empe+sharing+ifcs+experience+may2012

7/31/2019 EMPE+Sharing+IFCs+Experience+May2012

1/33

The Case ForEmerging Markets

Private Equity

V.10 May 2012


2/33

IFC has a long-standing commit ment to developing the pr ivate equi ty asset class in Emerging Market s(EMs).

We now have over ten years of exper ience wit h a specialist group f ocused on invest ing in Funds andwe think other investors may benefit fr om sharing this experience.

Based on our experience and analysis of data f rom our port fol io we draw the fol lowing thoughts :

1) Emerging Market Pri vate Equit y (EMPE) has matured signif icantly as an area of investment.Returns have exceeded t hose on US PE over the last 10 years and both US and EU ret urns overthe last 5 years.

2) There appear to be diversification benefits in EMPE due to low leverage, its focus on domesticgrowth and different industry coverage relative to listed markets.

3) The returns on EMPE are driven by growth and efficiency rather than leverage or multipleexpansion.

4) Signifi cant growth-oriented PE opportunit ies are available beyond the small number of countr iesin which most EMPE investors are curr ent ly concent rated.

5) Many of the ri sks of EMPE are over-stated and we provide data which places these ri sks inperspective.

Introduction

2

David WiltonChief Investment Officer, Manager Global Private Equity FundsJune 2012


3/33

Presentation

We int end that this becomes a living document.

We have based the content of this presentation on conversations with investors about theissues they have when t hey t hink about invest ing in EMPE.

There will be other issues of interest beyond the ones presently covered, so we have usedPowerPoint to make the information available as it is easy to up-date and add new information

in response to requests.

We encourage you to ask us questions and, if we have the information with which to answeror provide some insight, we wil l add it to the presentat ion posted on our websit e:

http://www.ifc.org/funds

If you find the informat ion useful and use it in your own presentat ions, we would appreciatean acknowledgement of IFC and the named data providers.

3


4/33

Acknowledgements

It i s possible to pr esent this informat ion due to the cooperat ion and hard work of a largenumber of people. We would part icularly like to thank:

The Managers of IFC invested funds who have been very generous in responding to ourrequests for information.

The Emerging Markets Private Equi ty Associat ion (EMPEA) for pr oviding market data and

insights.

Cambridge Associates for providing benchmark data.

Markus Taussig, now a professor at the Nat ional University of Singapore, for gather ing andanalyzing much of the data.

4


5/33

5

Private Equity

in Emerging MarketsHas Come of Age


6/33

Private Equity Has Proven At t ract iveRelat ive to Public Equity

6

Emerging

Markets VC

and PE

Index

MSCI EM

Index

S&P %00

Index

3 Years 11.9 6.6 1.2

5 Years 12.1 5.2 -1.2

10 Years 10.6 16.4 2.8

15 Years 8.3 6.8 5.2

Comparative Net "End-to-End"Returns as of September 30th, 2011

Source: Cambridge Associates

EMPE appears to offer better access to domestic consumer-facing growth sectors(refer slide 9)


7/33

EM PE Ret urns Have Caught Up andPassed Returns on US/EU PE

7

US Venture

Capital

Index

US Private

Equity

Index

W. Europe

PE Index

Emerging

Markets

VC and PE

Index

3 Years5 7.3 3.4

11.95 Years 6.8 8.1 8 12.1

10 Years 2.6 11.5 17.5 10.6

15 Years 31.7 11.6 17.4 8.3

Comparative Net "End-to-End" Returns as ofSeptember 30th, 2011

Source: Cambridge Associates

Returns on EM PE have exceeded those on US PE over 10 yearsand both US & EU PE over 5 & 3 years

A disproportionate number of EM funds are in the top half and top quartile ofthe Global PE Universe for vintage years from 2004. For vintage years 2004 to 2008 EMFunds constitute between approximately 30% to 45% of the top quartile of the GlobalPE Universe.


8/33

Diversification Benefits Exist:Industry Exposure

Focus on Domestic Growth

Low Leverage

8

Source: Cambridge Associates, quarterly data March 2000 Sept 2009

Cambridge Associates LLC. Correlation

of indices as of December 31, 2011

All Funds

Net to LP

Top

Quartile

Net to LP

Correlation US and EM Private Equity 2000-

20110.5705 0.5295


9/33

More Exposure to Consumer Growth thanPublic Markets

9


10/33

Growing Domest ic or Regional CompaniesProvide the Deal Flow

10

Sample: * IFC Funds Port fol io 2009 833 companies wit h clearly indicat ed market f ocus ** 300 companies that were ful ly exited

Target Market Return **

As a result of the trends in deregulation and openness, most of the EMPEopportunities are companies targeting growth in Domestic markets or Intra-emerging-market growth.

