300

400

500

600

2008 09 10 11 12 13 14 15 16 17

Global PE fundraising ($B)

United States Western Europe Other Developed Markets Emerging Markets

Emerging markets are less than 15% of global PE activity

183

105158

197 203 202

274 291 304 327

123

50

90

112 89 93

132

170 141151

28 3328 24

49

41 4944

27

18

20

2622 24

33

30 27

41

2008 09 10 11 12 13 14 15 16 17

Global PE investment ($B)

Source: EMPEA Industry Statistics, Pitchbook, Portico Advisers

Note: Investment figures include venture capital3

POINT OF DEPARTURE

Agenda

• Definitions

• A brief history of EM PE

• Diagnosing what went wrong

• Thoughts on the future

4

Photo by Romain Vignes on Unsplash

Definitions

Defining characteristics of emerging markets (EM)

• Access to financial and human capital: constrained

• Regulations and political risk: opaque and abundant

• Information asymmetries

• Lack of intermediaries

• Fragmented markets

6

Defining characteristics of EM private equity

• Growth equity

• Minority investments

• Organic growth

• Volatile exit windows

7

Defining characteristics of EM private equity

• Growth equity

• Minority investments

• Organic growth

• Volatile exit windows

8

Or are they?

Defining characteristics of EM private equity

• Growth equity being eclipsed by other strategies

• Minority investments control and structured deals are increasing in frequency

• Organic growth acquisitions and efficiency gains are becoming more common

• Volatile exit windows still true

9

A brief history of EM PE

Photo by Agustín Diaz on Unsplash

A brief history of EM PE in three stages

0 1 2 34 5

3 37

3 57

26

33

5854

17

26

3538

35

39

3026

36

1993 94 95 96 97 98 99 2000 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17

EM PE fundraising by region ($B)

Total

Multi-region

Sub-Saharan Africa

MENA

CEE & CIS

Latin America

Emerging Asia

Source: EMPEA Industry Statistics, Portico Advisers

Note: Excludes private credit, venture capital, and infrastructure and real assets beginning in 200811

Stage 1: Emergence

(Period of reform and privatization)

Stage 2: Expansion

(Period of global financialization)

Stage 3: Consolidation

(Period of crisis and uncertainty)

OVERVIEW

A new dawn in Europe, a new consensus in Washington

Berlin Wall and the Soviet Union collapse; private enterprise is in the ascendant

— 1989: First “Enterprise Funds” established for Poland and Hungary

— 1991: European Bank for Reconstruction and Development created

— 1992: Congress expands Enterprise Funds to former Soviet states

12

Berlin Wall fragment at Johns Hopkins SAIS

Source: Roger Leeds, Private Equity Investing in Emerging Markets (2015), Peterson Institute for International Economics (1990),

USAID, The Enterprise Funds in Europe and Eurasia: Successes and Lessons Learned (2013), Portico Advisers

ORIGINS

Washington and multilateral institutions push for market-driven reforms

— Fiscal discipline, market-based interest rates

— Liberalization of trade and foreign investment

— Privatization of state enterprises

Adventurous investors in the era of privatization and reform

0.8 0.8 1.5 3.4 3.7 1.8 2.6

0.7

1.1

1.0

1.2

0.8

0.8

0.1

0.8

1.5

2.6

4.3

4.8

2.6

3.4

1993 94 95 96 97 98 99 2000

EM PE fundraising by region ($B)

Total

CEE & CIS

Latin America

13

STAGE 1

Source: EMPEA, Venture Equity Latin America, Invest Europe + RVCA, Portico Advisers

Photo by Pedro Gabriel Miziara on Unsplash

Photo by Dan Freeman on Unsplash

Photo by Gus Ruballo on Unsplash

Results of early funds downright discouraging

17

STAGE 1

Poor Performance

0.16%Net pooled return for

1993-2000-vintage EM funds

(as of Q4 2000)

Source: Cambridge Associates, Roger Leeds, Private Equity Investing in Emerging Markets (2015), Portico Advisers

Note: Performance data includes EM buyout and growth equity funds; data as of Q3 2017, returns reported as of Q4 2000

Few Exits

Photo by Mathew MacQuarrie on Unsplash

Source: Roger Leeds, Private Equity Investing in Emerging Markets (2015)19

We had $1 billion of investments in 100 funds across

the emerging markets.

