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Document Sample
Sustainable Growth and
Development through Private
Equity Funds
January 2003
TERESA BARGER
PRIVATE EQUITY AND INVESTMENT FUNDS
INTERNATIONAL FINANCE CORPORATION
2
Overview
IFC as Fund Investor in Africa
View on Sustainable Growth and Development
Challenges of Private Equity in Africa
3
IFC’s Current Fund Portfolio
Total global commitments of US$1.3 billion
CSE WORLD MENA
2% AFRICA
CEU 4% 1% 12%
10%
EAST ASIA
29%
LAC
31% SOUTH ASIA
11%
4
IFC’s Fund Portfolio in Africa
Current outstanding active portfolio on the African continent:
- 15 Funds
- IFC commitments of US$169.5 million
- These funds represent total committed capital of US$949 million
FUND COMMITMENT YEAR
Africap 2001
Biotech Venture Partners Fund (South Africa) 2001
Capital Alliance Private Equity Fund (Nigeria) 2000
Maghreb PE Fund (Morocco) 2000
AIG African Infrastructure Fund (Africa Region) 1999
South Africa Private Equity Fund 1999
Tuninvest International (Tunisia) 1998
West Africa Growth Fund (CFA Countries) 1997
Zambezi Fund (Zimbabwe) 1996
South Africa Capital Growth Fund 1995
South Africa Franchise Capital Fund 1995
Mauritius Venture Capital Funds I and II 1994/1995
Africa Emerging Markets Fund 1992
Venture Capital Company of Zimbabwe 1991
Fianciere d’Investissement Aro (FIARO) I & II 1990/1991
(Madagascar)
5
Geographic Distribution of the
850 Investees
By US$ Valuation
WORLD
MENA
0%
3%
LAC AFRICA
17% 23%
CSE
9%
EAST ASIA
CEU 15%
25% SOUTH ASIA
8%
6
Sectoral Distribution of the
850 Investees
Wholesale and Retail Trade
Oil, Gas and Mining Food & Beverages Industrial & Consumer
Accommodation & Tourism Products
Textiles, Apparel & Leather
Professional, Scientific and
Chemicals Technical Services
Construction and Real
Estate
Nonmetallic Mineral Product
Manufacturing Transportation and
Information Warehousing
Finance & Insurance
Agriculture & Silviculture
Utilities
Pulp & Paper
Primary Metals
Collective Investment
Vehicles
Plastics & Rubber
Health Care
7
View on Development
Fund management is all about value addition
Company-by-company turnarounds, not a “wholesale”
vehicle
Only successful managers have developmental impact
– building great companies
Persistency of success consistent with IFC’s desire to
build “institutions”
Only best managers are successful in this high std
deviation pursuit. Second-time funds (teams) more
successful.
8
Skill is More Valuable in PE
In private equity, the spread between top performers and
average performers is large.
If you are not with a top fund manager, you would do better
investing in bonds.
9
“Persistency”- Success in Private
Equity is not Luck, it is Skill.
Mc Kinsey finding in Europe:
“If your first fund was top quartile, there is a 45% chance
your next fund will also be top 25% and a 73% chance it
will be top half. A new fund management team has a
16% chance of being in the top quartile.
Success in private equity is persistent.”
Conor Kehoe, Partner McKinsey & Co., EVCA, June 13, 2001
10
View on Sustainable Growth
If commercial companies do not provide
commercial return, unsustainable
Ultimate objective is productive companies to lead
economic growth. Better use of:
- Inputs
- Capital
- Labor
11
Private Equity Can Have Huge
Impacts on an Economy, e.g., UK
Huge employment impact
Companies are faster growing
Companies export more
12
Private Equity-Backed Companies
Impact on Local UK Economy
UK 1996 - 2001
Private Equity FTSE Overall
Backed 100
Companies
Increase in Employees 29 % 10 % 2%
Increase Increase
Number of Employees 15 % of UK
In PE-backed companies Workforce
2.7 mm
Sales Increase 27 % 13 %
(Average Annual)
Exports Increase 27 % 4.4 %
Investment Increase 24 % 8.8 %
13
More Than Just Money
87 % of UK PE-backed companies felt PE firms
contributed far more than money.
