michael barth, ceo, netherlands development finance company (fmo)
DESCRIPTION
Private Equity in Emerging Markets: An Introduction context, contribution, recent developments, and lessons learned. Michael Barth, CEO, Netherlands Development Finance Company (FMO). Private Equity: What and Why?. Clarifying the terminology. - PowerPoint PPT PresentationTRANSCRIPT
![Page 1: Michael Barth, CEO, Netherlands Development Finance Company (FMO)](https://reader033.vdocuments.site/reader033/viewer/2022052401/56814dd3550346895dbb3438/html5/thumbnails/1.jpg)
Private Equity in Emerging Markets: An Introduction
context, contribution, recent developments, and lessons learned
Michael Barth, CEO, Netherlands Development Finance Company (FMO)
![Page 2: Michael Barth, CEO, Netherlands Development Finance Company (FMO)](https://reader033.vdocuments.site/reader033/viewer/2022052401/56814dd3550346895dbb3438/html5/thumbnails/2.jpg)
Private Equity:What and Why?
![Page 3: Michael Barth, CEO, Netherlands Development Finance Company (FMO)](https://reader033.vdocuments.site/reader033/viewer/2022052401/56814dd3550346895dbb3438/html5/thumbnails/3.jpg)
Clarifying the terminology
PRIVATE EQUITY--medium to long-term financial commitment (equity or quasi-equity) in illiquid securities, with the expectation that future company performance will generate liquidity and opportunity to exit with substantial returns.
![Page 4: Michael Barth, CEO, Netherlands Development Finance Company (FMO)](https://reader033.vdocuments.site/reader033/viewer/2022052401/56814dd3550346895dbb3438/html5/thumbnails/4.jpg)
Private Equity is the Risk Capital “in Between”
Sponsor Financing- Start-up/ early stage- Absence of liquidity- High risk (no track
record)- Lack of information
base- No transparency- Family-run/ closely
held
Public Market
- At least 3 to 5 years’ track record
- Profitability
- Acceptable accounting standards
- Legal documentation
- Professional management
- Significant size
![Page 5: Michael Barth, CEO, Netherlands Development Finance Company (FMO)](https://reader033.vdocuments.site/reader033/viewer/2022052401/56814dd3550346895dbb3438/html5/thumbnails/5.jpg)
Who are prime PE candidates?
Annual Sales Publicly trade companies
Medium*-sizeCompanies, manyfamily-owned
Target for PrivateEquity
Small*, family-owned,informal economy
US $ 250 MM
$ 15 - $ 250 MM
< $ 15 MM
*Size definitions vary significantly depending on country’s size and level of economic development
Large*
Too small
![Page 6: Michael Barth, CEO, Netherlands Development Finance Company (FMO)](https://reader033.vdocuments.site/reader033/viewer/2022052401/56814dd3550346895dbb3438/html5/thumbnails/6.jpg)
The importance of private equity to emerging markets
Professionally managed Private Equity (PE) fills an important financing gapPE stands at the apex of development finance; it is not just about financing business, but about building businessesPE can have substantive effects on corporate professionalization, employment and export growth;support for the SME sectorPE is a potential building block for developing a stronger, more balanced financial sector
![Page 7: Michael Barth, CEO, Netherlands Development Finance Company (FMO)](https://reader033.vdocuments.site/reader033/viewer/2022052401/56814dd3550346895dbb3438/html5/thumbnails/7.jpg)
Context: Capital Mobilization Trends
![Page 8: Michael Barth, CEO, Netherlands Development Finance Company (FMO)](https://reader033.vdocuments.site/reader033/viewer/2022052401/56814dd3550346895dbb3438/html5/thumbnails/8.jpg)
Source: IIF, e=estimate
Financial flows to emerging markets has seen a downward trend in recent years
-50
0
50
100
150
200
250
300
350
400
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002e
US
$bn
Private flows Official flows
![Page 9: Michael Barth, CEO, Netherlands Development Finance Company (FMO)](https://reader033.vdocuments.site/reader033/viewer/2022052401/56814dd3550346895dbb3438/html5/thumbnails/9.jpg)
Only FDI has been a stable, growing component
Source: Global Development Finance, e= estimate