We were missing LPAs, subscription agreements,

histories on capital calls …

— IFC Investment Funds Department Member

“

Source: CDC Group plc annual reports, Norfund, Portico Advisers

Note: Aureos was a JV with Norfund, the Norwegian development finance institution; The Abraaj Group acquired Aureos in 2012; fund commitments are a sample as of 200520

spins out investment managers

(2001) (2004)

becomes fund of funds

investing in EM managers

3 billion new capitalists, liquidity, and the commodity supercycle

5

1521

26

33

6

5

5

105

6

3

4

76

7

35

7

26

33

58

54

2001 02 03 04 05 06 07 08

EM PE fundraising by region ($B)

Total

Multi-region

Sub-Saharan Africa

MENA

CEE & CIS

Latin America

Emerging Asia

21

STAGE 2

Source: EMPEA, Asia Private Equity Review, Venture Equity Latin America, AVCA + SAVCA/KPMG, Invest Europe + RVCA, Gulf Venture Capital Association (GVCA), Portico Advisers

Note: Excludes private credit, venture capital, and infrastructure and real assets beginning in 2008

The market clears; capital scarcity alpha investors return

22

STAGE 2

Source: Cambridge Associates, Portico Advisers

Note: Performance data includes EM buyout and growth equity funds; data as of Q3 2017, returns reported as of Q4 2007

49%

81%

55%

132%137%

130%

28%

43% 45%

59%

41%

26%19%

24%40%

43%

18%

0%

20%

40%

60%

80%

100%

120%

140%

160%

2001 2002 2003 2004 2005 2006

Vintage Year

EM PE fund net IRRs to LPs (%, as of Q4 2007)

Top 5%

Top Quartile

Median

Investors dogpile into emerging markets

5

1521

26

33

6

5

5

105

6

3

4

76

7

35

7

26

33

58

54

2001 02 03 04 05 06 07 08

EM PE fundraising by region ($B)

Total

Multi-region

Sub-Saharan Africa

MENA

CEE & CIS

Latin America

Emerging Asia

23

STAGE 2

Source: EMPEA, Asia Private Equity Review, Venture Equity Latin America, AVCA + SAVCA/KPMG, Invest Europe + RVCA, Gulf Venture Capital Association (GVCA), Portico Advisers

Note: Excludes private credit, venture capital, and infrastructure and real assets beginning in 2008

106%CAGR

Photo by Igor Ovsyannykov on Unsplash

Photo by Dawid Zawiła on Unsplash

Photo by Shripal Daphtary on Unsplash

Photo by Adrian Korte on Unsplash

Crisis, consolidation, and stagnation

1216

23 24 25 24 22 19

31

6

84

95

3

3

17

26

35

38

35

39

30

26

36

2009 10 11 12 13 14 15 16 17

EM PE fundraising by region ($B)

Total

Multi-region

Sub-Saharan Africa

MENA

CEE & CIS

Latin America

Emerging Asia

28

STAGE 3

Source: EMPEA Industry Statistics, Portico Advisers

Note: Excludes private credit, venture capital, and infrastructure and real assets

0.5%CAGR

Photo by Jeremy Bishop on Unsplash

The number of growth funds achieving a close nearly halves

Source: EMPEA Industry Statistics, Portico Advisers30

134

75

0

20

40

60

80

100

120

140

160

2009 10 11 12 13 14 15 16 17

# o

f F

un

ds

PE funds achieving a close by strategy (#)

