Note on Lp Interest in Emg Pe _final Draft

8/6/2019 Note on Lp Interest in Emg Pe _final Draft

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This report was written by E. Brooke Whitaker T06 under the supervision of Adjunct Associate Professor

Fred Wainwright and Professor Colin C. Blaydon of the Tuck School of Business at Dartmouth College. It

was written as a basis for class discussion and not to illustrate effective or ineffective management

practices.

Copyright 2006 Trustees of Dartmouth College. All rights reserved.

U.S. Institutional Investors Interest

in Emerging Market Private Equity

10 August 2006


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Tuck School of Business at Dartmouth 2

IMPORTANT NOTICE ................................................................................................................................ 3

1. EXECUTIVE SUMMARY .................................................................................................................. 4

1.1 OBJECTIVE AND METHODOLOGY ................................................................................................ 41.2 EMPEPORTFOLIO ALLOCATION ................................................................................................ 41.3 EMERGING MARKET PUBLIC EQUITIES ....................................................................................... 4

1.4 LPSTRATEGIES FOR EMPE....................................................................................................... 51.5 CONSTRAINTS ON INCREASED INVESTMENT IN EMPE .............................................................. 51.6 DEGREE AND SCOPE OF GPDUE DILIGENCE ............................................................................ 61.7 IMPORTANCE OF DFIINVESTMENT ............................................................................................. 61.8 REGIONS AND COUNTRIES OF INTEREST.................................................................................... 61.9 LOCAL INSTITUTIONAL INVESTMENT ........................................................................................... 61.10 RETURN EXPECTATIONS ............................................................................................................. 6

2. OBJECTIVE AND METHODOLOGY ............................................................................................. 8

2.1 OBJECTIVE................................................................................................................................... 82.2 METHODOLOGY ........................................................................................................................... 8

3. EMPE PORTFOLIO ALLOCATION................................................................................................ 9

4. EMERGING MARKET PUBLIC EQUITIES ................................................................................. 105. LP STRATEGIES FOR EMPE ....................................................................................................... 11

6. CONSTRAINTS ON INCREASED INVESTMENT IN EMPE .................................................... 12

7. DEGREE AND SCOPE OF GP DUE DILIGENCE ..................................................................... 14

8. IMPORTANCE OF DFI INVESTMENT ......................................................................................... 14

9. REGIONS AND COUNTRIES OF INTEREST ............................................................................ 15

10. LOCAL INSTITUTIONAL INVESTMENT ................................................................................ 16

11. RETURN EXPECTATIONS ....................................................................................................... 16

APPENDIX 1. SOURCES ....................................................................................................................... 17

APPENDIX 2. QUESTIONNAIRE .......................................................................................................... 22ANNEX ........................................................................................................................................................ 23

ABOUT THE AUTHOR................................................................................................................................ 23CENTER FOR PRIVATE EQUITY AT THE TUCK SCHOOL OF BUSINESS AT DARTMOUTH ......................... 23


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U.S. Institutional Investors Interest in Emerging Market Private Equity


Important Notice

As a research fellow at the Centre for Private Equity at the Tuck School of Business atDartmouth during 2005/2006, the author interviewed investment managers at 20 U.S.-based institutions in an effort to understand their views on emerging markets private

equity. Each interview lasted between 15 and 70 minutes. Although a number of theinvestment officers that were surveyed answered all questions in great detail and offeredadditional insight and thought, a few investment officers were unable to answer everyquestion due to their time constraints. The survey was conducted with the understandingthat each institution and the investment officer interviewed would remain anonymous. Toprovide an additional layer of anonymity, the surveys findings have been demarcatedinto broad categories based on total assets under management.

The term emerging market was defined for the purpose of this survey as all countries inCentral and South America, the Middle East, Central and Eastern Europe, Africa, andAsia (except Japan and Australia).

The general partners of private equity funds are hereafter known as GPs. Institutionalinvestors are hereafter collectively known as limited partners or LPs or simply asinstitutional investors. Development finance institutions (DFI) are those institutionssuch as the International Finance Corporation (IFC), the European Bank forReconstruction and Development (EBRD), the Asian Development Bank (ADB), etc.

The author and the Centre for Private Equity at the Tuck School of Business atDartmouth wish to thank the investment officers who participated in this survey for theirtime and insight. We also wish to thank the many GPs of private equity funds based inthe UK, Kenya, South Africa, Indonesia, Thailand, UAE, Vietnam and Singapore, the

development finance institutions, and the Emerging Markets Private Equity Association.A number of attorneys in Singapore, Indonesia, and South Africa who provide transactionsupport services to private equity firms also contributed generously to this study.


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1. Executive Summary

1.1 Objective and Methodology

The objective of the survey was to understand how US-based institutional investors viewemerging markets private equity (EMPE), and to identify any major trends, strategies,and perceptions therein.

Using Thomsons VentureXpert1

online limited partner directory, 20 institutionalinvestors who had a cumulative total of $994 billion in total assets under managementwere contacted during March, April, and May 2006 and were asked a series of questions(See Appendix 2. Questionnaire) in confidential telephone interviews that lasted between15 and 70 minutes each.

