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Challenges to Securities Markets. NBFI Seminar December 4-6, 2002 Santiago, Chile Peter Tropper International Finance Corporation. Panelists. Mr. Jose Luiz Osorio, Former CVM Chairman, Brazil Mr. Hernan Rodriguez, Bank of New York Mr. Sergio Luiz de Cerqueira Silva, Bovespa, Brazil - PowerPoint PPT Presentation
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Challenges to Securities Markets
NBFI Seminar
December 4-6, 2002
Santiago, Chile
Peter Tropper
International Finance Corporation
2
Panelists
Mr. Jose Luiz Osorio, Former CVM Chairman, Brazil
Mr. Hernan Rodriguez, Bank of New York
Mr. Sergio Luiz de Cerqueira Silva, Bovespa, Brazil
Mr. Sergio Undurraga, President, Moneda Asset Management, Chile
Mr. Scott Swensen, Managing Director, DB Capital Partners
Mr. Camilo Arenas, Corporación Andina de Fomento
3
Market Performance, Jan. – Nov. 2002
-60
-50
-40
-30
-20
-10
0
10
20
30
S&
P/IF
CG
Ind
ex
Argentina Brazil Chile Colombia Mexico Peru Venezuela
-58%
-36%
-16%
10%
-12%
27%
-23%
4
Market Capitalization as % of GDP, 2001
020406080
100120140160
Uni
ted
Sta
tes
Japa
nC
hile
Sou
th A
frica
Arg
entin
aG
erm
any
Kor
ea, R
ep.
Bra
zil
Indi
aM
exic
oP
eru
Col
ombi
aV
enez
uela
% o
f G
DP
Source: World Bank
5
Market Concentration, 2001
0%10%20%30%40%50%60%70%80%
NYSE
Santia
go
Lond
on
Sao P
aulo
Lim
a
Mex
ico
Bueno
s Aire
s
Source: FIBV
6
Foreign investments can provide
CashBest practices catalytic roleTransfer of financial , managerial, operational
technologies
BUT: Successful countries finance their own economic development
7
ResponsesSet up 2nd tier marketsEncourage cross-listings, including ADRs & GDRsEnsure greater transparency thru corporate governance rulesPermit institutional investors to invest more in listed and unlisted equitiesReduce trading costs: move to electronic trading floors drop stamp taxes & transaction taxes permit negotiated commissions create on-line trading by investors
8
Private Equity Investments in Latin America
0
1
2
3
4
5
6
1998 1999 2000 2001 2002
$b
illio
ns
(Jan-Jun)
$5b
$3.6b
$2.8b
$0.8b$0.4b
source: Venture Equity LA
9
IFC INVESTMENT IN PRIVATE EQUITYIN LATIN AMERICA
$314 million committed in 22 funds$314 million committed in 22 funds
IFC commitment Breakdown by country (2001)
-
20
40
60
80
100
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
0
2
4
6
8
10
$ m
illio
ns
No. of
Fun
ds Regional
30%
Argentina
20%
Brazil
20%
Mexico
10%
Other
20%
10
Benefits of Private Equity 87 % of UK PE-backed companies felt PE firms
contributed far more than money. Financial advice
Strategic guidance
Management recruitment
Time Frame: Market investors: Short Term Classic owners: Long Term Private equity: Medium Term
15% of the UK workforce is in a company backed by private equity
11
Other Impacts
Job creation
Productivity enhancement
Economic growth
Ownership transfer, diversification (including professionalizing family companies)
Corporate governance
12
Basic Investment Theses1) EBITDA expansion
• Organic growth• Roll-ups/M&A, especially in consolidating sectors• Bring business concept from U.S./Europe to new markets
2) Multiple expansion• Re-rate company / redefine industry• Shed non-core assets and refocus
3) Margin improvement• Better production, distribution, products• Better use of labor and inputs• Branding
4) Transparency and governance• Remove “governance discount”• Increase worker productivity and customer loyalty through
transparency• Professionalize family businesses
5) Restructuring• Financial; including leverage
13
Private Equity ChallengesFocus often is on small companies Dominance of family owned business Lack of professional management Weak corporate governance Limited access to debt financing Lack of reliable financial information Maybe 10% of small companies ever grow;
means IPOs are unlikely
Currency devaluation riskWeak regulatory environmentEconomic and political uncertainty
=> DIFFICULT EXITS
14
Little Shop of Horrors
The management contract allows investors to fire the manager any time…but only with his permissionThe manager buys shares of investee first then brings Fund in later at a higher priceBoard doesn’t notice $13 mm in cash sitting idle in $26 mm fundManager of an E. European country fund decides to move to London. “It’s easier.”
15
Top Quartile Managers vs Average Managers
(U.S. Private Equity, 1980-1995)
15
2.3
1.1
0 5 10 15 20
Private Equity
Listed Equity
Fixed Income
Spread (Percentage Points)
source: McKinsey
16
Final hard lesson
Manager
Manager
Manager
You can’t structure around a bad manager