Prevailing in a New Financial Landscape

IFC’s 14th Annual Global Private Equity Conference: Prevailing in a New Financial Landscape

Robert B. Zoellick

President, World Bank Group

Introduction

It’s a great pleasure to join you today for IFC’s 14th Annual Global Private Equity Conference in association with the Emerging Markets Private Equity Association, or EMPEA.

The story of this conference is emblematic of how the world economy has changed: Fourteen years ago, a small group met in the basement of IFC to discuss the prospect of private equity in developing countries. 

Today, there are more than 800 people here, from nearly 60 countries: institutional investors; public and pension funds; private investors; endowments and family offices; senior investment professionals; chief investment officers, and directors from leading fund managers around the world, as well as representatives from development institutions and government agencies.  

Plenary sessions and roundtable discussions cover a range of issues over three days – the global economic outlook and regulatory trends, of course – but also non-financial risks, infrastructure, SMEs, mezzanine…and intriguing markets beyond the BRICs to Turkey, Palestine, Africa, and frontier markets.

The success of this conference is in large part because of the enormous potential of emerging markets: over the past five years, developing countries have provided two-thirds of global growth.

This conference also reflects the terrific partnership between Lars Thunell and the Private Equity Funds group at IFC, and Sarah Alexander and her team at EMPEA.  Together, they’ve made this conference one of the leading global forums for private equity.  So I want to thank them for their hard work and their leadership.

I also want to thank an impressive set of participants: sponsors; panelists; speakers –and all of you. 

Yet I want to add a special word of thanks for Lars.

When I came to the Bank in July 2007, it was a time of trouble.

Frankly, meeting Lars was like having a breath of fresh air: He was steady, sensible, constructive – clearly an excellent executive, committed to the private sector’s role in development, and doing interesting things. 

Together, we came up with some innovative ventures both to help developing countries during tough times, and to move IFC even closer to the cutting edge of private sector development in these exciting markets.

He always offered good counsel, fine judgment, common sense, and friendship – for which I’m grateful. 

Keeping the Focus on Growth and Structural Reform

Last month, at the Spring Meetings of the World Bank Group and IMF shareholders, much of the focus was – understandably – on macroeconomic stability. 

This attention to the macroeconomic picture is necessary – but it’s not sufficient.  Extraordinary monetary policies buy time – but they don’t solve the fundamental problems.

As my friend, Deputy Prime Minister and Finance Minister Tharman of Singapore said at our Spring Meetings, investors will accept short-term costs if they perceive good returns over time.  All countries – developed and developing – need to focus on the structural reforms – the microeconomic policies – that will drive future growth.

Structural changes are essential to enhance productivity, competition, and innovation for developed and developing countries – whether it’s so that Europe can restore its economic performance, or China can avoid the so-called “middle income trap” and meet its challenges in the coming decades.  Structural reforms are important for the United States, too.

In practical terms – and for investors like you – what does structural reform mean?

It means strengthening the fundamentals of productive supply-side growth in all sectors – agriculture, manufacturing, services.

It means investing in infrastructure – especially through public private partnerships.

It means private sector development – the engine of innovation and job growth: markets; investment; small and medium-sized businesses; as well as focusing on jobs training and skills.

It means expanding markets – through both the hardware and software of trade: regional integration; ports and infrastructure; lowering the costs of formal, informal, or logistics barriers.

At the same time, structural reform means investing in green growth and energy efficiency – because “growing dirty, cleaning up later” is not a viable option.  Environmental degradation cannot be the price for short-term growth.

Structural reform also means investing in human capital: 

-          Efficient and affordable safety nets – because only 1 out of every 5 people in the poorest countries has any form of social protection;

-          Basic financial services – because more than half the world’s poor, almost 2.4 billion people, are “unbanked”;

-          Basic nutrition and health – because without these essentials, people cannot begin to achieve their potential; and

-          Quality education, connected to training, which leads to better jobs, more innovation, and greater gains for all.

Investing in people means tapping the energies and genius of all: young people, the elderly, and not least girls and women – an under-realized source of growth everywhere.

Importance of Partnerships

You can play an important role in making all this happen.  

Countries need private equity more than ever to push forward the structural agenda.  But to be most effective, the right partnerships are critical – to seize opportunities, open up new markets, share market knowledge and learning.  