Financial Advice
Strategic Guidance
Management Recruitment
14
Other Development Impacts
Job creation
Productivity enhancement
Economic growth
Ownership transfer, diversification (including
professionalizing family companies)
Corporate governance
15
Challenges of Private Equity in Africa
Currency Risk
Limited Exit Strategies
No “Easy Wins”
Legal Environment
Building Trust
Small Country Markets
16
Challenge: Small Country Markets
There are 52 countries Excluding South Africa
on the continent. and Nigeria
average
Overall, the GDP of African market
sub-Saharan Africa
(including South Africa,
=
size . Barbados
Nigeria) is equal to that
of Belgium.
17
Challenge: Small Country Markets
Viability of single country funds?
- Many managers have gone regional
- Technical assistance money to defray costs
Portfolio company growth opportunities?
- Screen out life-style businesses (only 5-10% SMEs
grow)
- Look to new geographic markets to reach critical mass
- Watch for higher costs of imported materials, may
limit international competitiveness
- Don’t rely on attracting international strategic
acquiror, think creatively on structuring and exit
18
DPI of Fully Realized Investments
by Deal Size - Gross Data
High Correlation between deal size and returns
Small (< $2m) investments have lost money to date
4
3.5
3
2.5
2 Average DPI: 1.99
1.5
1
0.5
0
USD 2< M USD 2-5 M UDS 5-10 M USD > 10 M
Number 88 49 33 5
of
Investees
19
Challenge: Building Trust
Political Boundaries Major Ethnic Groups
20
Challenge: Building Trust
Tradition of financing within ethnic and family groups
Concept of financial investors new in many markets
- Hold seminars, workshops with local businesses
- Team up with other organizations to promote
entrepreneurship (e.g., Entrepreneur of the Year Award)
- Meet w/banks, accounting firms, etc. to build network
of referrals
- Encourage angel investors
Track record of objective, sound commercial decision
making is critical to gain trust
21
Challenge: Legal Environment
May constrain innovation
in agreements, financing
structures
Be willing to trail blaze
with regulatory and legal
authorities for new
structures (e.g., quasi-
equity, convertible debt)
Be willing to go to court
on legal enforceability of
shareholder agreement
covenants
22
Challenge: No “Easy Wins”
Which investment theses are really available?
1) EBITDA expansion
• Organic growth
• Roll-ups/M&A, especially in consolidating sectors
• Bring business concept from U.S./Europe to new markets
2) Multiple expansion
• Re-rate company / redefine industry
• Shed non-core assets and refocus
3) Margin improvement
• Better production, distribution, products
• Better use of labor and inputs
• Branding
4) Transparency and governance
• Remove “governance discount”
• Increase worker productivity and customer loyalty through transparency
• Professionalize family businesses
5) Restructuring
• Financial; including leverage
6) Corporate governance
23
Challenge: Currency Risk
Devaluation vis-à-vis the US$ has been a one-way bet
Structure investments to generate cash sooner rather
than later, distribute to investors asap
Look for investment opportunities with natural hedges,
e.g., export-orientation, revenues from multiple
countries
Invest in multiple countries, regional or Pan-African
Put hedge in place for the entire portfolio
Seek local and other African investors, institutional,
perhaps wealthy individuals and families
24
Challenge: Limited Exit Strategies
IPOs have very limited applicability, trade sales tend to
require critical mass
Be realistic about attractiveness of listing, may not be
the liquidity event
Strive for trade sale, but build in an exit (e.g., put
option, self-liquidation)
Build technical expertise, lower cost base, don’t just
have market share on offer
Be creative about potential buyers (smaller strategics,
diversified locals)
25
The Summit
Successful Fund Managers:
Building Private Enterprises
for Sustainable Growth
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