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8/3/2019 Fund+Selection+in+EM+by+DW Super+Return+Geneva+Jn+2010
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A Comparison Of Performance Between First Time Fund Managers &Established Managers Moving Into A New Market.
How Important Is Track Record?
David Wilton, Chief Investment Officer, Private Equity, IFC
Geneva June 28-30th
http://www.icbi-events.com/sremergingmarkets8/3/2019 Fund+Selection+in+EM+by+DW Super+Return+Geneva+Jn+2010
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Outline
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IFCs Experience- Not an intuitive result
The growth of the Opportunity
- Scale
- Returns
The Nature of the Opportunity
- Drivers of returns
- Minority Positions Selecting Successful Emerging Market GPs
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IFCs Experience
- Managers skill set is key
- Track record is not fully portable
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A Fund Manager With the Right Skills
CAN Overcome
1st Time Fund & Frontier Risks
Sample: 150 Funds in IFC portfolio (invested pre- and post- 2000) as of March 2009,
excluding those in the J-curve
IRR as ofMarch 2009
(simpleaverage %)
DevelopmentImpact Score
Highly Suc = 3HighlyUn S = -1
1st Time
Funds %
IDA %(
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Quartile Performance in IFC Portfolio
Relative to Prior Experience
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Sample: Mature and failed funds invested post-2000 in IFC portfolio pre-crisis 2008
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Performance Relative to Expectations
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Sample: Mature and failed funds invested post-2000 in IFC portfolio pre-crisis 2008
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The Growth of the Opportunity
- Scale
- Returns
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Where Can We Find Adequate Selectivity?
8
100
10
30
2-3
Raw deals sighted
Deals committed
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A Very Broad Opportunity
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Developed Single Country Regional Grouping
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Significant Expansion of Private Equity Deal Flow
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Shift to market-based
Economies. Growth in
private companies.
Limited impact on PE deal
flow as limited motive to
sell to 3 rd parties
Reduction in barriers to
trade and capital flows.
Increased competitive
pressure and opportunity
to expand. Significant
stimulus to PE deal flow.
Development of more sophisticated
capital markets and banks will increase
potential deal flow.
PE as % of GDP is presently very low in mostEmerging markets. Lack of leverage currently
makes slower growing companies unsuitable for PE.
Phase 1 Phase 2 Phase 3?
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Considerable Scope to Grow
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Source: EMPEA
Even in the BRICs, fundraising as a percentage of GDP is low in EMs
compared to the US, indicating much more room to grow.
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Competitive Returns from EM PE
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5 Year 10 YearChange
in Rank
Absolute
Change
%
Change
Central & Eastern Europe 24.09 15.61 0 8.48 54%
LAC 19.06 1.71 5 17.35 1015%
Western Europe PE euro 15.53 12.45 -1 3.08 25%
Emerging Market VC & PE 12.83 6.63 0 6.2 94%
US Buyout 10.44 7.68 -2 2.76 36%
Asian VC & PE 9.22 6.14 -1 3.08 50%
Asia ex Japan 9.1 5.72 -1 3.38 59%
Western Europe VC euro -2.01 -4.13 0 2.12 51%
End-to-end pooled mean Net to LPs
Source: Cambridge Associates September 2009 Quarterly Report
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Strong Growth in Returns
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1000%
Source: Cambridge Associates September 2009 Quarterly Report
5
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Clear Gains From Diversification
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Source: * All Private Equity funds invested by IFC since 2000, calendar year. Excludes debt, infrastructure & real estate funds. Numbers differ from early presentation due to mistaken
Inclusion of two non-PE funds and omission of closed fund, now corrected. ** Matching cash flows to IFC Private Equity Funds invested/divested from MSCI.
Cambridge Numbers from Cambridge Associates.
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
Cambridge EMIndex
The Emerging Market Index has
outperformed the Asia-only Index,
although close to 70% of the Emerging
Market Index is Asia.
IFC has out-performed the Emerging
Market Index with a much more
geographically diversified exposure.
Weighting
IRR from 2000 to Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09
IFC: Private Equity Funds * 22.9% 15.6% 14.4% 15.3% 17.0% 18.1%
IFC : All Funds (includes debt, real estate, etc) 19.8% 12.3% 11.4% 13.0% 14.1% 15.0%
Cambridge EM Top Quartile 16.9% 10.7% 9.4% 10.3% 12.7%Cambridge Asia ex-Japan Top Quartile 14.9% 10.6% 6.6% 8.5% 9.0%
Cambridge US PE Top Quartile 19.5% 14.2% 12.0% 12.2% 16.0%
MSCI (IFC PE Fund cash flows) ** 8.8% 1.8% -1.1% 7.7% 12.1% 13.4%
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Summary
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Good deal flow over a very broad geography
Scope for further growth
EM returns challenging developed markets
Strong returns outside Asia
Benefits from Diversification
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The Nature of the Opportunity
- Different to Developed Market PE- Minority Positions
- Growth Focus
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Minority/Majority Driven by Motivation of Sellers
17 17
PositiveMotivation to
Sell
- Strong growth situation
- Pre-Listing Clean-Up
- Geographic Expansion
Minority
Minority
Minority
Neutral
Motivation toSell
- Generational Change
-Conglomerate focusing on CoreBusiness selling non-Core
- Privatization
Majority
Majority
Majority
Negative
Motivation toSell
- Distressed business
- Distressed owners
Majority
Majority
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Motivation of Sellers Differs Across
Countries
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China
India
Minority Majority
South Africa
Egypt
BrazilVietnam
SSA
Turkey
Growth
Growth +
Gen Change +
Non core
Consolidation +
Growth
LBO +
Gen Change +
Growth
Consolidation +
Gen Change +
Growth
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Drivers of Return in Private Equity
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IRR Equity
Cash out by
Dividend ,
Stock
Purchase etc
P/E at Entry P/E at ExitRevenue
Growth p.a
Margin
Improves from
5% to x%
Holding
Period
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
A PE fund can achieve the same IRR through any of four basic strategies:
leverage, multiple expansion, growth and efficiency.