Type and Number of Institutional Investors

Type Population Number Contacted

Banks & Financial Corps. 142 1

Consultants/Gatekeepers/Fund of Funds 63 3

Educational Endowments 284 4

Foundations 113 3

Government 153 3

Corporate Pension Funds 910 3

Insurance Companies 158 3

Total 1,823 20

1.2 EMPE Portfolio Allocation

Although there were a few outliers, all LPs except for insurance companies andconsultants/gatekeepers/fund of funds expected to invest between 10 and 15 percent oftheir total portfolio in private equity, and to have between 10 to 15 percent of their totalprivate equity investments be comprised of EMPE.

1.3 Emerging Market Public Equities

With the exception of the EMPE consultants/gatekeepers/fund of funds, all LPsinterviewed held emerging market public equities within their investment portfolios and

stated that they were invested in individual companies rather than in emerging marketindex or mutual funds. Six LPs viewed emerging markets public equities as the onlyemerging market investment that they would currently make based on the fact that theirinvestments in emerging markets public equities have performed well historicallywhereas investments in EMPE have, historically, performed poorly. These same LPs,

1 http://vx.thomsonib.com/NASApp/VxComponent/VXMain.jsp


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however, stated that they would reconsider investing in EMPE once returns started toimprove.

1.4 LP Strategies for EMPE

While all LPs interviewed were aware of EMPEs poor performance in recent years andsix LPs stated that they would want to see EMPE returns improve for a period of timebefore they would consider to invest or to increase their investments in EMPE, of theremaining 11 LPs (except for insurance companies who were not considering investing inEMPE), all believed that it is possible to generate commercial returns in EMPE. They allalso recognized that it would be best if they had internal personnel with knowledge of thecultures, languages and business practices of different emerging markets who wouldidentify, evaluate and monitor the institutions EMPE investments rather than to havesomeone without this experience performing this function. The size of the LP and itsnumber of internal investment personnel, however, greatly influenced each LPs EMPEstrategy.

For example, two of the Large LPs stated that in order to increase their investments inEMPE, they would need dedicated resources to identify, evaluate and monitor theirEMPE investments. These Large LPs and some of the Medium LPs with investments inEMPE therefore focused only on two or three emerging market countries and divided theworkload among their investment staff.

The Medium and Small LPs that lacked the internal staff to identify, evaluate andmonitor EMPE investments effectively or to do so on a larger scale (i.e. an increase oftwo or more investments) were either making select investments in EMPE with GPs withwhom they already had relationships, were investing through an EMPE fund of funds, or

were using a gatekeeper or consultant to identify EMPE investment opportunities forthem.

Only two Large LPs had made investments in EMPE fund of funds while all other LargeLPs and a many Medium LPs found this strategy problematic due to a perceived lack ofalignment between the fund of funds interests and that of the investing LP.

The EMPE fund of funds had the most long term view of EMPE in terms of havingexperienced investment personnel with extensive emerging market experience andcreating a contact network with many emerging GPs throughout a number of emergingmarkets with the goal of developing the next generation of GPs in emerging markets.

1.5 Constraints on Increased Investment in EMPE

In addition to the lack of internal investment personnel, other constraints on investmentor increased investment in EMPE were: poor historical returns for EMPE; few qualified


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GPs in emerging markets2; lack of supporting institutions3; and the relative small size ofsome EMPE funds (affected mostly Large LPs).

1.6 Degree and Scope of GP Due Diligence

The degree and scope of due diligence that Large and Medium LPs would perform onEMPE investment opportunities were generally very comprehensive and detailed. Asignificant majority of Large and Medium LPs stated that they would perform the samelevel of due diligence on EMPE GPs as they would on developed market GPs, but theseLPs recognized that the general lack of experienced GPs in EMPE required the relaxationof certain criteria (e.g. number of years the GPs have worked together and have producedtop quartile returns).

The level and degree of due diligence that Small LPs would conduct on GPs wasgenerally more qualitative and much less investigatory than the level and degree of duediligence that Medium & Large LPs performed. When asked if they applied the same

level of due diligence for GPs within EMPE, they stated that they would apply morestringent criteria than they would to GPs within developed markets.

1.7 Importance of DFI Investment

Large and Medium LPs views on development finance institution4 (DFI) investmentcapital ranged from neutral to negative when considering an EMPE investmentopportunity, while all Small LPs view DFI investment as a positive.

1.8 Regions and Countries of Interest

There was no clear consensus among the LPs regarding their interest in investing inregional versus country-specific funds. However, China, India, Brazil, Israel and SouthAfrica were of particular interest to a number of LPs.

1.9 Local Institutional Investment

All LPs viewed local institutional investment as a positive sign, while a majority statedthat they would view a very large GP investment in the fund as the most positive sign.

1.10 Return Expectations

2 It is interesting to note that an overwhelming number of those LPs who followed a top-down approachto EMPE investing stated that the poor state of supporting institutions in emerging markets was a keyconstraint, while those LPs that followed a bottom-up approach to EMPE investing stated that the limitednumber of qualified GPs in emerging markets was a key constraint.3 Ibid.4 For example, International Finance Corporation (IFC), European Bank for Reconstruction andDevelopment (EBRD), Asian Development Bank (ADB), etc.


