Private equity firms active in places like Vietnam or Romania frequently tout their ?boots on the ground? as a competitive advantage. General partners at such firms stress the value of having a fulltime presence in target geography to source talent and deals, gather market intelligence and hone their local profile. On the fundraising trail, they stress how much a local face can facilitate negotiations and even provide proprietary deal flow, delivering the returns that grew private equity from a niche practice to a global industry.
However, many of these GPs also understand that what makes a successful firm is more than deal flow. The private equity industry grew out of developed markets, and the majority of LPs and service providers remain based in the US and Western Europe. As a result, many emerging market firms have at least a partner or an office based in places like London, New York or Miami to provide that invaluable emerged-market boost to their fundraising, IR and other administrative efforts. Other firms treat their Western office as a nerve center, coordinating deal activity in multiple geographies to apply consistent metrics and best practices across all their funds. Such a feat is easier said than done, requiring a daunting dose of jet lag and a willingness to pick up the phone at all hours of the day.
Costabile suggests that geographic expertise often requires local presence, whereas industry expertise does not. ?The chemical company in Germany faces the same global market dynamics as the one in China,? he says.
?There's no doubt that it takes a lot of resources to execute in the emerging markets,? says Steve Costabile, the global head of the private equity funds group at AIG Investments. ?If a firm has the resources, they can really benefit from having a foot in both emerging and developed markets.?
Costabile suggests that geographic expertise often requires local presence, whereas industry expertise does not. ?The chemical company in Germany faces the same global market dynamics as the one in China,? he explains. The local staff simply marries their perspective with the industry expertise located elsewhere. Costabile warns that sourcing such experts in each individual market may not be worth the trouble.
Larger, established groups like AIG Investments may have the resources necessary to have a nerve center as well as satellite offices in emerging markets, but most firms doing deals in these markets have far smaller budgets, and shape their staffs accordingly.
Bucharest on the Hudson
One example of a smaller firm that has managed both a Western and emerging-market presence is Enterprise Capital, focused on Eastern Europe, with 10 investment professionals at their headquarters in Bucharest and four in a satellite office in Sofia, Bulgaria. Enterprise's CEO, John Klipper, is based in New York. ?I still spend roughly 40 percent of my time in Eastern Europe,? explains Klipper. One reason for this spread of staff is that their first fund, the Romanian American Enterprise Fund (RAEF), was established by $50 million (€34 million) provided by the US Congress in 1994 to nurture Romania's post communist economy with direct equity investments. ?I'm here to help manage our relationship with Congress and the US Agency for International Development (USAID) which gave us our start.? The other reason for the New York office is that the first fund, though investing in Romania, is based in the US, so local accounting standards apply. Even so, this office consists of only Klipper and an administrative assistant.
Klipper explains the their second vehicle was raised outside of Congress, largely due to the success of the first fund, which turned that initial $50 million into $150 million, with an expectation that by the exit of their last investment, they'll post a final return of $200 million. This second vehicle, the Balkan Accession Fund (BAF), closed at €150 million and has a wider geographic focus that includes Bulgaria, Serbia, and Moldavia, in addition to Romania.
?I'm in Eastern Europe about once month these days, reviewing and approving deals for the two funds,? he says. While expanding their target geography and their pool of investors, Klipper plans to stay based in New York. ?Most of the investors for BAF were Western European, but there were a few high net worth Americans that participated, and we believe that as the opportunities of our region become more apparent, we'll garner even more support on this side of the Atlantic,? says Klipper.
Beachhead in Miami
Given the origins of Enterprise, it seems only natural that some facet of their operations would be based in the US, but even funds native to emerging markets are basing partners in the US and Western Europe to liaison with developed markets. One is Brazil's CRP.
Back in 1981, CRP started backing local small and mid-sized companies in the southeastern Brazil from their headquarters in Porto Alegre. In July of 2006 the firm moved one partner, Russell Deakin, to Miami to strengthen ties with developed markets outside of South America. Deakin first joined CRP in 2000, originally as a consultant and then later as the firm's first non-Brazilian partner. ?They brought me over from a Brazilian real estate management company where I was acting as CFO, to tap my experience as a CFO in the country and my Wall Street background,? explains Deakin. He made trips to the US on behalf of the firm as early as 2004, but Deakin explains there just wasn't much interest among American investors for Brazil. ?I met with HarbourVest, but that meeting was really due to my connections at my alma mater, Tufts University,? he says.
?Our deal teams know the micro-view of the market, and we complement that with the macro-view, which is what's going to convince LPs to invest,? says Beckwith.
It wasn't until January 2006 that the firm noticed a groundswell of interest into Brazil thanks to encouraging macro-economic trends in the country. Deakin says his partners began to receive invitations to speak at industry conferences. ?At these events, we'd notice more investors getting curious about Brazilian assets, not to the extent they were looking at China or India, but still, there was a genuine interest,? he says.
As CRP ramped up its next fundraising drive, the partners realized that moving a partner north made more and more sense. ?We arrived at Miami as the locale to establish offices given its proximity to South America, and the ease with which I could fly to New York and easily connect to flights to London or Paris,? he says. As the only American partner, Deakin knew it made sense for him to be the partner that relocated.