We’ve seen this at the World Bank Group with IFC’s Asset Management Company, or AMC, which Lars and I created in 2010 to supplement IFC’s traditional model of raising money in bond markets and then investing it.  The idea was for the AMC to tap sovereign wealth funds, pension funds, and other institutional investors that are looking to increase their exposure to emerging markets, and that are interested in accessing IFC’s transaction pipeline, investment approach, and track record of superior returns. 

Now ably led by Gavin Wilson and a fine team, the AMC considers investments in spaces where IFC-supported private equity fund managers are not active, either because of the size of the investment or the riskiness of the sector.  As the AMC makes profitable returns for its institutional investors, these investors are likely to feel more comfortable investing in smaller private equity funds and frontier markets. 

The AMC now totals over $4 billion – almost $3 billion of which had little previous exposure to Africa and other less recognized emerging markets.  Building on the success of its $1 billion African, Latin American, and Caribbean Fund, last year, the AMC established an African Capitalization Fund that invests in commercial banking institutions in northern and Sub-Saharan Africa.  This Fund has already made investments in Ghana and Malawi. 

AMC offers a great model for a win-win partnership between capital, experience, and expertise.

When I asked one pension fund manager what attracted him to AMC, he told me: We now know developed markets are risky, too; we see growth potential in developing markets – but we don’t know where to invest.  IFC does.  And we can learn through this partnership.

  

Opportunities: Doing Well and Doing Good

We have seen the positive impact private equity can have. 

IFC has private equity investments of about $3 billion across 180 funds in emerging markets.  We estimate that these investments alone have helped create about 300,000 new jobs over the last 10 years, many of them for women.  We see much more potential for the future.

Private equity also increases the wealth – the savings – of pension funds and other institutional investors who assist many millions of savers, small and big.

Increasingly, institutional investors want their investment capital not only to do well, but to do good.  Private equity can help companies grow, hire more workers, raise productivity.  But at the same time, private equity can also be a powerful driver of change: raising standards; fostering growth; promoting new opportunities for businesses and individuals; helping to overcome poverty; bringing hope.

Let me give you some examples.

China Environment Fund

Tsing Capital’s China Environment Fund:  Founded by Don Ye in 2000 to focus on clean tech investments, the Fund adopted a triple bottom line, balancing social, environmental, and financial returns. 

At first, portfolio companies were resistant to the Fund’s focus and approach.  After all, government regulations were weak.  Investors would say, “We give you the money, and you give us a return.  Why are you talking to us about welfare, child labor, the environment, and insurance?”  Deal flow was slow for the first fund: it only raised $13 million from socially responsible investors.  

Now, Tsing Capital’s investors are telling a different story.   The company has become a market leader, generating three digit financial returns.  The latest China Environmental Fund, in which IFC invested $20 million, had a target size of $350 million. 

What’s the secret of Tsing Capital’s success?  Certainly persistence on the part of Don and his team.  But they also chose the right partners. 

From the outset, Tsing Capital performed social and environmental risk screening on companies during due diligence before it invested.  The company checked standards against national laws and regulations, but they also made thorough use of IFC’s performance standards which provide guidance on how to identify – and avoid – risks and impacts.

If Tsing Capital identified any excluded activity – potential deals were dropped.  If they found risks, they were corrected.   Tsing Capital worked hand-in-hand with companies to improve corporate governance and upgrade management capability and strategies.

Their hard work has paid off.  Today, Tsing Capital is raising environmental and social standards across the industry, and transmitting those standards into multiple start-up companies.  It has twice been honored as a corporate citizen in China, and Don Ye has been recognized by Business Week as one of China’s 40 most powerful people – alongside President Hu Jintao and Yao Ming of the Houston Rockets!

It’s a great success story.  It shows how commercial concerns linked to environmental and social standards offer win-win opportunities.  It demonstrates how private equity can be a powerful driver of growth and change.

Pragati India Fund

One of IFC’s recent investments, the Pragati India Fund, offers another good example of doing well and doing good. 

The fund is a pioneering investment vehicle that will focus on economically under-developed states in India.  These are areas where it has traditionally been a challenge to attract private investments – but where the changing political, social, and economic development dynamics offer new opportunities that are largely untapped.  Sixty percent of Pragati’s investments target the country’s 8 poorest states.  