Growth

Buyout

44%

decline

STAGE 3

Capital concentrates in fewer, larger funds

31

$6.2$12.9 $15.7

$16.3 $16.1

$32.3

$14.5 $15.5

$19.6

0%

10%

20%

30%

40%

50%

60%

70%

2009 2010 2011 2012 2013 2014 2015 2016 2017

% o

f To

tal P

E / V

C C

ap

ita

l R

ais

ed

Capital raised by PE / VC funds ≥ $1B in size (% of total capital raised, $B, # of funds)

Source: EMPEA Industry Statistics, Portico Advisers

Note: Figure includes venture capital funds

# of Funds ≥ $1B 5 9 11 9 6 16 5 8 5

STAGE 3

Fewer new firms are entering

Source: EMPEA Industry Statistics

Note: Includes both final and interim closes32

STAGE 3

44% 45%55%

61% 58%

26%30%

32%

32%33%

30%24%

13%7% 9%

0%

20%

40%

60%

80%

100%

2008-2009 2010-2011 2012-2013 2014-2015 2016-2017

% o

f To

tal C

ap

ita

l R

ais

ed

EM growth equity fundraising by fund sequence, 2008-17 (% of total capital raised)

First-time

Second or Third

Fourth or Later

DFIs are exhibiting a “flight to quality”

Source: EMPEA, Preqin, Portico Advisers

Note: Includes 12 DFIs; fund # is based on the total number of funds that a firm has raised, not simply sequential funds in a series; data through 1H 16 or latest available33

STAGE 3

0

10

20

30

40

50

08 09 10 11 12 13 14 15 16

# o

f D

FI C

om

mitm

en

ts

Fund I Fund IV+

08 09 10 11 12 13 14 15 16

Vintage Year

Fund II Fund IV+

08 09 10 11 12 13 14 15 16

Fund III Fund IV+

DFI commitments to EM funds by fund sequence (#)

A lost decade for LPs

34

0.0x

1.0x

2.0x

3.0x

4.0x

5.0x

6.0x

0

10

20

30

40

50

60

2001 02 03 04 05 06 07 08 09 10 11 12

Net D

PI M

ultip

le

EM

PE

Fu

nd

rais

ing (

$B

)

EM PE fundraising and net distributions to paid-in capital ($B; DPI multiple)

Fundraising (lhs)

Top 5 Percent (rhs)

Upper Quartile (rhs)

Median (rhs)

STAGE 3

Source: Cambridge Associates, EMPEA Industry Statistics, Portico Advisers

Note: Performance data includes EM buyout and growth equity funds; data as of Q3 2017

72%

61%57% 55% 54%

43%

2012 2013 2014 2015 2016 2017

LPs expecting net returns of 16%+ from EM PE funds

35Source: EMPEA, Global Limited Partners Surveys, Portico Advisers

6%3%

13%

22%

13%

25%

2012 2013 2014 2015 2016 2017

% of LPs decreasing allocations to EM PE

Return expectations have been declining for five years LPs are planning to reduce exposure

Investors are walking away from EM PE once again

STAGE 3

43%

Photo by Dikaseva on Unsplash

Diagnosing what went wrong

Photo by Hush Naidoo on Unsplash

Was it all just a bubble?

Source: Jean-Paul Rodrigues, EMPEA Industry Statistics, Portico Advisers

Note: Excludes private credit, venture capital, and infrastructure and real assets beginning in 200838

0

10

20

30

40

50

60

19

93

94

95

96

97

98

99

20

00

01

02

03

04

05

06

07

08

09

10

11

12

13

14

15

16

17

EM PE fundraising by region ($B)

Or was there genuine opportunity?

Source: IMF World Economic Outlook October 2017, Portico Advisers39

51

31

36

59

1990 1995 2000 2005 2010 2015

Share of global GDP on PPP basis (%)

Major Advanced Economies (G7)

Emerging Markets

Emerging markets generate lion’s share of global output

Or was there genuine opportunity?

Source: McKinsey Global Institute (left), BCG (right), Portico Advisers40

Rapid growth in consumption expenditures Local companies in EM grow rapidly

2634

12

30

2010 2025

Global consumption ($T)

Developed markets Emerging markets

Growth

150%

31%

28

11

53

BCG localdynamos

MSCI EmergingMarkets Index

companies

S&P 500companies

MSCI WorldIndex companies

Annual growth rate (%)

Or was there genuine opportunity?