Deakin's mandate wasn't simply to drum up interest among investors for their next vehicle, but to cultivate relationships with intermediaries that could lead to fresh exit routes via Western buyers, both strategic and financial. ?Getting on the calendars of investment banks and other buyout firms isn't easy,? says Deakin. ?You have to build a rapport over time.?
Deakin now concentrates more on the realization side of the investment process, as he's no longer local enough to monitor investments as he once did. ?I'm still on the investment committee, which votes on what deals we do, and I return to Brazil every six weeks or so,? says Deakin. Beyond that, he participates in weekly conference calls with his partners, though he admits that communication is often the first thing to be sacrificed.
?You'd like it to be smoother, but establishing a beachhead like this seems to be working for us so far, and the benefits outweigh any temporary challenges.?
London service station
Not every firm relies on a single partner to liaison with more developed markets. In some cases, they leave only the deal professionals in a given locale, and base the rest of their fund services team in the West. Henderson Equity Partners is one such firm, with professionals in Singapore, New Delhi and Hong Kong, but with their fund services operating out of its London office. Henderson has a unique structure to begin with, employing three distinct strategies: an Asian private equity business, a fund of funds offering and an infrastructure business. Both the fund of funds and infrastructure businesses are based out of London, with Asian activities originating from the three other offices.
?It's vital that deal processes are local,? explains Viane Frost, Henderson's head of marketing. ?Our partners believe that you get the best origination on-the-ground in Asia and this also means knowledge and speed for our portfolio companies because our investment committee is local and not in Europe or the US.?
Henderson Equity specializes in relatively small growth equity opportunities on the continent in the range of $5 million to $50 million per investment. The sourcing and management of these deals are handled by local staff exclusively. However, the firm puts equal priority on centralizing the fund services for all lines of their business. Henderson defines ?fund services? as all finance, tax, legal, fundraising and IR responsibilities. ?This centralized approach makes it easier for our CFO to monitor these functions and ensure that best practices are shared across all our funds,? says Frost. She added that local experts are consulted on legal and tax issues for individual deals. Human resources for their Asian private equity efforts are London-based with team members specializing on the private equity business and the international offices. They utilize local recruitment given their preference to source talent native to the market. The geographic spread of Henderson's LPs also argues for a London office. ?Historically, most of our investors have been based in Western Europe and the US, though there's a growing percentage of support from the Middle East,? she says. Unlike CRP or Enterprise, Henderson's London executives don't constantly travel unless they are in the midst of fundraising, and even then it's primarily to investors, not to the emerging markets and back. The firm's fund services work closely with local teams in sharing their data, but that's primarily done virtually, via phone and email.
For Western firms that are involved in multiple emerging markets, there's a tendency to reserve some investment authority for a centralized committee, and not rely solely on local deal teams for transaction decisions. Costabile, based out of New York, explains that at AIG Investments, deal committees for their emerging market funds are made up of both local and Western deal professionals.
?AIG Investments gives our local teams tons of flexibility to make real time decisions when managing an investment, but before they pull the trigger on a deal, we think there's real value to have someone on hand that takes a step back and provides a broader context to individual deal decisions.?
Aureos Capital takes this model one step further, using its Western office almost exclusively to apply that ?broader context? to local deal teams that are based around the world, from Central America to Southeast Asia. Launched in 2001 as a joint venture spin-out from CDC Group plc, a UK government fund of funds, and Norfund, the Norwegian investment fund for developing countries, Aureos began with an investment portfolio of 139 companies in South Asia, Africa, the Pacific Islands and Central America. Aureos kept its focus on deal sizes ranging from $5 million to $10 million per investment and leaves individual deal decisions to local teams. However, the small team that surrounds the CEO in London feels their primary role is to provide investment counsel and support for their 120 professionals based around the world.
?We really look after investments on two levels,? says Noah Beckwith, a London-based partner at Aureos. ?First, we explore opportunities that involve a wider geography than our local deal teams may have the immediate capacity to take note of, and for any operational synergies between teams that could make them more efficient.? The second level involves reviewing the individual investments to help gauge where and when the next fund should be raised. Since 2002, they've launched ten funds based in various areas of Asia, Africa and Latin America for a total amount of commitments of over $500 million, with 116 exits from both new and legacy portfolios.
The London team also handles fundraising, once they've decided which fund concept to pursue. ?We're really an IR focal point,? explains Beckwith. ?You need that when you look at the diversity of our LP base.? He estimates that 30 to 50 percent of their investors are from local geographies. ?Our Western investors like to see local support for these funds? some actually require it before venturing into places like Central Asia or Latin America.? Beckwith finds that centralizing the fundraising role in London allows Aureos to translate that local support into compelling terms for LPs based in developed markets. ?Our deal teams know the micro-view of the market, and we complement that with the macro-view, which is what's going to convince LPs to invest.?
No one disputes that private equity investing in emerging markets requires some local deal professionals. What remains to be seen years down the line is whether a firm's fundraising and investor relations staffs will remain focused on the West, where the majority of today's LPs reside. As these markets mature, will they produce a new class of LP to court the way local deal teams now court local investment bankers and entrepreneurs? For the time being, while all politics may be local, plenty of private equity is still global.