The Mongolian deal is being negotiated by Cerberus Frontier, a new investment team created in November when Cerberus acquired SGI Frontier Capital, a Singapore-based private-equity firm led by Gabriel Schulze and Alexander Benard. They specialize in emerging markets, with a particular focus on Mongolia, Ethiopia and the former Soviet republic of Georgia. Cerberus Frontier plans to raise a new fund dedicated to emerging markets, the people said.

Cerberus’s emerging-markets push comes as U.S. private-equity firms explore so-called frontier markets across Asia and Africa. Mongolia, the former states of the Soviet Union and the nations of Africa have proven challenging places to invest because of volatility in economies, currencies and politics.Blackstone Group and KKR & Co., for example, have both scaled back plans to explore frontier markets.

Still, the prospect of less competition in developing countries with fast-growing populations and periodically high economic growth keeps drawing investors. Mongolia’s economy grew 8.6% percent in the first three months of 2019. The country had just 13 private-equity deals totaling $139 million in the last 11 years, according to the Washington-based Emerging Markets Private Equity Association.

Private-equity firms are raising more money for emerging markets. The amount raised increased 36% to a record $90 billion in 2018 from 2008, according to EMPEA. In the same period, private-equity fundraising for investment in the U.S. rose 6% to $235 billion.

Cerberus last year bid for Abraaj Group, which was the largest emerging markets private-equity firm before it collapsed amid fraud allegations. Cerberus ended takeover talks in July as Abraaj’s legal problems mounted. The founder of Dubai-based Abraaj and five of his deputies now face trial in the U.S. 

Mr. Schulze and Mr. Benard talked to Cerberus co-Chief Executives Stephen Feinberg and Frank Bruno throughout 2018, the people familiar said. As Cerberus’s leadership lost trust in Abraaj, they continued to believe in Abraaj’s strategy of focusing on emerging markets, the people said. When the Abraaj talks ended, Cerberus decided to explore frontier markets through the acquisition of SGI Frontier.

Cerberus Frontier plans to market its new fund to pension plans and other asset managers, including those who invested in Abraaj’s funds, the people said.

In Mongolia, SGI Frontier has a portfolio of loans made with funding from investors including the Overseas Private Investment Corp., a U.S. government agency. In Georgia, the firm has invested mainly in hydroelectric dams which use the mountainous nation’s streams to make electricity. In Ethiopia, the firm has invested in companies including Afriflora, a large rose farm KKR previously owned.

Cerberus has created a dedicated investment committee to decide which companies its frontier team should invest in, including Messrs. Feinberg, Bruno, Schulze and Benard.

Mongolia has a “boom-to-bust” track record in attracting foreign investment, according to a World Bank report published last year. Foreign direct investment hit a record $4.5 billion in 2011 fueled by a rapid expansion of the landlocked nation’s mining sector. Investment later fell as commodity prices slumped.