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  • 1. Private Equity in Emerging Markets: An Introduction context, contribution, recent developments, and lessons learned Michael Barth, CEO, Netherlands Development Finance Company (FMO)
  • 2. Private Equity: What 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 Medium*-size Companies, many family-owned Target for Private Equity Small*, family-owned, informal economy US $ 250 MM $ 15 - $ 250 MM < $ 15 MM *Size definitions vary significantly depending on country’s size and level of economic development Large* Too small
  • 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 growth;support 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, e=estimate
  • 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. ASIA (ex-Japan, Australia) Sources: Compiled by Cambridge Associates from multiple sources including AVCJ, internal proprietary fund manager database, VE-LA Publications, and 3i/PWC. LATIN AMERICA Fund raising and investment trends
  • 14. MIDDLE EAST (Israel only) & AFRICA (South Africa only) Sources: Compiled by Cambridge Associates from multiple sources including IVC, SAVCA/KPMG, EVCA, 3i/PWC and internal proprietary fund manager database. CENTRAL & EASTERN EUROPE (incl. Russia) Fund raising and investment trends
  • 15. Emerging markets private equity investments by region Latin America Central & Eastern Europe 2% Russia/NIS Africa (S. Africa only) Russia/NIS Central & Eastern Europe Emerging Asia (ex. Japan) 59% 18% 3% 4% Middle East (Israel only) 14% Cumulative 1998-2001 2001 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. Middle East (Israel only) 13% Africa 3% 0% 3% Latin America 11% Emerging Asia (ex. Japan,) 70%
  • 16. Returns on VC and PE funds (%)
    • Note: Pooled end to end return, net of fees, expenses and carried interest
    • Source: Cambridge Associates, LLC
    11.4 35.9 0.2 10 Year 3.7 46.7 (1.6) 5 Year (4.0) 25.1 (5.3) 3 Year (9.2) (29.4) (13.1) 1 Year (5.2) (9.1) (6.0) 1 Qtr US Private Equity Index US Venture Capital Index Preliminary Emerging Markets VC and PE index As of September 30, 2002
  • 17. A broader look at returns - Public Markets
    • *Commenced November 1, 1984, **Returns of the one year period ending September 30, 2002. Source: Bloomberg, Venture economics
    10.6 8.2 (2.4) (30.2) (30.2) NASDAQ 12.7 9.3 (0.6) (14.6) (22.1) S&P 500 Public equity Private equity 6.5 7.3 (3.2) (15.1) (13.9) FTSE* 10.2 4.0 (2.9) (17.2) (15.9) EAFE 8.4 1.6 26.7 5 year 15.2 9.1 26.0 10 year 14.5 12.6 16.5 20 year 1.2 (4.2) 15.0 3 year (12.1) Total private equity (8.2) Buyouts (22.1) Venture capital** 1 year Annualized returns as of Dec 31 2002 (%)
  • 18. Performance: “Management matters” Source:Teresa Barger, International Finance Corporation &quot;What is a Private Equity fund?” 25.2 Spread between top and bottom 25% European PE 1993-1999 1.1 2.3 15.0 Spread between top and bottom 11.5 14.8 6.9 Lower 25% 12.0 15.9 14.0 Median 12.6 17.0 21.9 Upper 25% US Fixed Income (%) US Listed Equity (%) US Private equity (%) US 1980-95
  • 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
    • Practitioner’s perspective
      • Mr. Alejandro Schwedhelm, Managing Director, Darby Overseas Investments, Ltd.
    • Domestic/policy perspective
      • Mr. Alvaro Gon ça lves, Managing Partner of Stratus (Brazil), Board Member, Venture Capital Association of Brazil
    • Investor’s perspective
      • Dr. Patricia Dinneen, Consultant, Cambridge Associates

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