Paul's new frontier

A number of global secondaries investors are beginning to prowl the emerging markets savannah. At the head of the pack is Paul Capital Partners with plans for an innovative side fund. By Andy Thomson

Emerging markets private equity, buoyed by substantial commitments to Asian funds, is now firmly on the map. According to figures from the Emerging Markets Private Equity Association (EMPEA), funds raised by general partners in developing countries soared 300 percent from just short of $5 billion (€3.9 billion) in 2004 to over $20 billion last year.

While many primary investors have been busy honing emerging markets strategies over the last several years, secondaries funds are now also looking to get in on the act in anticipation of a fresh wave of opportunity. New York-based AIG Capital Partners and the Netherlands' AlpInvest Partners, for example, are both known to be keen on increasing their secondaries exposure in emerging markets.

However, at the current time, such exposures are decidedly tentative. Given the lack of readily available data in emerging markets, together with more pronounced economic and stock market volatility than you would typically find in more developed markets, global secondaries players are concerned by the ability to price deals accurately and hence tend to keep their exposures at a modest few percent of assets under management.

But the extent to which attitudes are changing is arguably highlighted in the most dramatic way by a new fund being raised by Paul Capital Partners, the San Francisco-based funds of funds and secondaries investor. According to David de Weese, a general partner, the firm was fairly typical of its peers in the global secondaries arena in having an emerging markets exposure ranging between three and five percent of total assets until 18 months ago.

Since then, though, he says the firm has been ?substantially increasing? its exposure. This growing appetite will become starkly apparent through the firm's new global fund – Paul Capital Partners IX – which it is currently raising and which is planning on a 20 to 25 percent commitment to emerging markets. The firm's previous global fund closed on $960 million in October 2004.

While such an allocation would automatically propel Paul Capital some distance clear of its competitors in terms of emerging markets penetration, it is also considering offering particularly adventurous investors an even greater exposure.

Explains de Weese: ?We are considering setting up a dedicated emerging markets side fund so that any emerging markets transaction would be shared between our regular secondary fund and that vehicle pro rata on dollars committed to both funds. An investor could then determine their desired total emerging market exposure by committing to one or both.?

De Weese stresses that the side fund is only a concept that the firm is considering at the moment and that no final decision has been made on whether to run with it. However, an investor committing $50 million to the fund (divided equally between the regular and side funds) could theoretically end up with $31.25 million of that capital being allocated to emerging markets should Paul Capital decide on a 25 percent allocation from the regular fund.