5 Questions for Jim McGuigan, Capital International

Capital International yesterday announced that it has closed its fifth emerging markets private equity fund, with $2.25 billion in capital commitments. So we have 5 Questions for Jim McGuigan, a Capital International partner focused on investor relations.

1. There’s a perception that emerging markets deals are relatively cheap. Risky, but cheap. So why raise $2.25 billion?

McGuigan: As we began to raise our fourth fund in January 2004, many of the markets we were covering were becoming stronger, more transparent and more fiscally responsible. This is particularly true in places like Russia, China, Brazil and South Africa. At the same time, we’re investing in market-leading companies – companies that are in first, second or third position in their countries – so these have become much larger-scale enterprises that require larger investment sizes to make a meaningful position.

The average investment size in our early says was just $6 million, but it’s now $100 million. The last thing we wanted to do with this fund was to marginalize ourselves, so we felt an appropriate fund size would be around $2 billion.

2. Is LP demand for emerging markets funds appropriate for GP supply, or is there an imbalance?

McGuigan: I think that the whole business of emerging markets needs to be kept in perspective. For years it was a niche, and top LPs were much more focused on buyouts and venture funds in developed countries – with maybe a very modest emerging markets exposure. But what we see now is that LPs are moving the emerging markets allocation much more toward the mainstream. We’ve had longtime global support from large institutional LPs, but around 60% of this fund actually comes from new investors. I think they look at us a longtime players in the space, and that we’re well positioned with investment professionals all over the world.

3. You’ve been with Capital International for eight years. In that time, are there any nations or region that have dropped off your radar because they’ve moved from emerging to emerged?

McGuigan: Korea would be one that’s soon going to graduate into the developed markets. But, generally speaking, we take a global approach that processes and selects opportunities rather than regions. So we have no must-do countries. We also try to stay open to countries that today may not have sufficient transparency or accountability, by watching for positive developments.

4. You’ve already invested 25% of the fund. So how long until you’re back in market?

McGuigan: I mentioned to an institutional investor recently that we may be 50% invested by the end of this year. This is because we’ve got a very strong pipeline of new deals, and because of that increasing size of market leaders I mentioned earlier. At the same time, we’re continuing to rely on a very disciplined process. Our average due diligence period is six months, so we’re committed to taking our time and relying on the tools of private equity… We’re in no rush to raise a new fund, but will obviously do so when the time comes.

5. Given the explosive growth of global and local emerging markets managers, has it become harder for Capital International to hire and retain key talent?

McGuigan: Yes, there’s certainly a lot more competition. Around $60 billion was raised in 2007 for emerging markets funds, which is a 78% increase over just 2006. But, to keep it in perspective, it’s still just one-seventh of what was raised for buyout funds in the developed markets, even though emerging markets have about half the global economy and 85% of the world’s population.

We’ve found that our 16-year franchise – our longevity – has helped us be successful in attracting attractive professionals and in keeping our senior private equity pros. Most of our partners have been with us for more than five years. I was told recently by an LP that he considered our team to be the most senior in the emerging markets, which I think was a major factor in our fundraising success.