Amid slowing growth, rising interest rates and currency volatility, some $33 billion has been withdrawn from emerging market stock and bond funds this year, exceeding the $29.2 billion outflow for all of 2013. Yet annual private equity fundraising for emerging markets is running 32 percent ahead of last year, according to data compiled from Palico’s proprietary database of more than 7,200 GPs and 12,000-plus funds.

Frontier Markets Capital Invested as a % of Emerging & Frontier Total (source: EMPEA)

Some $6.5 billion has been raised by emerging market PE funds this year, while the category’s share of global fundraising stands at nearly 17 percent, almost double last year’s 8.5 percent.

In general, experienced PE investors find short-term volatility appealing, so emerging markets represent a buying opportunity. This has a lot to do with the roughly ten-year investment horizon of private equity, which bridges the ups and downs of economic cycles.

More Than Half of Global GDP

Emerging markets represent a highly diverse range of countries in various stages of development, but they tend to share high long-term economic growth rates, rapidly developing middle classes and relatively low rates of PE investment. The approximately 70 countries classified as “emerging” or “frontier” by index providers account for as much as 85 percent of the world’s population and more than half of global GDP.

Frontier Market Investment Rises

Arguably the most striking recent development in emerging markets, is the rising popularity of frontier markets, where PE investment opportunities can be particularly difficult to uncover. An emerging markets subset, frontier markets are characterized by the Emerging Markets Private Equity Association as having a relatively high degree of “underdevelopment in their legal, regulatory and public equity markets.”

Investment in the 40-odd countries commonly considered “frontier,” including nations as diverse as Argentina and Ghana, rose to 12 percent of PE-backed emerging market asset purchases in 2013, up from 6 percent the year before, notes EMPEA. The countries of Sub-Saharan Africa took the lion’s share – 39 percent of the $2.8 billion invested in frontier markets.

Financing Gap Creates Opportunity

As EMPEA puts it in their just released Frontier Markets Data Insight 2013: “Much of the investment thesis that sparked investor interest in emerging markets PE when the asset class was in its infancy in the early 2000s is part of the rationale that has propelled PE activity in frontier economies, including the exposure to a wide spectrum of companies in some of the fastest growing economies in the world and the opportunity to take advantage of a financing gap.”

In other words, the supply of capital in frontier markets remains far short of demand. That presents a big opportunity for private equity investors.

Palico GP Member Focus on Emerging & Frontier Markets

  • 41.4% – Investing In/Considering Emerging & Frontier Markets
    • 18% – Asian Emerging & Frontier Markets
    • 11.9% – African & Middle Eastern Emerging & Frontier Markets
    • 11.5% – Latin American Emerging & Frontier Markets
  • 15.4% – Investing In/Considering Frontier Markets