-20%
0%
20%
40%
60%
80%
100%
% o
f to
tal
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002e
Breakdown of aggregate net resource flows
FDI Portfolio equity Bonds Bank and trade related lending Official net resource f low s
![Page 10: Michael Barth, CEO, Netherlands Development Finance Company (FMO)](https://reader033.vdocuments.site/reader033/viewer/2022052401/56814dd3550346895dbb3438/html5/thumbnails/10.jpg)
Capital mobilization in most emerging equity markets has been depressed in recent years
Gross New Capital Raised by Domestic Companies
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
1997 1998 1999 2000 2001
% o
f m
arket c
ap
italizatio
n
Latin America Europe and Central Asia
Middle East East Asia and Pacific
Africa
Source: FIBV data for sample countries comprising Latin America -Mexico, Brazil, Chile, Argentina,Peru; Europe and Central Asia -Turkey,Poland. Hungary, Czech Republic,Estonia, Lithuania; Middle East -Egypt, Bahrain, Jordan, Oman, Kuwait; East Asia- Taiwan, Korea, Malaysia, Indonesia, Thailand, Philippines; Africa- South Africa, Mauritius, Ghana, Namibia, Swaziland
![Page 11: Michael Barth, CEO, Netherlands Development Finance Company (FMO)](https://reader033.vdocuments.site/reader033/viewer/2022052401/56814dd3550346895dbb3438/html5/thumbnails/11.jpg)
IPO markets have mirrored this downward trend
Number of New Firms Listed, Emerging stock markets, 1997-2001
0
50
100
150
200
250
300
350
1997 1998 1999 2000 2001
# o
f c
om
pa
nie
s
Latin America Europe and Central Asia Middle East East Asia and Pacific Africa
Source: FIBV data, New issue data for Nigeria in 2000-2001 and Kenya 1999 unavailable
![Page 12: Michael Barth, CEO, Netherlands Development Finance Company (FMO)](https://reader033.vdocuments.site/reader033/viewer/2022052401/56814dd3550346895dbb3438/html5/thumbnails/12.jpg)
Focus on private equity: funds raised and invested; performance
![Page 13: Michael Barth, CEO, Netherlands Development Finance Company (FMO)](https://reader033.vdocuments.site/reader033/viewer/2022052401/56814dd3550346895dbb3438/html5/thumbnails/13.jpg)
3.23.7
6.5
9.28.5
4.4
5.8
11.9 12.3
10.0
0
2
4
6
8
10
12
14
1997 1998 1999 2000 2001
(US$
b)
InvestmentFunds raised
ASIA (ex-Japan, Australia)
Sources: Compiled by Cambridge Associates from multiple sources including AVCJ, internal proprietary fund manager database, VE-LA Publications, and 3i/PWC.
2.7
0.7
3.7
1.3
3.43.7
1.8
2.6
0.6
0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
5
1997 1998 1999 2000 2001
(US$
b)
LATIN AMERICA
Fund raising and investment trends
![Page 14: Michael Barth, CEO, Netherlands Development Finance Company (FMO)](https://reader033.vdocuments.site/reader033/viewer/2022052401/56814dd3550346895dbb3438/html5/thumbnails/14.jpg)
3.7
1.9
3.5
1.51.41.0
2.3
1.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
1998 1999 2000 2001
(US$
b)
Investment
Funds raised
MIDDLE EAST (Israel only) & AFRICA (South Africa only)
Sources: Compiled by Cambridge Associates from multiple sources including IVC, SAVCA/KPMG, EVCA, 3i/PWC and internal proprietary fund manager database.
0.77
0.63
0.48
0.37
0.85
0.56
0.57
0.47
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1
1998 1999 2000 2001
(US$
b)
CENTRAL & EASTERN EUROPE (incl. Russia)
Fund raising and investment trends
![Page 15: Michael Barth, CEO, Netherlands Development Finance Company (FMO)](https://reader033.vdocuments.site/reader033/viewer/2022052401/56814dd3550346895dbb3438/html5/thumbnails/15.jpg)
Emerging markets private equity investments by region
Latin America
Central & Eastern Europe 2%
Russia/NIS
Africa (S. Africa only)
Russia/NIS
Central & Eastern Europe
Middle East (Israel only)
13%Africa3%
0%
3%
Latin America
11% Emerging Asia (ex. Japan,)
70%
Emerging Asia (ex. Japan)
59%
18%
3%
4%
Middle East (Israel only)14%
Cumulative 1998-2001 2001
Sources: Compiled by Cambridge Associates from multiple sources including EVCA, AVCJ, MITI/Japan, VE-LA Publications, SAVCA/KPMG, IVC, 3i/PWC and internal proprietary fund manager database.