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LPs across all categories generally believed that investments in EMPE should generate areturn greater than 25 percent.


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2. Objective and Methodology

2.1 Objective

The objectives of the survey were to understand how US-based institutional investorsview emerging markets private equity (EMPE), and to identify any major trends,strategies, and perceptions therein. Specifically, the objective of the survey was tounderstand the following:

The current and future percentage of their portfolios that LPs allocate to EMPE.

The strategy that LPs have for EMPE.

The criteria that LPs utilize in evaluating GPs in EMPE and the degree to whichthis criteria is applied to GPs in EMPE vis a vis GPs in developed markets such asin the US or UK.

Which emerging market regions and countries are popular or unpopular, and whyare they viewed as such.

The importance of development finance institution5 (DFI) investment capital inhelping attract U.S. based institutional investment capital.

The major constraints or issues that prevent or hinder LPs from investing orincreasing their investment in EMPE.

2.2 Methodology

Using Thomsons VentureXpert6

online limited partner directory, a population of 1,823institutional investors representing a cross-section of different types

7of institutional

investors was identified. Of these, 20 institutional investors who had a cumulative total

of $994 billion in total assets under management were contacted during March, April andMay 2006 and were asked a series of questions (See Appendix 2 Questionnaire) intelephone interviews that lasted between 15 and 70 minutes each. Although a number ofthe investment officers surveyed answered all questions in great detail and offeredadditional insight and thought, a few investment officers were unable to answer everyquestion due to their time constraints.

The survey was conducted with the understanding that each institution and the investmentofficer interviewed would remain anonymous. To provide an additional layer ofanonymity, the surveys findings have been demarcated into broad categories based ontotal assets under management. Large LPs were classified as those institutions withmore than $5 billion in total assets under management; Medium LPs were classified asthose institutions whose total assets under management were less than $5 billion but

5 For example, International Finance Corporation (IFC), European Bank for Reconstruction andDevelopment (EBRD), Asian Development Bank (ADB), etc.6 http://vx.thomsonib.com/NASApp/VxComponent/VXMain.jsp7 Bank & financial corporations, consultants/gatekeepers/fund of funds, educational endowments,foundations, government, corporate pension funds, and insurance companies.


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greater than $2 billion, while Small LPs were classified as those institutions with lessthan $2 billion in total assets under management.

Because there are many different types of institutional investors, for the purpose of thissurvey, the institutional investors were classified into the following types of institutions:

corporate pension funds, educational endowments, foundations, insurance companies,banks and financial corporations, and consultants/gatekeepers/fund of funds. Thesedifferent types of institutional investors are hereafter collectively known as limitedpartners or LPs or simply as institutional investors.

In choosing which institutional investors to contact within each type of institution, aneffort was made to contact at least one Small, one Medium and one Large LP for eachtype of investor. Due to the difficulty in successfully reaching the investment officers ofany particular institution and the time constraint that the survey was conducted under,some LPs within each type of institution were similar in size (e.g. two Large LPs and oneMedium LP rather than one Small, one Medium and one Large LP).

Type and Number of Institutional Investors

Type Population Number Contacted

Banks & Financial Corps. 142 1

Consultants/Gatekeepers/Fund of Funds 63 3

Educational Endowments 284 4

Foundations 113 3

Government 153 3

Corporate Pension Funds 910 3

Insurance Companies 158 3

Total 1,823 20

3. EMPE Portfolio Allocation

Although there were a few outliers, all LPs except for insurance companies andconsultants/gatekeepers/fund of funds expected to invest between 10 and 15 percent oftheir total portfolio in private equity, and to have between 10 to 15 percent of their totalprivate equity investments be comprised of EMPE. One Small LP stated, however, thatthey wished to have 25 percent of their total private equity investments be comprised ofEMPE within the next five years.

By contrast, insurance companies had only one percent of their total portfolios allocatedto private equity, and their investments in EMPE were practically nonexistent, due toregulatory constraints. Fund of funds had 100 percent of their funds invested in EMPE.


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4. Emerging Market Public Equities

With the exception of the EMPE consultants/gatekeepers/fund of funds, all LPsinterviewed held emerging market public equities within their investment portfolios, and

stated that they were invested directly in individual companies rather than in emergingmarket index or mutual funds.

Six LPs viewed emerging markets public equities as the only emerging marketinvestment that they would currently make, an assessment they made based on the factthat their investments in emerging markets public equities have performed wellhistorically, in contrast to investments in EMPE, which have performed poorlyhistorically. These LPs also stated that they preferred emerging market public equitiesbecause they provided greater liquidity than did EMPE, diversification for theirportfolios, and companies with better corporate governance structures in which to investthan did private companies in emerging markets. Furthermore, these LPs mentioned that

the emerging market countries in which they had invested possess enhanced capitalmarkets and better supporting institutions

8, which made investing in emerging market

public equities a better investment than did EMPE. These LPs also stated that they wouldreconsider investing in EMPE once returns start to improve.

