Private equity investors are increasingly turning their backs on the bulk of emerging markets, even as they throw record sums of money at Asia, according to industry figures.

Private capital funds targeting Latin America, Africa, the Middle East, and eastern Europe and the former Soviet Union raised just $7.9bn between them last year, down from a cycle high of $18.6bn in 2014 and the weakest out-turn since 2009, according to data from the Emerging Market Private Equity Association.

At the same time, funds focused on emerging Asia raked in $49.7bn, the highest figure since comparable records began in 2006, comfortably ahead of the pre-financial crisis peak of $40.9bn in 2008.

The data are another sign of the stranglehold Asia is taking of the broader emerging market universe, with the region on course to account for 75 per cent of the sector’s public equity markets in the aftermath of a proposed revamp by MSCI, the dominant index provider.

“Emerging Asia has seen a lot of sustained interest from the big European and US investors. That has been building for some time, which is clear from the 2017 numbers,” said Jeff Schlapinski, director of research at Empea, whose data cover private credit and infrastructure and real asset funds, as well as classical private equity.

“Outside of emerging Asia, I think capital raising can be a bit more volatile from year to year. We are at different stages of the fundraising cycle at the moment. Brazil, South Africa and Nigeria have gone through periods of subdued economic growth and policy transitions, but I think they are gaining momentum,” added Mr Schlapinski, who believed the slowdown outside Asia was more cyclical than structural and was hopeful Latin America and sub-Saharan Africa would return to growth this year as a number of major private equity houses attempt to get funds off the ground.

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Just $1.6bn was raised for funds targeting sub-Saharan Africa in 2017, according to Empea, down from $4bn two years earlier. Of this just $724m was directed to private equity funds, compared with $3bn in 2014, with the largest slice, $825m, raised by infrastructure and real asset vehicles.

Funds focused on central and eastern Europe and the former USSR saw asset raising fall a third from $1.8bn to $1.2bn, while just $516m was raised for Middle East and north Africa vehicles, the lowest figure on record and a far cry from the $6.1bn vacuumed up in 2007.

Latin American fundraising saw a modest uptick, from $4.4bn to $4.6bn, but this was still a big comedown from the $11.5bn received in 2014.

Despite this, the total amount raised by emerging market-focused funds rose 27 per cent to a nine-year high of $60.9bn in 2017. Multi-region funds accounted for $3.3bn of this, but the vast majority of the money is destined for emerging Asia, which saw a 38 per cent leap in fundraising to $49.7bn. The picture is the same for investment by private capital funds.

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All three categories of Asian funds saw record fundraising in 2017, with private equity funds attracting $39.9bn, private credit funds $6.8bn and infrastructure and real asset vehicles $3bn.

The league table was headed by New York-based KKR, which saw its Asian Fund III draw in $9.3bn of commitments. Hong Kong-based Affinity Equity Partners attracted $6bn for its fifth Asia Pacific Fund and Washington DC’s Carlyle Group garnered $4.5bn for its fifth Asia Partners vehicle.

“The sense I get from speaking to investors is that a lot of people are seeing a lot of Asian markets as more mature and less risky and frightening. There is a sense that they are not so much the unknown any more,” said Karen Guch, partner in the London office of law firm Baker McKenzie and chair of its Emea private equity group, who cited China and the Philippines as countries investors are increasingly comfortable with.

In contrast, Ms Guch said private equity dealmaking by western funds had “virtually fallen off a cliff” in Russia and Turkey, even if it remained robust elsewhere in eastern Europe, due to concerns over rising geopolitical risk.

“Turkey was a very big private equity market for a long time, but that has changed somewhat with activity from western PE funds being put on hold, although local Turkish and Middle Eastern funds are still doing deals,” she added.

At the same time, some erstwhile private equity investors in Latin America and Africa have been “burnt” by the volatility of those regions, deterring them from putting fresh money to work.

In Africa in particular, Ms Guch said, the time needed to put together scalable pan-continental businesses that can attract a high valuation means that assets often need to be held for longer, “so if you have pressure to flip after three or four years you might not get the returns”.

As a result, she said at least one private equity house was talking to potential investors about launching an open-ended fund, overturning the traditional 10-year life of such vehicles.

Sanjeev Dhuna, a partner at law firm Allen & Overy, said he had heard of similar discussions regarding putative open-ended Middle East-focused funds.

Within Asia, fundraising was focused on China and India last year, with interest waning in south-east Asia and plunging to its lowest level on record in South Korea.

Mr Dhuna said interest in India was being driven by reforms initiated by Prime Minister Narendra Modi, which made it easier for private equity investors to buy companies outright, rather than being limited to a minority stake.

“[Investors’] risk profile and appetite has changed significantly. They can deploy more capital and they can influence and implement exits. India is the bright spot, in terms of deal flow, in Asia,” said Mr Dhuna, who believed the number of profitable exits seen of late in was generating greater interest in emerging markets as a whole.

“There are more successful exits that private equity investors can point to and say ‘it has matured like in Europe and the US’,” he added. “That has happened in the last 12-18 months. 2017 saw the most IPO exits on record in India. This is more than just a macroeconomic opportunity.”

Mr Schlapinski said China was witnessing the rise of local private equity investors, broadening out an industry traditionally largely reliant on money from North America, Europe and the Middle East.

Renminbi-denominated private capital funds raised $7.6bn from Chinese institutions last year, according to Empea’s data, virtually double the tally for 2016 and the second-highest figure on record.

Although some Chinese funds have targeted companies in the US and western Europe in recent years, he believed restrictions on outbound merger and acquisitions activity imposed by Beijing were pushing them to invest more domestically.

The sheer weight of money targeting opportunities in Asia could start to undermine potential returns, however, particularly as funds raised in recent years are still sitting on a lot of undrawn capital, known as dry powder.

“There is a lot of dry powder in the market and there is still the phenomenon of too much money out there chasing too few deals. Assets are really expensive,” said Dorothea Koo, a Baker McKenzie partner and head of the firm’s private equity practice in Hong Kong.

Twitter: @em_sqrd

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