Most funds use a blend of the four.
In EMs IRR is driven by growth & efficiency
Source: IFC model
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Returns on Private Equity in Emerging Markets
are Driven More by Growth than Leverage
Annual revenue growth * 19.5% 37.8%
Debt-to-equity ratio ** 0.33 0.74
Sample: * 527 companies in IFC-invested funds with holding time of at least one year ** 604 companies in IFC-invested funds, not including financial services
Higher growth and lower leverage makes the source of risk in EM PE less cyclical and
more operational
Median Average
Companies in IFC-invested Funds:
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Growth Focus, With Variants
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China
India
South Africa
Egypt
Brazil
Vietnam
SSA
Growth +
Leverage
Organic +
Inorganic
Growth
Organic Growth
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Summary
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Many Minority Positions
Growth-Driven Returns
Variation in Local Conditions
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Selecting GPs
- How local?
- Market segments?
- What skills?
- Change the constant in EM PE
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Summary of Opportunity
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Good deal flow over a very broad geography
Scope for further growth
EM returns challenging developed markets
Strong returns outside Asia
Benefits from Diversification
Many minority positions
Growth-driven returns
Variation in Local Conditions
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Being Local is Very Important
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International
Large Local
MidCap
SME
Fly-In, Fly-Out Used
to Work. Now much
more competitive.
Fly-In, Fly-Out has
Never Worked.
Access, reputation checking, due diligence, management,
acquiring talent, acquiring leverage
All are Highly Local
Deal Size
Company
Sophistication
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Ways of Being Local
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GP Type How Become Local? Issues
Local GP Fully local operation Good access to transactions,
talent, due diligence. Funding
typically limits access to largest
deals need to syndicate. (This is
slowly changing)
Foreign GP Affiliation with local GP Access to largest deals with fulllocal skill set. Not access deals
local affiliate can do for itself.
Foreign GP Local office Local skills + broader deal access.
Expensive. Need to ensure
alignment and influence with HQ.
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GP Experience Required Skills Depend on Model
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Return Driver Source of profit Sk ill Required
Arbitrage Pricing multiple differential
between private market andpublic/M&A markets
Investment or Merchant Banking
Consultancy
Leverage Leverage a company with stableearnings
Investment Banking
Earnings growth Increase earnings throughexpansion or acquisition.
Corporate Operations, Entrepreneurial,Consulting
Margin expansion Increased profits via improvedefficiency or shifting product tohigher margin niche.
Corporate Operations, Entrepreneurial,Consulting
Improved transparencyand governance
Earnings attract a higher price,as buyers feel more informedand protected.
Corporate Operations, Entrepreneurial,Consulting
Multiple expansion dueto growth or profits
Earnings of company attract ahigher price / earnings multiple
Private Equity acquire based onwhat you can sell
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Successful Minority Requires Partnership
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Partnership reduces risk where the legal system does not
easily support enforcement
Partnership comes from high value-add
High Value-Add is also needed to
- Access transactions
- Influence company direction
- Influence Exit
High Value-Add = active advice and hand-holding
based on own experience
= sitting on the Board as a general sounding board
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Partnership has lead to Good Performance from
Minority Positions
Median IRR Average IRR
Sample: Exits of 61 majority positions and 251 minority positions from IFC invested funds
Minority positions (blue) have performed well in all forms of exit,
indicating that the risks associated with minority positions can be managed effectively.
0%
10%
20%
30%
40%
50%
IPO/Listing Trade Sale MBO StructuredExit
Majority
Minority
0%
10%
20%
30%
40%
50%
IPO/Listing Trade Sale MBO Structured Exit
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What We Have Not Looked For
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Well known brand
Fund III+ with full-exit track record
Top Quartile Record Outside the Target Market
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Change the Guaranteed Constant
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Possible future changes:
Increased competition
= risk profile of 1st time funds increases
Increased deal flow via greater access to leverage
= expansion of key GP skill set
= increasing risk profile
Increased local funding, LP comfort with local GPs
= less syndication available for Foreign GPs
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Summary its quite simple
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Select GPs with:
- Local presence
- Strong value-add capacity
Watch for on-going changes
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Thank You
For further information on IFCs experience investing in emerging market private equity
please see our website http://www.ifc.org/funds under the publications tab
http://www.ifc.org/fundshttp://www.ifc.org/funds