![Page 16: Michael Barth, CEO, Netherlands Development Finance Company (FMO)](https://reader033.vdocuments.site/reader033/viewer/2022052401/56814dd3550346895dbb3438/html5/thumbnails/16.jpg)
Returns on VC and PE funds (%)
Note: Pooled end to end return, net of fees, expenses and carried interestSource: Cambridge Associates, LLC
As of September 30, 2002
Preliminary Emerging
Markets VC and PE index
US Venture Capital Index
US Private Equity Index
1 Qtr (6.0) (9.1) (5.2)
1 Year (13.1) (29.4) (9.2)
3 Year (5.3) 25.1 (4.0)
5 Year (1.6) 46.7 3.7
10 Year 0.2 35.9 11.4
![Page 17: Michael Barth, CEO, Netherlands Development Finance Company (FMO)](https://reader033.vdocuments.site/reader033/viewer/2022052401/56814dd3550346895dbb3438/html5/thumbnails/17.jpg)
A broader look at returns - Public Markets
*Commenced November 1, 1984, **Returns of the one year period ending September 30, 2002. Source: Bloomberg, Venture economics
Annualized returns as of Dec 31 2002 (%)
1 year 3 year 5 year 10 year 20 year
Public equity
S&P 500 (22.1) (14.6) (0.6) 9.3 12.7
NASDAQ (30.2) (30.2) (2.4) 8.2 10.6
EAFE (15.9) (17.2) (2.9) 4.0 10.2
FTSE* (13.9) (15.1) (3.2) 7.3 6.5
Private equity
Venture capital** (22.1) 15.0 26.7 26.0 16.5
Buyouts (8.2) (4.2) 1.6 9.1 12.6
Total private equity (12.1) 1.2 8.4 15.2 14.5
![Page 18: Michael Barth, CEO, Netherlands Development Finance Company (FMO)](https://reader033.vdocuments.site/reader033/viewer/2022052401/56814dd3550346895dbb3438/html5/thumbnails/18.jpg)
Performance: “Management matters”US 1980-95 US
Private equity
(%)
US Listed Equity
(%)
US Fixed Income
(%)
Upper 25% 21.9 17.0 12.6
Median 14.0 15.9 12.0
Lower 25% 6.9 14.8 11.5
Spread between top and bottom
15.0 2.3 1.1
European PE 1993-1999
Spread between top and bottom 25%
25.2
Source:Teresa Barger, International Finance Corporation "What is a Private Equity fund?”
![Page 19: Michael Barth, CEO, Netherlands Development Finance Company (FMO)](https://reader033.vdocuments.site/reader033/viewer/2022052401/56814dd3550346895dbb3438/html5/thumbnails/19.jpg)
Some of the important “lessons learned”
![Page 20: Michael Barth, CEO, Netherlands Development Finance Company (FMO)](https://reader033.vdocuments.site/reader033/viewer/2022052401/56814dd3550346895dbb3438/html5/thumbnails/20.jpg)
Private equity in Emerging Markets- Lessons Learned
Apparent critical need to adapt PE operations to the local environmentManagement x 3; private equity is a craft, not a commodity; focus on additionalityIssues of critical mass, incentivesDeal flow, timing, acquisition pricesIssues of instrumentation, exit planningEnvironmental issues, esp. those related to poor investor protection/corporate governance, basic domestic capital markets
![Page 21: Michael Barth, CEO, Netherlands Development Finance Company (FMO)](https://reader033.vdocuments.site/reader033/viewer/2022052401/56814dd3550346895dbb3438/html5/thumbnails/21.jpg)
A Closer Look: Different Perspectives on Private Equity
Analytical perspectiveDr. Roger Leeds, Johns Hopkins University School of Advanced International Studies
Practitioner’s perspectiveMr. Alejandro Schwedhelm, Managing Director, Darby Overseas Investments, Ltd.
Domestic/policy perspective Mr. Alvaro Gonçalves, Managing Partner of Stratus (Brazil), Board Member, Venture Capital Association of Brazil
Investor’s perspective Dr. Patricia Dinneen, Consultant, Cambridge Associates