IFC is investing up to $20 million in the new fund.  The idea is to help Pragati provide growth capital to start-ups outside of major urban centers – adapting successful business concepts to small- and medium-sized enterprises in low-income states and rural regions.  In India, small- and medium-sized businesses typically receive only 5 percent of all private equity capital, forcing them to rely on high-cost informal borrowing.  The Pragati Fund is designed to fill that funding gap and support the development of India’s financial infrastructure. 

As a co-investor, IFC can help increase the impact of the project – bringing not only capital but management expertise, which can help strengthen operations as well as environmental and social governance.

Just last month, Pragati India Fund made its first investment – in Jash Engineering Limited, a manufacturer of customized engineering goods for the water and waste water infrastructure sector.  Jash is now expanding into manufacturing equipment for water treatment plants, and even generating clean power from residual water of the plants.  The company is looking to move into municipalities across India.

With India’s government pushing for world class water treatment facilities, investing in a company like Jash offers real opportunities – to help these enterprises access finance, create jobs, promote inclusive growth, and contribute to cleaner, healthier water and energy for hundreds of thousands. 

Supporting the Poorest

I hope more fund managers and investors will look for these types of opportunities – and look for them beyond BRICs and within frontier regions.

IFC is increasingly shifting its focus in this direction.  Since 2007, over half the funds supported by IFC have been in the poorest countries supported by the World Bank’s International Development Association, or IDA.  IFC's equity returns over the last 10 years in low-income countries, compared with IFC as a whole, provide a compelling case for investment.

Africa has been IFC's top performing region over the last 10 years, with a real rate of return of 25 percent compared to 18 percent for IFC worldwide.

Sub-Saharan Africa is also the region where IFC’s investments in private equity funds have grown the most, and where we have more private equity partners – a total of 38 – than anywhere else.  In FY11, IFC committed new investments in 5 funds in Africa, and so far in FY12 we’ve invested $70 million in 3 funds. 

We already have plans for 2 or 3 more funds this fiscal year – including 8 Miles Fund, a pan-African private equity fund backed by Bob Geldof. 

8 Miles plans to make investments in growth areas across Africa such as agribusiness, consumer and retail health, telecommunications, banking and financial services.  The target fund size is $450 million, with $15 to $40 million investments in 10 to 12 African companies with above-average potential for revenue growth and job creation.   Investors partnering with IFC include the United Kingdom’s CDC, the African Development Bank, and Vital Capital Fund.  J.P. Morgan will provide fund administration services.

Private equity is already changing the face of Africa – and funds such as 8 Miles recognize that there’s huge potential to do more.  The fund’s name refers to the fact that, at their nearest points, Africa and Europe are only eight miles apart.

For much of Africa, however, the distance is far greater.  Countries dealing with fragility and a history of conflict are home to the world’s poorest – the Bottom Billion, as Paul Collier pointed out in his 2007 book, though today, it’s more on the order of 1.5 billion. 

In 2010, the World Bank focused on these countries in our World Development Report on Conflict, Development, and Security.  One of the conclusions of that report was that private sector development is a key factor in infrastructure and logistics, local banking, service delivery, and job creation – to show early results as well as longer-term growth.  Access to capital and finance is vital for putting these countries on the path to economic stability.  But, of course, most fund managers aren’t ready to provide the risk capital and strategic advice that private equity provides. 

That’s why IFC conceived of SME Ventures, an initiative to support local private equity fund managers and raise equity and advisory services funds in low income – and particularly post-conflict – countries.  Today, we’re putting private equity to work is some of the most underdeveloped areas of the world.

Take Central Africa – a region rich in minerals, but with a history of fragility and instability.  Private equity groups have traditionally focused on larger investments in the extractive industries.  Yet it’s small- and medium-sized businesses that create the most jobs in any economy.

So two years ago, IFC committed up to $12.5 million to the Central Africa SME Fund.  Managed by XSML, a Dutch SME fund manager, and Cenainvest, its partner based in Cameroon, the fund aims to mobilize a total of$25 million from other development finance institutions and the private sector.  With offices and a team on the ground in the Democratic Republic of the Congo and the Central African Republic, the fund’s focus is on making investments and providing advisory services to the local business community, to help African entrepreneurs build sustainable businesses that create jobs and income.

The funds’ first investments in the DRC have been in a healthcare clinic, including new medical training for staff; a call center; and a food processing company for baby cereal, where the fund is also helping improve the company’s financial management and developing audited financial statements.  In the Central African Republic, the fund is preparing to invest in an internet service provider.  

