fund+selection+in+em+by+dw super+return+geneva+jn+2010

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/sremergingmarkets


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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

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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.


Improved transparencyand governance

Earnings attract a higher price,as buyers feel more informedand protected.


Multiple expansion dueto growth or profits

Earnings of company attract ahigher price / earnings multiple

Private Equity acquire based onwhat you can sell

21


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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

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