Private Equity in Emerging Markets: An Introduction context, contribution, recent developments, and lessons learned - PowerPoint PPT Presentation

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Private Equity in Emerging Markets: An Introduction context, contribution, recent developments, and lessons learned

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PRIVATE EQUITY--medium to long-term financial commitment (equity or quasi-equity) ... Mr. Alejandro Schwedhelm, Managing Director, Darby Overseas Investments, Ltd. ... – PowerPoint PPT presentation

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Title: Private Equity in Emerging Markets: An Introduction context, contribution, recent developments, and lessons learned


1
Private Equity in Emerging Markets An
Introductioncontext, contribution, recent
developments, and lessons learned
  • Michael Barth, CEO, Netherlands Development
    Finance Company (FMO)

2
Private EquityWhat and Why?
3
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.

4
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
5
Who are prime PE candidates?
Annual Sales
Publicly trade companies
Large
US 250 MM
Target for Private Equity
Medium-size Companies, many family-owned
15 - 250 MM
Small, family-owned, informal economy
Too small
lt 15 MM
Size definitions vary significantly depending
on countrys size and level of economic
development
6
The importance of private equity to emerging
markets
  • Professionally managed Private Equity (PE) fills
    an important financing gap
  • PE stands at the apex of development finance it
    is not just about financing business, but about
    building businesses
  • PE can have substantive effects on corporate
    professionalization, employment and export
    growthsupport for the SME sector
  • PE is a potential building block for developing a
    stronger, more balanced financial sector

7
Context Capital Mobilization Trends
8
Financial flows to emerging markets has seen a
downward trend in recent years
Source IIF, eestimate
9
Only FDI has been a stable, growing component
Source Global Development Finance, e estimate
10
Capital mobilization in most emerging equity
markets has been depressed in recent years
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
11
IPO markets have mirrored this downward trend
Number of New Firms Listed, Emerging stock
markets, 1997-2001
Source FIBV data, New issue data for Nigeria in
2000-2001 and Kenya 1999 unavailable
12
Focus on private equity funds raised and
invested performance
13
Fund raising and investment trends
ASIA (ex-Japan, Australia)
LATIN AMERICA
Sources Compiled by Cambridge Associates from
multiple sources including AVCJ, internal
proprietary fund manager database, VE-LA
Publications, and 3i/PWC.
14
Fund raising and investment trends
MIDDLE EAST (Israel only) AFRICA (South Africa
only)
CENTRAL EASTERN EUROPE (incl. Russia)
Sources Compiled by Cambridge Associates from
multiple sources including IVC, SAVCA/KPMG, EVCA,
3i/PWC and internal proprietary fund manager
database.
15
Emerging markets private equity investments by
region
Cumulative 1998-2001
2001
Middle East (Israel only)
14
Africa (S. Africa only)
4
Central Eastern Europe
Russia/NIS
Russia/NIS
3
Central Eastern Europe
Emerging Asia (ex. Japan)
2
59
Latin America
18
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.
16
Returns on VC and PE funds ()
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
  • Note Pooled end to end return, net of fees,
    expenses and carried interest
  • Source Cambridge Associates, LLC

17
A broader look at returns - Public Markets
Annualized returns as of Dec 31 2002 () 1 year 3 year 5 year 10 year 20 year
Public equity
SP 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
  • Commenced November 1, 1984, Returns of the one
    year period ending September 30, 2002. Source
    Bloomberg, Venture economics

18
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
SourceTeresa Barger, International Finance
Corporation "What is a Private Equity fund?
19
Some of the important lessons learned
20
Private equity in Emerging Markets- Lessons
Learned
  • Apparent critical need to adapt PE operations to
    the local environment
  • Management x 3 private equity is a craft, not a
    commodity focus on additionality
  • Issues of critical mass, incentives
  • Deal flow, timing, acquisition prices
  • Issues of instrumentation, exit planning
  • Environmental issues, esp. those related to poor
    investor protection/corporate governance, basic
    domestic capital markets

21
A Closer Look Different Perspectives on Private
Equity
  • Analytical perspective
  • Dr. Roger Leeds, Johns Hopkins University School
    of Advanced International Studies
  • Practitioners perspective
  • Mr. 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
  • Investors perspective
  • Dr. Patricia Dinneen, Consultant, Cambridge
    Associates
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