Source: SME Finance Forum, Portico Advisers41

9MFormal SMEs in EM

have unmet financing needs

Formal SMEs face a $4.5T finance gap

So what happened?

• Too much capital too quickly

• Herding of LPs into “hot” markets

• Quality of managers

• Economics of PE model

• Limits on absorptive capacity

42

22

171

2001-04 2005-08

Aggregate EM PE fundraising ($B)

+7.7x

Source: EMPEA Industry Statistics, Portico Advisers

0.81.6 1.8 1.6 1.3

2.92.5

1.50.6

09 10 11 12 13 14 15 16 17

Africa-dedicated PE fundraising ($B)

So what happened?

• Too much capital too quickly

• Herding of LPs into “hot” markets

• Quality of managers

• Economics of PE model

• Limits on absorptive capacity

43

Source: The Economist, EMPEA Industry Statistics and LP Surveys, Thomson Reuters Datastream, Portico Advisers

Note: Africa-dedicated figures are for Sub-Saharan Africa only

2.2

6.5

1.7 1.1

3.9

1.1

2009 10 11 12 13 14 15 16 17

Brazil-dedicated PE fundraising ($B)#1 attractive market

in EMPEA LP Survey

BOVESPA & BRL

at / near all-time highs

Top 3 attractive market

in EMPEA LP Survey

So what happened?

• Too much capital too quickly

• Herding of LPs into “hot” markets

• Quality of managers

• Economics of PE model

• Limits on absorptive capacity

44

Source: EMPEA Industry Statistics, Portico Advisers

Note: Excludes private credit, venture capital, and infrastructure and real assets; data as of November 2016

137

176

Fund managersachieving a close between 2005-09

Fund managersraising a subsequent fund

EM PE managers raising follow-on funds

313

failed to raise a follow-on fund

The teams have been heavy on investment bankers who don’t know how to do deals. In emerging markets, private equity is the dumb money.

— LP“

So what happened?

• Too much capital too quickly

• Herding of LPs into “hot” markets

• Quality of managers

• Limits to absorptive capacity

45

So what happened?

• Too much capital too quickly

• Herding of LPs into “hot” markets

• Quality of managers

• Limits to absorptive capacity

46

$35B Avg fundraising

volume b/w 2005-17

x 3 Target gross

return multiple

$105B Required

exit proceeds

So what happened?

• Too much capital too quickly

• Herding of LPs into “hot” markets

• Quality of managers

• Limits to absorptive capacity

47

Source: Thomson Reuters, Portico Advisers

Note: All private equity exits for investment location in emerging markets; data as of 1 March 2018

24

4952

12

18

56

48

21

15

65

4551

36

2005 06 07 08 09 10 11 12 13 14 15 16 17

Exit Year

Exit proceeds from EM-based portfolio companies ($B)

Total

Secondary Sales

Trade Sales

IPO Proceeds

$105B

Photo by Kalle Kortelainen on Unsplash

Photo by Thomas Lefebvre on Unsplash

Photo by Igor Ovsyannykov on Unsplash

Photo by paolo candelo on Unsplash

Thoughts on the future

“Traditional” EM PE is in structural decline

• Commercial LPs are voting with their feet

• So are the DFIs

• Smaller universe of players

• Less capital for the strategy

Source: Portico Advisers52

POINT 1

This is okay

• Shakeout needed to happen; market needed to clear

• New managers are emerging with strategies better aligned with their investable markets

• Surviving managers may offer a genuinely differentiated product

• In previous cycles, less capital higher returns

Source: Portico Advisers53

POINT 1

Now is a good time to go shopping for managers

LPs are recalibrating their exposure to EM …

0

20

40

60

80

100

120

140

160

2009 10 11 12 13 14 15 16 17

# o

f F

un

ds

EM PE funds achieving a close by strategy (#)

