When private equity firms first started to creep into the Cambodian market in 2008, hungry for options outside of an overheating Vietnamese economy that was on the brink of a crisis, there was hope that the Kingdom would be the next destination for a flood of private investment.

However, eight years later, the market has been met with mixed results as firms lack viable commercial opportunities and limited exit options. With few players in the private equity game, few new firms have dared to enter the risky market while those that have established a solid foothold in the region still manage to raise new funds to support commercial endeavours.

For instance, Emerging Markets Investment Advisers (EMIA) recently received its second round of funding after it initially operated a $19 million fund targeted at small to medium-size enterprise (SMEs) in Cambodia and Laos.

Joshua Morris, CEO of EMIA, said the firm raised $65 million – $15 million above its target – boosted by better-than-expected demand from the investor base.

“This new fund follows on from our first which invested in similar SMEs in Cambodia and Laos,” he said. “The investors in our fund are largely European-based development finance institutions and the International Finance Corporation – all of whom have mandates to invest in funds seeking commercial financial returns that have a positive development impact in their markets in which they invest.”

While he noted that 2008 expectations were likely fuelled by unrealistic optimism, leading to a perception that private equity has not developed as aggressively as expected, the market today has matured.

“We view the market today as more settled and rationale now,” he said. “We believe the market for private equity investments is robust and growing. The quality of businesses and, as importantly, the quality of management in these businesses is improving dramatically.”

With private equity still being in its early phases of funding cycles, Morris said that running a sponsor-led model provides the firm with the ability to venture into frontier sectors that have strong commercial opportunities.

“As such, we have made investments in financial services, food and beverage, for-profit education and agricultural processing,” he said. Nevertheless, with a restricted pool of exit options for private equity firms that traditionally look for large-scale buyouts or listing on Cambodia’s nascent stock exchange to payback investors, he said the current climate in Cambodia had its limitations.

“Limited exit options definitely hinder private equity growth, and hence having a robust stock exchange would be a valuable development to further grow the private equity market in Cambodia,” he said. Instead, for EMIA, he said the group would rely on exit options that include strategic trade sales to larger institutions or to larger financial investors.

However, Douglas Clayton, CEO of investment firm Leopard Capital, the first private equity firm to create a footprint in Cambodia in 2008 with a fund of $34 million, was less optimistic about the future of private equity as its own funding cycle expired earlier this year.

His company had made 14 investments in such companies as Engage Resources, Kingdom Breweries, Greenside Holdings, EDL Generation – a publicly listed hydropower company in Laos – and Kulara Water.

“Basically, the nature of private equity hasn’t changed much over the last eight years,” he said. “As far as I know the same players are still around and I don’t think any of them have had huge success and this hasn’t provided a catalyst for private equity to take off.”

He added that despite the strong economic growth the country has seen, Cambodia still ranks low on global terms for investment. Regardless, he said that Leopard Capital operates in a different way than EMIA, being completely commercially oriented without the support of development banks.

“For commercially oriented private equity firms, there is a lack of qualified deal opportunities,” Clayton said. “Private equity in other countries has usually been used in the growth area or buyout area. In Cambodia there are very few buyout opportunities because the economy is also new and people are not selling their businesses yet.”

He added that status quo for private equity in Cambodia would likely continue with the same small players, and would be restricted until firms can sell their investments for four to ten times of what they originally paid for.

“But I don’t know if there is any investment that is posed to do that in the next few years,” he said. “It could take as long as ten years for private equity to mature and have companies eligible for large buyouts.”