Domest ic, 72%

Regional, 12%

EmergingMarkets, 8%

IndustrializedMarkets, 5%

Global, 3%

Target Market Focus *

-30

-20

-10

0

10

20

30

Median

Mean

(percent)


11/33

IRR Equity

Cash out by

Dividend ,Stock

Purchase etc

P/E at Entry P/E at Exit RevenueGrowth p.a

MarginImproves from

5% to x%

HoldingPeriod

Years

Leverage 25% 30% 55% 6 6 0% 5%5

Multiple

Expansion25% 75% 10% 6 14 0% 5%

5

Growth 25% 75% 10% 6 6 20% 5% 5

Efficiency 25% 75% 85% 6 6 0% 30%5

There are Four Basic Ways to Create IRR

A PE fund can achieve the same IRR through any of four basicst rategies: leverage, mult iple expansion, growth and eff iciency.

Most funds use a blend of the four.

In EMs IRR is driven by growt h & eff iciency (see Slide 12)

Source: IFC model

11


12/33

Returns on Private Equity in Emerging Marketsare Driven More by Growth t han Leverage

Annual revenue growth * 19.5% 37.8%

Debt-to-equit y rat io ** 0.33 0.74

Sample: 2009 * 527 companies in IFC-invested funds with holding time of at l east one year ** 604 companies in IFC-invested funds, not incl uding financial services

Higher growt h and lower leverage makes the source of r isk in EMPE lesscyclical and more operational

Emerging MarketsMedian Average

Companies in IFC-invested Funds:

12


13/33

PE in EM Creates Jobs and Supports SMEs

13

020

40

60

80

100

120

140

160180

0

50000

100000

150000

200000

250000

300000

Less than 20employees

20-100employees

101-300employees

+300employees

NewJ

obsCreated

Job Creation (net)

0%

5%

10%

15%

20%

25%

Less than 20employees

20-100employees

101-300employees

+300 employees

% Job Growth (net ) CAGR

An analysis of investments made by 64 PE funds between 2000 and 2010

#ofcompanies


14/33

The Opportunity is LargerThan You Think

14


15/33

Since 2000 the number of countr ies in which there i s a meaningful

volume of deal f low suit ed to PE (equity wit h real influence or control)has increased considerably.

Having adequate deal f low to support local country-based teams improvesthe quali t y of t he opport unit y as deal origination, st ructuring and providingadvice t o the companies, can be done in close proximit y and in real t ime bypeople embedded in t he local market .

Both the Breadth and the Quality of t heEMPE Opportunity Have Improved Since 2000

15


16/33

2000 the Start of a Rapidly Growing Opportuni ty

Developed Markets

Emerging Market s wit h Private Equit y Opportunit y

16


17/33

2012 The Opportuni ty is Very Broad

17

Developed Markets

Emerging Market s wit h Private Equit y Opportunit y, mostl y single count ry, some regional


18/33

What Has Driven the Growth of thePE Opportuni ty?

The move to market-based economies since the 1990s is increasing entrepreneurialactivity and the number of businesses of interest to PE (see slide 19).

The opening of t rade and capit al f lows since 2000 increases both opport unit ies toexpand and competi t ive pressure, leading to more business owners seeing thir dparty capit al as at t ract ive (see slide20).

The close ident if ication of f amily status and wealt h wi th direct ownership of acompany reduces as portfolio wealth becomes an option and is seen to work,reducing reluctance to allow in thir d party equit y.

Future growt h in t he PE opportunit y in EM wi ll require a cont inuation of t hese t rendsplus improvement at the local level in the ability to enforce contracts and access todebt (see slide 21) .

PE requires (i) interest ing businesses in which to invest ,

and (i i) access to equit y stakes wi th influenceover the business.

Three t rends have increased both the number of businesses and the abili tyto acquire influence.

18


19/33

Improved Local Conditions Create Businesses

Source: Fraser Inst it ute, Economic Freedom of the World (EFW) Index

Measures of condit ions for pri vatebusiness have improved acrossa wide range of emerging marketssince the 1990s, leading to anincrease in the number of companiesof interest to PE.

The scale of the improvement incondit ions for pr ivate business in

EMs since 1990 is significant.

19


20/33

Increased Openness Creates PE Deal Flow

Emerging markets have opened their t rade and capital accounts since 2000,increasing both opportunit ies to expand and competit ion in domest ic markets.