When questioned further about whether they would invest in EMPE in countries withenhanced capital markets and supporting structures, a number of these LPs added to thereasons given above that there were inherent difficulties in investing in EMPE such as thelanguage and cultural differences. As one Medium LP stated, they needed to havesomeone get on the ground who understood the place [country] to evaluate the GPs andthe opportunity, which the quoted investment officers institution could not do with its

current staffing.

One other Medium LP mentioned that although returns in EMPE had been quite lowhistorically and that past performance was not an indicator of future performance, thisinvestment officers other chief concern with EMPE was the poor level of corporategovernance at the company level in emerging markets. This Medium LP stated that,corporate governance in companies that are publicly listed on exchanges in emergingmarkets is far better than it is in the private companies in these countries [emergingmarkets]. The author recognized that, in general, private companies in emerging marketsdo have poor corporate governance, but the author replied that GPs in emerging marketshad an unusually great opportunity and fiduciary responsibility to improve the corporate

governance structures in the companies in which they invest and could do so moreeffectively than could the shareholders in public equities, creating tremendous value inthe process. In response, the investment officer stated that his institution had not receiveda private placement memorandum for an EMPE fund from a qualified GP, in which

8 Independent judiciary, developed professional services industry such as accounting, tax, businessconsulting, and legal advisory services, developed banking sector, enhanced capital markets, etc.


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improving the corporate governance in the portfolio companies in which the GP wouldinvest was core to the investment strategy.

5. LP Strategies for EMPE

While all LPs interviewed were aware of EMPEs poor performance in recent years andsix LPs stated that they would want to see EMPE returns improve for a period of timebefore they would consider to invest or to increase their investments in EMPE, of theremaining 11 LPs (except for insurance companies who were not considering investing inEMPE), all believed that it is possible to generate commercial returns in EMPE. They allalso recognized that it would be best if they had internal personnel with knowledge of thecultures, languages and business practices of different emerging markets who wouldidentify, evaluate and monitor the institutions EMPE investments rather than to havesomeone without this experience performing this function. The size of the LP and its

number of internal investment personnel, however, greatly influenced each LPs EMPEstrategy.

For example, two of the Large LPs whose investment performances are highly regardedin the industry and are active investors in EMPE, mentioned the importance ofconducting on the ground/in-country reference checks on emerging market GPs toconfirm not only their character and standing within the local business communities, butalso their ability to unlock value from their contact and information networks. TheseLarge LPs stated that in order to increase their investments in EMPE, they would needdedicated resources to identify, evaluate and monitor their EMPE investments. TheseLarge LPs and some of the Medium LPs with investments in EMPE therefore focused

only on two or three emerging market countries and divided the workload among theirinvestment staff.

The Medium and Small LPs that believed that it is possible to generate returns in EMPEbut stated that they lacked the internal staff to identify, evaluate and monitor EMPEinvestments effectively or to do so on a larger scale (i.e. an increase of two or moreinvestments) were either making select investments in EMPE with GPs with whom theyalready had relationships, were investing through an EMPE fund of funds, or were usinga gatekeeper or consultant to identify EMPE investment opportunities for them. Of theMedium and Small LPs investing in EMPE fund of funds, they viewed these investmentsas a way in which they could establish relationships with emerging market GPs in order

to facilitate direct investment in specific GPs in the future.

Only two Large LPs had made investments in EMPE fund of funds while all other LargeLPs and a many Medium LPs found this strategy problematic. Specifically, these LPsfelt that fund of fund managers stringency in due diligence on emerging market GPswould not match their own standards, because they believed that fund of fund managerswere not return driven, thereby creating a lack of alignment between the fund of funds


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interests and that of the investing LP. As a result, these LPs stated that they wouldnteven consider investing in an EMPE fund of funds.

The investment officers from these 11 institutions made a number of notable commentsduring their interview concerning the need for experienced internal investment staff with

emerging market expertise that would be responsible for identifying, evaluating andmonitoring EMPE investments:

We just cant deal with those different cultures.

We dont have expertise in these markets. The language and cultural, not tomention the accounting differences, are very difficult to deal with.

There is a lack of good information on GPs in emerging markets. We needsomeone who can confirm the credibility of GPs on the ground in thesecountries.

It [EMPE] is difficult to do right unless you get on the ground and do your owndue diligence. No way am I going to leave that to a consultant to do.

I would have no idea how to go about evaluating an opportunity in Indonesia or

an opportunity in some of those other countries. We dont have anyone dedicated to EMPE but we have an in-house generalist

with an MBA who monitors our [EMPE] investments, but he doesnt speak thelanguage or understands the culture in these countries for company portfoliocalls.

Although a large majority of these 11 LPs stated a desire to supplement their currentinternal investment staff with additional personnel, only three of them had actually begunto develop an internal emerging market resource: one Large LP at the time of thesurvey had a staff member dedicated to EMPE while one other Large LP had one senioranalyst spending approximately 60 percent of his time on EMPE. Another Large LP at

the time of the survey was in the process of hiring a graduate from a top-tier MBAprogram to be dedicated to EMPE. (Note: By June 2006, this Large LP had hired thisindividual.) These LPs thus seemed dedicated to develop or acquire the requisite internalskills to identify, evaluate and monitor EMPE investments effectively. They also allstated that they were developing relationships with a number of GPs with whom theycould invest over the long term, and were interested in identifying opportunities in othercountries.