Buyout Growth Venture Capital Private Credit

Source: EMPEA Industry Statistics, Portico Advisers54

2.4 1.72.9 2.9 3.7 4.2

6.65.4

7.3

2009 10 11 12 13 14 15 16 17

Private credit fundraising ($B)

1.9 2.1

8.7

3.3 2.6

7.79.8

11.19.4

2009 10 11 12 13 14 15 16 17

Venture capital fundraising ($B)

POINT 2

… but they should be more creative

Source: Portico Advisers55

POINT 2

Traditional PE Funds

– Standard fixed-life (i.e., 10-

year), blind pool, closed-end

fund

– Likely to remain the preferred

vehicle for established GPs,

large LPs, and DFIs

Platform Companies /

Deal-by-Deal Funds

– Allow firms to mobilize capital for

a single opportunity

– Reduces amount of time spent

fundraising and can foster strong

relationships with investors

Evergreen /

Listed Vehicles

– Allow firms to raise permanent

capital

– Likely to grow in popularity for

asset managers offering multiple

strategies (e.g., equity,

mezzanine, credit)

Pledge Funds

– Enable firms to build a track

record while giving investors the

option to pass on deals

Hybrid Funds

– Provide flexibility to pursue

opportunities across public and

private markets (e.g., hedge

funds employing side pockets for

illiquid investments, PE firms

executing PIPEs)

Corporate Partnerships /

Joint Ventures

– Team with multinationals to de-

risk acquisitions / validate entry

in new markets

Products that fit neatly within rigid asset allocation buckets may not be the right fit for EM

Photo by Geoff Greenwood on Unsplash

Is past performance a reliable indicator?

Source: EMPEA Industry Statistics, Portico Advisers57

POINT 3

• Academic literature raises questions about top-quartile persistence in the United States

• Emerging economies are transitioning very rapidly

• Technology is disrupting everything, and EM consumers are early adopters

• Deep-pocketed, local, non-PE investors can create competition for deal flow

Is past performance a reliable indicator? Check your benchmarks.

58

Source: Cambridge Associates, EMPEA Industry Statistics, Portico Advisers

Note: Exhibit includes EM buyout and growth equity funds; Cambridge Associates data as of Q3 2017

35

1524 27 28

20 14 205

170

107

158

140

159

144138

114 116

2008 09 10 11 12 13 14 15 16

EM buyout and growth equity funds (#)

Total

EMPEA Fund Count

Cambridge AssociatesFund Count

16

9

20 21 22

1520

17

9

54

17

26

35

38

35

39

30

26

2008 09 10 11 12 13 14 15 16

EM buyout and growth equity capitalization ($B)

Total

EMPEA Capitalization

Cambridge AssociatesCapitalization

POINT 3

Is past performance a reliable indicator?

Source: EMPEA Industry Statistics, Portico Advisers59

POINT 3

• Academic literature raises questions about top-quartile persistence in the United States

• Emerging economies are transitioning very rapidly

• Technology is disrupting everything, and EM consumers are early adopters

• Deep-pocketed, local, non-PE investors can create competition for deal flow

Great performance during previous eras may not be a reliable guide;

and the poor aggregate returns seen in recent vintages may mask genuine opportunity

Photo by Robert Metz on Unsplash

In conclusion

• EM PE has been going through growing pains

• Pro-cyclical behavior of LPs is part of the problem

• Capital is concentrating in fewer, larger funds – particularly in Asia

• There is a scarcity of capital for investors targeting the mid-market

(where there are more deals)

• Compelling macro dynamics don’t make you money, managers do; selection is crucial

• The opportunity set in EM defies rigid asset allocation frameworks – be nimble

Source: Portico Advisers61

Learn more

62

Books Portico Advisers

Context Free research, newsletter, perspectives

www.porticoadvisers.com

Industry Associations & Research

www.empea.org

Data, interviews, events, news

www.lavca.org

www.asiape.com***Recommended***

Michael CaseyFounder & Managing Director

E: mike@porticoadvisers.com

O: +1 202 657 6736

W: www.porticoadvisers.com