This creates more sit uat ions where sale of equity with inf luence over t hebusiness is seen as desirable by owners in order to at t ract the capital or t heski ll s needed to expand, t o compete, or to increase focus on core business bysale of non-core business.

20

Increase

1999-2008

Brazil 45%

China 73%

India 104%


21/33

Key Drivers of Growth in t he PE Opportunity

21


22/33

Low Penet rat ion Room to Grow Fur ther

Source: EMPEA

Even in the BRICs, fundraising as a percentage of GDP is low in EMscompared to the US, indicating much more room to grow.

22


23/33

Cont inued Growth in Emerging MarketsSupports Private Equity

GDP growth predicted toremain posit ive acrossthe emerging markets

Source: Int ernat ional Monetary Fund, World Economic Outlook Database, April 2012 GDP at constant prices, percentage change

GDP Growth in EMspredicted to remainconsiderably above that ofdeveloped economies

23


24/33

Share of World GDP is Dynamic

Source: Angus Maddison, Universit y of Groningen

Dif ferent ial rates ofgrowth, over t ime, have a

signif icant effect on thedist ribution of investmentopportunities

24


25/33

Taking Advantage of the

Broader OpportunityImproves Returns

25


26/33

Private Equity Performance Benefits fromDiversification

26

IFC has out-perf ormed t he EmergingMarket Index wit h a much moregeographically diversified exposure.

* Includes: Agribusiness, Cleantech, Midcap, Mining, SME, VC and Healthcare Funds

** Includes: Agribusiness, Cleantech, Midcap, Mining, Small business, SME, VC, Healthcare, Debt, Forestry, Infrastructure, Listed, Real Estate, Secondary Funds

*** All PE Fund types excluding Forestry, Infrastructure, Real Estate, and Secondary Funds

IRR from Jan '00 to . June 30 2011

IFC: Private Equity Funds * 22.20%IFC: All Funds ** 18.30%

Cambridge EM PE Top Quartile *** 19.80%

Cambridge Asia EM PE Top Quartile *** 21.70%

Cambridge US PE Top Quartile *** 17.40%


27/33

Myth Busters:

Frequently Cited Riskswith Private Equity inEmerging Markets

27


28/33

Minor ity Posit ions Are NOT Too Risky

Median IRR Average IRR

Sample: 2009 Exit s of 61 majori t y posit ions and 251 minorit y posit ions from IFC invested funds

Minor it y posit ions (blue) have performed well in all f orms of exit ,indicat ing that the r isks associated with minori ty posit ions can bemanaged effectively.

0%

10%

20%

30%

40%

50%

IPO/ List ing Trade Sale MBO St ruct uredExit

Majority

Minority

0%

10%

20%

30%

40%

50%

IPO/ List ing Trade Sale MBO St ruct ured Exi t

28


29/33

Smaller Companies Are NOT Too Risky

Investment Size $ million

+

Sample: 2009 * 313 exits from IFC invested funds ** 323 exit s from IFC invested funds

IRR by Investment Size *

Low

Exper ience in deals as small as $2 mi llion has been posit ive, suggest ing

that smaller companies are less r isky t han commonly perceived.

-20.00%

-10.00%

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

Median

Mean

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

Share of Write Offs by InvestmentSize **

29


30/33

At t ract ive Exits ARE Available

IRR on Exits **

Sample: 2009 * 325 exit s fr om IFC invested Funds ** 266 non-wri te-of f exit s

Average Holding Period = 4.9 years

Att racti ve exit s are happening despit e less developed capit al markets,although access to an IPO improves returns.

0

20

40

60

80

100

120

140

IPO Trade sale MBO St ruct uredExit

Write Off

Number of Exits *

0

10

20

30

40

50

60

IPO Trade sale MBO St ruct uredExit

Median

Mean

(percent)

30


31/33

A Fund Manager With the Right SkillsCAN Overcome

1st Time Fund & Front ier Risks

Sample: 2009 150 Funds current ly in IFC port fol io, excl uding those in the J-curve

IRR as ofMarch 2009

(simpleaverage %)

DevelopmentImpact Score

Highly Suc = 3HighlyUn S = -1

1st Time

Funds %

IDA %(


32/33

32

First Time Fund Risk is Lower Than Expected

Early Mover Advantage reduces risk on

1st

Time funds in Emerging Markets

IFC All Funds 18.3%

1st Time Funds 24.0%

Non-1st Time Funds 11.1%

IRR from 2000 to June 30th 2011


33/33

It Does NOT Take Longer to Exi t the J-Curve

33

Source: IFC fund investment s by Vint age Year as at June 2011

Net IRR

empe+sharing+ifcs+experience+may2012

Documents