The EMPE fund of funds had the most long term view of EMPE in terms of havingexperienced investment personnel with extensive emerging market experience andcreating a contact network with many emerging GPs throughout a number of emerging

markets with the goal of developing the next generation of GPs in emerging markets.

6. Constraints on Increased Investment in EMPE

In addition to the lack of internal investment personnel, other constraints on investmentor increased investment in EMPE were poor historical returns for EMPE; few qualified


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GPs in emerging markets9; lack of supporting institutions10; and the relatively small sizeof some EMPE funds (affected mostly Large LPs).

The poor historical performance of EMPE has detracted a number of investment officersfrom EMPE and has made it a difficult sell for investment officers seeking to make to

their respective investment boards. When the author mentioned to one Medium LP thatCambridge Associates Emerging Markets Private Equity Index noted a 22.1 percentreturn for the year ending 30 June 200511, this Medium LP stated that we need to seereturns improve for a few years in a row before his institution would invest or increaseits investments in EMPE. One LP stated that emerging markets private equity needs ahigh profile champion to get the word out that EMPE is beginning to producecommercial returns.

Eight of the LPs, particularly the Large and Medium LPs, stated that the lack ofexperienced GPs in EMPE was also a key constraint in investing or increasing investmentin EMPE. These LPs mentioned that few GPs had the experience or track record of

providing top quartile returns for their investors and as a result, would frequently have torelax their criteria or standard for certain GPs. The Large LPs and Medium LPs whowere intent on tracking the industry and on developing or acquiring internal skills toidentify, evaluate and monitor EMPE investments on a larger scale, were currentlymonitoring a few emerging GPs in a few emerging markets.

A number of the LPs also mentioned that few emerging market countries lacked thesupporting institutions (e.g. developed capital markets, independent judiciary, etc.),which not only hindered their ability to increase investments in EMPE, but it also madeconfirming the emerging market GPs ability to operate and create value in these difficultmarkets all the more important. A majority of the Small LPs didnt raise these issues asconstraints. Rather, these Small LPs stated that their internal human resource constraintwas their greatest hindrance in investing or increasing investment in EMPE.

One Large LP stated that his institution needed to deploy larger quantities of capital inorder to move the return needle than did smaller-sized LPs. That, when combined withthe fact that a number of EMPE funds are small (i.e. $100 million to $300 million) andinternal policy constraints that prohibit an LP from investing more than a specifiedpercentage of the total funds value, there are fewer opportunities to invest large sums ofcapital in EMPE than in developed markets such as the US or UK for Large LPs.

9 It is interesting to note that an overwhelming number of those LPs who followed a top-down approachto EMPE investing stated that the poor state of supporting institutions in emerging markets was a keyconstraint, while those LPs that followed a bottom-up approach to EMPE investing stated that the limitednumber of qualified GPs in emerging markets was a key constraint.10 Ibid.11 http://www.empea.net/docs/newsletters/Emerging%20Markets%20PE%20Returns%20Improving.pdf


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7. Degree and Scope of GP Due Diligence

The degree and scope of due diligence that Large and Medium LPs would perform onEMPE investment opportunities were generally very comprehensive and detailed. For

instance, Large & Medium LPs conduct on-site interviews with members of the generalpartnership and team; review investment memoranda, portfolio company cash flow, andvaluation assumptions; perform independent background checks on the GPs; and conductinterviews with portfolio company management. Two Large LPs mentioned that theyeven liked to conduct independent background checks on the GPs and sought to confirmthe network and contacts that the GPs would use to generate deal flow. One of theseLarge LPs wanted to make certain that the GP had an unfair advantage in theirrespective market compared to other GPs in that market, which could only be done bybeing there, speaking with people and understanding the market and the opportunity.

A significant majority of Large and Medium LPs stated that they would perform the same

level of due diligence on EMPE GPs as they would on developed market GPs, but theseLPs recognized that the general lack of experienced GPs in EMPE required the relaxationof certain criteria (e.g. number of years the GPs have worked together and have producedtop quartile returns); if the LPs applied the same level of criteria to GPs in EMPE as theydid to GPs in developed markets, no EMPE GP would ever meet our criteria.Furthermore, one Medium LP stated there is a lack of good information on GPs inemerging markets and that we need someone who can confirm the credibility of GPs inthese countries.

The level and degree of due diligence that Small LPs would conduct on GPs wasgenerally more qualitative and much less investigatory than the level and degree of due

diligence that Medium & Large LPs performed. For example, of the Small LPs surveyed,none mentioned such actions as reviewing investment memoranda or cash flowstatements or valuation assumptions. Rather they looked for the alignment of interests,experience, checked references and looked for a unique investment thesis. When asked ifthey applied the same level of due diligence for GPs within EMPE, they stated that theywould apply more stringent criteria than they would to GPs within developed markets.