The Central Africa SME Fund is also looking ahead.  So, for example, it’s conducting a market study on fresh fruits for a fruit producer in Kinshasa, and helping prepare a business plan and financial projections for a cassava mill run by smallholders.

Through the SME Ventures initiative, IFC has also committed equity to funds for Liberia and Sierra Leone; Bangladesh; Nepal; and we are currently working on a fund for Bhutan.

And just last month, IFC made its first private equity investment in Haiti.

When Haiti was hit by a major earthquake in 2010, we knew that the Bank Group’s support to help the country recover, rebuild, and break its dependence on aid must include bringing in the private sector.

IFC has already committed five investments and significantly scaled up its advisory operations in Haiti.  These projects are helping create 5,000 new jobs – as well as safeguard 5,000 existing jobs.

Now, IFC is committing up to $10 million to the Leopard Capital Haiti Fund to support small and medium-sized businesses.  

With a team already on the ground in Port-au-Prince, the fund is raising $75 million in equity to invest in four main sectors: renewable energy; low- and medium-income housing; agribusiness; and hospitality.  It’s also raising $4 million in donor money to provide technical and managerial assistance to companies that were thriving before the earthquake, but now want to upgrade their operational capacity and grow.  At the same time, this Haiti Fund will work with its portfolio companies to enhance corporate governance, and environmental and social standards and practices.

It’s an exciting new partnership for IFC.  Our Private Equity Funds team has already catalyzed an additional $10 million from investors – and will continue to support the Leopard Capital team in raising more.  

We hope this will encourage more investors to invest in Haiti’s potential.

Importance of Openness

Over the past five years, I’ve seen this private equity conference grow in size, scale, and quality.  I’ve also seen, from my discussion with our clients in developing countries around the world, just how important they consider the capital and expertise that private equity brings in helping their countries grow and raise standards.

Yet the role of private equity has come under increasing scrutiny and political focus in the developed world – not least here in the United States.  For some, the very term is synonymous with corporate raiders, asset strippers, and secretive back room deals.

The private equity industry needs to respond to the demand for higher standards of openness, transparency, and integrity.   Private Equity should be a major part of the new investment climate in emerging markets.   It should increase overall investor confidence.  

I recognize that some investment professionals aren’t used to being in the public eye.  But you are now.  And transparency is the best antidote to conspiracy theories.   

At the World Bank Group, we can see the transformative power of openness.    Our new information and knowledge-sharing initiatives may turn out to be the most important legacy of my tenure at the Bank Group.  

Our Access to Information policy releases to the public vast numbers of documents about the Bank’s projects, analytic and advisory activities, and proceedings of the Board.  It’s now viewed as the “gold standard” for financial institutions.  

Our Open Data initiative has unlocked our world-class knowledge and development data.  We now provide free access to more than 7,000 indicators, including GDP data and development statistics, meaning that anyone – from a PhD student, to an NGO, to a farmer, or even a private equity investor – can download our data, analyze it, and come up with solutions.

Our Mapping for Results website shares geo-spatial information on more than 2,500 Bank-funded projects. 

Now we are beginning to work with communities to map their own infrastructure – clinics, wells and schools.  The next step is to allow people to use hand-held devices to let the Bank know, from wherever there are in the world, what is really going on with our projects and investments.

These initiatives are making the World Bank Group more open, transparent, and accountable; helping us fight corruption and build better governance; and getting us ready for a new era of democratized development.

The investment community can benefit from greater openness as well.  

  

Conclusion

I have always enjoyed taking part in this conference.  I have spoken at it every year during my time at the World Bank Group. 

I wanted to come here again, for the fifth time, because I am convinced that private equity investments can be one of the most powerful and important agents of change for developing countries: boosting local economies and creating jobs; improving governance and sustainability standards in private industry and capital markets; transforming thinking about growth; reducing poverty and creating hope. 

That Change agenda is the core of our mission at the World Bank Group.  It’s what we strive to do every day.  It’s why private equity – and this conference – is important to me. 

The success of this event demonstrates that I’m by no means alone in this conviction. 

So I want to thank you again for joining us today.  I hope your time at this conference opens new insights and creates new partnerships for all of you – and for the World Bank Group.  

But most of all, I hope that it affirms your commitment to doing well and doing good – to using the power of private equity to support people in developing markets who want to create, build, and seize new opportunities.  

That can be a lasting legacy for all of us.  

Thank you.