Can you tell me about the size of the portfolio you manage and your recent performance?
We have a little more than $3 billion in investments, in about 180 funds, of which $1.5 billion is disbursed. We ramped up counter-cyclically in 2009 and 2010; we normally would invest $400 million a year but in the last few years we increased that. We calculate that fund managers supported by IFC represent about 10% of total emerging market private equity funds, making us the largest investor in this space.
The total portfolio including debt funds and real estate funds is around 15.5%. Just the private equity is around 18% to19%. Pre-crisis it was running around 23%, during the crisis it dropped to around 15%. Now it is back to 18% to 19%.
You are much more globally invested than other emerging market private equity fund of funds and the benchmark, which tend to focus more on Bric countries.
Our geographic split is very different from the Cambridge Associates benchmark, which has around 70% in Asia but we are only around 35% in Asia. Cambridge also only has 3% in Africa and we are around 16% in Africa. So we have very different weightings.
Why do you have less weighting in Asia than the benchmark?
We were investing in China in the late 1990s to 2006 but then in the past three years we haven’t been very active at all because the private sector crowded in and we were able to move on. We are focused now in East Asia in places like Vietnam, Indonesia and Cambodia. We are starting to do a little bit in Mongolia.
In South Asia, especially India, our experience in the 1990s wasn’t great. We were slow to get back into the Indian market. In general private equity in emerging markets follows the growth model not the leverage model. We like to see managers who have a background that can add value to fast growing companies. And we were not seeing that in India. When private equity took off there, people were sitting on very good returns. But when we took a look at the returns in 2005, we decided that a lot of the performance was coming from momentum. So even though from a commercial perspective they were getting good returns, from a development perspective, momentum investing does not achieve much. We like to see growth that then generates job growth.
From a risk perspective, given all the other risks in emerging markets, if you can handle the operational and execution risk, the growth model is relatively less exposed to cyclical and macro shocks. We have now backed a number of growth-focused managers in India.
Does your absence from China mean you think there is no money to be made any more in Chinese private equity?
No, not at all. It just means that there is enough commercial capital in there that we are not required. There is nothing for us to really kick-start. We are still interested in doing climate change, renewable and sustainable energy investments. And we still would be interested in the Far West or North of the country. But in the coastal area where most of the activity is, our money is not required.
There are worries about excess leverage in the global financial system at the moment. Do you shy away from funds that look to rely on leverage?
In most of these markets it just would not work. The leverage is not available, although it does vary a bit. For instance South Africa has a sophisticated capital market and leverage is more important in deals from there than in other markets. In Brazil also the financial markets support a little more leverage, but not a lot more. But generally, leverage is just not there.
In each country we pay a lot of attention to how we think the money is going to be made. In private equity there are — simplistically — four ways to make money: growth; efficiency gains; margin improvements; or multiple expansion. So in each country we look at where we think the money will be made. We think in most emerging markets, it is growth and efficiency gains, not leverage.
So if we have a team coming to us who are mainly ex-commercial or investment bankers in a market where the model should be growth equity, we are not going to back them.
How else do you assess the quality of the managers you back?
The key thing is that the skill set of the team matches our assessment of how the money is going to be made. We also believe emerging market private equity is a very local business, so it needs a local private team. It is local because in many of these countries there is a relatively small number of people who control the businesses. And they have all known each for a long time. So we need to get access to that group.
On the due diligence side, a lot of these places have multiple sets of accounts and they are not set up as someone from the developed markets might anticipate. Having someone who understands that can cover that in their due diligence approach. This is where foreigners trip up: they use a Western template that just does not fit what is there. We have seen that too many times, especially in our old portfolio from the 1990s.
Are you the biggest LP globally in emerging market private equity?
We may be the biggest, I’m not quite sure. For a group with a truly global coverage, we may be. But we do play a very big role in this space. We calculated that during the past ten years, we have backed more than 10% of all the emerging market private equity funds that have come to market. From 2000 to 2006 we did about eight to 10 funds a year for about $200 million a year. Then by 2006 we were getting proof of concept — the J-curve in private equity takes a long time to mature — so we first got results in 2005 that were confirmed in 2006. At that point, IFC said: ‘Let’s expand this business.’ So we took it to 20 funds a year for $400 million. And then counter cyclically in 2009 and 2010 we tried to do even more.
What is your best investment?
I cannot tell you the names, but we have had one fund with a 200% IRR [internal rate of returns] and a few others with 100% IRRs. We have many with about 40% IRRs.
Where are you excited about investing at the moment?
I really like Vietnam as it has seen a bit of a shake up. Five years ago there were 65 or so funds all claiming to be doing private equity when they were in fact focused on the OTC and listed markets, where valuations were very high. Now that has fallen back to a much smaller number of funds focused on private equity and valuations are lower. Also, Indonesia and Egypt are very interesting. Indonesia has experienced an increase in private equity deal flow during the past two years as some of the conglomerates start to rationalise. Egypt had interesting deal flow from generational change and post privatisation acquisitions — companies that could be used as a footprint for expansion into the region.