8. Importance of DFI Investment

Large and Medium LPs views on development finance institution12 (DFI) investmentcapital ranged from neutral to negative when considering an EMPE investmentopportunity, while all Small LPs view DFI investment as a positive.

12 For example, International Finance Corporation (IFC), European Bank for Reconstruction andDevelopment (EBRD), Asian Development Bank (ADB), etc.


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Those LPs that believed DFI investment was a negative held the view that if the GPswere truly capable and likely to generate commercial returns, those GPs would be ableto raise their funds totally with institutional capital and would not need DFI investmentcapital. Therefore, the fact that a DFI had invested in a fund raised red flags for thisinvestment officer. One other Large LP stated specifically that the different DFIs

investment officers interests were not similarly aligned with those of an institutionalinvestor because this particular investment officer was remunerated based on his abilityto meet or exceed a benchmark index such as Cambridge Associates Private EquityIndex, whereas the DFI investment officers remuneration was most likely notbenchmarked to a similar performance index.

One other Large LP qualified his view by stating that they would view DFI investment asa no go if the DFI constrained the GP from making certain types of investments or ifthe GP had any type of development focus.

The remainder of Large LPs held neutral views of DFI investment; as these Large LPs

stated that each had its own standards, policies and due diligence procedures forevaluating GPs and could make an investment decision independently of DFI investmentin a GP.

Medium LPs generally held neutral views of DFI investment in GPs as these LPs alsoheld their own standards, policies and due diligence procedures for evaluating GPs andwould make an investment decision independent of DFI investment in a GP.

Small LPs all held positive views of DFI investment in GPs. A majority of the Small LPsbelieved the DFI provided a stamp of approval for the GP and, thus, they were morelikely to invest in that GP.

9. Regions and Countries of Interest

There was no consensus among the LPs regarding their interest to invest in regionalversus country-specific funds. Due to time constraints, the investment officers wereunable to discuss in detail what made specific countries attractive for their investmentcapital. However, the investment officers made the following comments:

Large LP: would only invest in country funds on a deal by deal basis. This LP

also stated that they liked India and Russia but not China because of a lack ofrule of law and Brazil due to poor fundamentals.

Small LP: had no specific strategy but liked regional funds and would considerAfrica, Central Europe and Asia.

Large LP: liked India and China for venture capital investing only.

Large LP: would only invest in country specific funds because regional fundsjust dont work.


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Large LP: liked regions and country specific funds but mostly invested in EMPEfund of funds.

Medium LP: liked emerging Europe as a regional play.

Small LP: was very specific that they wanted to make regional plays in Asia andCentral Europe only.

Large LP: China only. Medium LP: Asia only on a country-by-country basis.

Medium LP: had a particular interest and success in Israel with venture capital.

10. Local Institutional Investment

All LPs viewed local institutional investment as a positive sign but a few Large LPsrecognized that most of the opportunities that they would be interested in pursuing wouldbe of such high value that they wouldnt expect local institutions to have the requisitecapital to be able to participate in the first instance.

All LPs agreed that they would view a very large GP investment in the fund morepositively than they would view local institutional investment.

11. Return Expectations

LPs across all categories generally believed that investments in EMPE should generate areturn greater than 25 percent.


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Appendix 1. Sources

Printed Material

Albert, Kevin. The Albert Matrix Private Equity International. November 2005

Andersen, Jenny. After Doing Its Homework, a College Puts Its Money into HedgeFunds The New York Times. 12 May 2006

Arnold, David J. and Quelch, John A. New Strategies in Emerging Markets. MITSloan Management Review. Fall 1998

Asset Alternatives. Private Equity Partnership Terms and Conditions, Second EditionAsset Alternatives

Bartlett, Joseph W. Do Emerging Economies Have the Right Stuff Private EquityInternational. September 2002

Bartlett, Joseph W. Private Equity in Emerging Markets Private Equity International.July/August 2002

Bremmer, Ian. Managing Risks in an Unstable World Harvard Business Review.June 2005

Drucker, Peter F. Reckoning with the Pension Fund Revolution Harvard BusinessReview. March-April 1991

Emerging Markets Private Equity Association. "EMPEA Advisor David RubensteinShares His Views on Emerging Markets" Emerging Market Private Equity Association.2005

Emerging Markets Private Equity Association. "EMPEA Symposium: InvestmentConditions Improving" Emerging Market Private Equity Association. June 2005

Emerging Markets Private Equity Association. "Institutional Investor Views onEmerging Markets Private Equity" Emerging Market Private Equity Association. May2004

Emerging Markets Private Equity Association. "Survey of LP Interest in EmergingMarkets Private Equity" Emerging Market Private Equity Association. April 2006

Emerging Markets Private Equity Association. Emerging Markets Fundraising UpSignificantly for 2004 Emerging Market Private Equity Association. March 2005


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Emerging Markets Private Equity Association. Emerging Markets PE ReturnsImproving Emerging Market Private Equity Association. December 2005

Emerging Markets Private Equity Association. Emerging Markets Private EquityGrows, But Where are the Local Pensions Emerging Market Private Equity Association.

December 2005

Emerging Markets Private Equity Association. EMPEA Advisor David RubensteinShares His Views on Emerging Markets Emerging Market Private Equity Association.December 2005

Emerging Markets Private Equity Association. EMPEA and Cambridge Associates toCollaborate on Performance Index Emerging Market Private Equity Association. March2005

Emerging Markets Private Equity Association. Exits: $12bn Returned to Emerging

Market PE Investors already in 2005 Emerging Market Private Equity Association.December 2005

Emerging Markets Private Equity Association. Fundraising for Emerging Markets MoreThan Double 04 Totals Emerging Market Private Equity Association Newsletter. Vol I,Issue 3 Q3 2005

Emerging Markets Private Equity Association. Fundraising More Than Double 2004Emerging Market Private Equity Association. December 2005

Emerging Markets Private Equity Association. Improved Corporate GovernanceDriving Returns Emerging Market Private Equity Association. September 2005

Emerging Markets Private Equity Association. New Funds of Funds Increase Optionsfor Emerging Markets Private Equity Investors Emerging Market Private EquityAssociation. March 2005

Emerging Markets Private Equity Association. US Industry Leaders Target EmergingMarkets Emerging Market Private Equity Association. September 2005

Ernst & Young. Renewal and New Frontiers, Global Private Equity: Venture CapitalInsights Report 2004-2005 Ernst & Young 2005

Ernst & Young. Transitions, Global Private Equity Insights Report 2006 Ernst &Young 2006

Froot, Kenneth A. and McBrady, Matthew. The 1994-95 Mexican Peso CrisisHarvard Business School. December 1999


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Hardymon, Felda and Leamon, Ann. Actis & CDC: A New Partnership HarvardBusiness School. April 2005

Hardymon, Felda and Leamon, Ann. Gobi Partners: October 2004 Harvard BusinessSchool. March 2005

Hardymon, Felda; Lerner, Josh and Leamon, Ann. Between a Rock and a Hard Place:Valuation and Distribution in Private Equity Harvard Business School. March 2005

Hardymon, Felda; Lerner, Josh and Leamon, Ann. CDC Capital Partners: December2002 Harvard Business School. January 2004

Institute of International Finance, Inc. Capital Flows to Emerging Market EconomiesInstitute of International Finance, Inc. 16 January 2003

Irwin, Brian P. Currency Crisis Harvard Business School. March 1999

Kennedy, Robert E. and Katherine Marquis. China: Facing the 21st Century HarvardBusiness School. January 2002

Khanna, Tarun and Palepu, Krishna. Emerging Giants: Building World ClassCompanies in Emerging Markets. Harvard Business School. September 2005

Khanna, Tarun and Palepu, Krishna. Spotting Institutional Voids in EmergingMarkets. Harvard Business School. August 2005

Khanna, Tarun; Palepu, Krishna G. and Sinha, Jayant. Strategies That Fit Emerging

Markets Harvard Business Review. June 2005

Kuan, Judy. Latin America Revisited Private Equity International. March 2006

Kuemmerle, Walter. Capital Alliance Private Equity: Creating a Private Equity Leaderin Nigeria Harvard Business School. April 2004

Leeds, Roger and Sunderland, Julie. Private Equity Investing in Emerging MarketsJournal of Applied Corporate Finance. Spring 2003

Leeds, Roger. Do Labels Matter Private Equity International. April 2006

Lerner, Josh. A Note on Private Equity in Emerging Markets Harvard BusinessSchool. November 2003

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Lerner, Josh. A Note on the Private Equity Fundraising Process Harvard BusinessSchool. March 2001

Li, Shaomin. Why a Poor Governance Environment Does Not Deter Foreign DirectInvestment: The Case of China and Its Implications for Investment Protection Kelley

School of Business, Indiana University. 2005

McLelland, Albert and Zhang, Jiannan. Emerging From Turbulence Private EquityAnnual Review 2005. 2005

Morse, Gardiner. Doing Business in a Dangerous World: Interview with Ambassador L.Paul Bremer Harvard Business Review. April 2002

Nualkhair, Chawadee and Kelleher, Brian. China Private Equity May Be a Minefieldfor Investors Reuters News. 15 December 2004

Palepu, Krishna G. The Right Way to Restructure Conglomerates in EmergingMarkets Harvard Business Review. July 1999

Pill, Huw. Portfolio Capital Flows to Emerging Markets. Harvard Business School.February 2002

Pomerleano, Michael and Shaw, William. Corporate Restructuring: Lessons fromExperience The World Bank. March 2005

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Pozen, Robert C. Institutional Investors: The Reluctant Activists Harvard BusinessReview. January-February 1994

Rubenstein, David. "Have Emerging Markets Finally Left Behind Their Second ClassCitizenship for Private Equity Investors?" The Carlyle Group. May 2006

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Snow, David. Emerging Manager Mania Private Equity International. May 2004


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Wainwright, Fred and Colin Blaydon. Private Equity Finance Course Readings. TuckSchool of Business at Dartmouths Centre for Private Equity. 2005

Websites

VentureXpert by Thomson Financial (Online Limited Partner directory)

Conferences

2004 Annual Yale School of Management Private Equity Conference. 3 December 2004

2005 Asia Business Conference, Harvard Business School. 19 February 2005

2005 MIT Sloan Private Equity Symposium, MIT Sloan School of Management. 15April 2005,

2006 Venture Capital and Private Equity Conference, Harvard Business School. 4February 2006

Africa Business Conference 2005, Harvard Business School. 11-13 February 2005

The 2005 Emerging Markets Private Equity Forum, London, UK. Emerging MarketPrivate Equity Association and Private Equity International. December 13-14 2005

Wharton Africa Business Forum 2005, The Wharton School. 19 November 2005

Wharton Private Equity Conference 2005, The Wharton School. 21 January 2005


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Appendix 2. Questionnaire

Questions

1. What is your total capital under management?

2. What percentage of that is allocated to private equity?3. Of the total allocated to private equity, what percentage of the private equity

portfolio is currently invested in emerging markets private equity (EMPE)?Five years ago? What will it be in five years?

4. What is your strategy for EMPE? Global v/s regions v/s country funds,industries, early stage/buyout, funds of funds v/s direct investment funds, US-headquartered funds v/s funds based overseas, etc.?

5. What are the criteria that you use to evaluate GPs in EMPE? How do these differfrom the criteria that you apply to GPs in non-emerging markets?

6. How important is the participation of a development finance institution DFI(e.g. IFC, EBRD, etc.) in a particular fund to your investment decision? How do

you interpret this stamp of approval?7. Are you more likely to invest in funds that already have capital committed by

local sources?8. Do you or will you invest in first time fund managers? If so, what are your

criteria?9. Do you have a dedicated staff to monitor EMPE investments?10.What is the minimum return on any private equity fund that is acceptable to you?

How does this threshold vary between developed markets private equity andemerging markets private equity? Do you expect higher returns for EMPE tocompensate for political and currency risks?

11.Do you invest in public equities in emerging markets? If so, how do you compare

those risks with the risks of EMPE?12.Do you expect to increase your commitment to EMPE in the next five years?13.What is your biggest constraint toward increasing your commitment to EMPE?


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Annex

About the Author

E. Brooke Whitaker is an MBA graduate from the Class of 2006 and was a researchfellow at the Centre for Private Equity at the Tuck School of Business at Dartmouth.Prior to Tuck, Brooke spent 13 years living and working in Africa, the Middle East andAsia. He has led or has worked on over 80 sell-side transactions valued at over $3 billionacross a broad spectrum of industries and sectors, has worked in almost 30 emergingmarket countries, and has resided for extended periods of time in Egypt, Thailand, SouthAfrica, Kenya and Indonesia.

Brooke worked for Andersen within its Global Corporate Finance/Emerging Marketspractice from 1995 to 2002 and served on Andersens Emerging Markets InvestmentCommittee, was a founding member of the Emerging Markets Core Team, was the

regional manager for Africa, and was the key liaison to Andersen representative firmsand numerous external professional advisory firms in the firm-wide provision ofprivatization and restructuring advisory services throughout Asia, the Middle East andAfrica. Brooke is a published author of articles addressing African and Middle Eastinternational trade issues and can communicate in English, Arabic, French, Thai andSwahili.

Email: [email protected] or [email protected]

Phone: +1-617-959-9196

Center for Private Equity at the Tuck School of Business atDartmouth

The Tuck Center for Private Equity aims to advance the understanding of private equityinvestingthe engine behind the entrepreneurial activity that drives global innovationand productivity. The center focuses on macro and micro issues relating to private equity:capital markets, financing structures, governance and entrepreneurship.

While an academic research center, the Tuck Center for Private Equity andEntrepreneurship is actively involved in the practitioning communities of private equity,both to gain information about current trends and challenges and to share insights andsolutions. The center interacts with institutional investors, venture capitalists, buy-outinvestors, corporate venturers, angel investors, entrepreneurs, portfolio companies,industry lawyers and accountants, industry associations, and the media. Through theseoutreach efforts, the center also promotes networking that facilitates the pursuit ofventure-backed activities.


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A thought leader in the field of private equity, the Tuck Center for Private Equity andEntrepreneurship's work is represented in prestigious publications and industryconferences. The center is a regular contributor to the Venture Capital Journal, theleading industry magazine, and its directors are often sought out as authorities by topbusiness publications, such as The Wall Street Journal. The center seeks to educate Tuck

students in entrepreneurship and private equity investing through such courses as PrivateEquity Finance, Advanced Entrepreneurship, Field Studies in Private Equity and throughsupporting internships, fellowships and independent studies.

Center for Private Equity and EntrepreneurshipTuck School of Business at Dartmouth100 Tuck HallHanover, NH 03755

Phone: +1-603-646-0522Fax: +1-603-646-9084

Email: [email protected]

Website: http://mba.tuck.dartmouth.edu/pecenter/

Documents

Note on Lp Interest in Emg Pe _final Draft