A Comparison Of Performance Between First Time Fund Managers & Established Managers Moving Into A New Market.

How Important Is Track Record?

David Wilton, Chief Investment Officer, Private Equity, IFC

Geneva June 28-30th

Outline
IFCs Experience - Not an intuitive result The growth of the Opportunity - Scale - Returns The Nature of the Opportunity - Drivers of returns - Minority Positions Selecting Successful Emerging Market GPs

IFCs Experience
- Managers skill set is key - Track record is not fully portable

A Fund Manager With the Right Skills CAN Overcome 1st Time Fund & Frontier Risks
IFCs experience is that the differentiating factor in fund quality is the Managers skill set, not 1st time fund risk or a frontier focus.
IRR as of March 2009 (simple average %) Development Impact Score Highly Suc = 3 HighlyUn S = -1 IDA % (<$1000 GDP per capita) Average Deal Quality Score Max = 1 Min = 0

1st Time Funds %

Top 10% Bottom 10%

46.6%

2.10

53%

27%

0.97

-38.3%

0.14

53%

13%

0.17

Sample: 150 Funds in IFC portfolio (invested pre- and post- 2000) as of March 2009, excluding those in the J-curve

The Same

More Top 10% in the Frontier

Quartile Performance in IFC Portfolio Relative to Prior Experience

Sample: Mature and failed funds invested post-2000 in IFC portfolio pre-crisis 2008

Performance Relative to Expectations

Sample: Mature and failed funds invested post-2000 in IFC portfolio pre-crisis 2008

The Growth of the Opportunity

- Scale - Returns

Where Can We Find Adequate Selectivity?

100 Raw deals sighted

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2-3 Deals committed

A Very Broad Opportunity

Developed

Single Country

Regional Grouping

Significant Expansion of Private Equity Deal Flow

Shift to market-based Economies. Growth in private companies. Limited impact on PE deal flow as limited motive to sell to 3rd parties

Reduction in barriers to trade and capital flows. Increased competitive pressure and opportunity to expand. Significant stimulus to PE deal flow.

Development of more sophisticated capital markets and banks will increase potential deal flow. PE as % of GDP is presently very low in most Emerging markets. Lack of leverage currently makes slower growing companies unsuitable for PE.

Phase 1

Phase 2

Phase 3?

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Considerable Scope to Grow

Even in the BRICs, fundraising as a percentage of GDP is low in EMs compared to the US, indicating much more room to grow.

Source: EMPEA

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Competitive Returns from EM PE

Central & Eastern Europe LAC Western Europe PE euro Emerging Market VC & PE US Buyout Asian VC & PE Asia ex Japan Western Europe VC euro

End-to-end pooled mean Net to LPs Change Absolute % 5 Year 10 Year in Rank Change Change 24.09 15.61 0 8.48 54% 19.06 1.71 5 17.35 1015% 15.53 12.45 -1 3.08 25% 12.83 6.63 0 6.2 94% 10.44 7.68 -2 2.76 36% 9.22 6.14 -1 3.08 50% 9.1 5.72 -1 3.38 59% -2.01 -4.13 0 2.12 51%

Source: Cambridge Associates September 2009 Quarterly Report

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1000%

Strong Growth in Returns

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Source: Cambridge Associates September 2009 Quarterly Report

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Clear Gains From Diversification

IRR from 2000 to IFC: Private Equity Funds * IFC : All Funds (includes debt, real estate, etc) Cambridge EM Top Quartile Cambridge Asia ex-Japan Top Quartile Cambridge US PE Top Quartile MSCI (IFC PE Fund cash flows) ** Sep-08 22.9% 19.8% 16.9% 14.9% 19.5% 8.8%
Weighting

Dec-08 15.6% 12.3% 10.7% 10.6% 14.2% 1.8%

80.0% 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0%

Mar-09 14.4% 11.4% 9.4% 6.6% 12.0% -1.1%

Jun-09 15.3% 13.0% 10.3% 8.5% 12.2% 7.7%

Sep-09 17.0% 14.1% 12.7% 9.0% 16.0% 12.1%

Dec-09 18.1% 15.0%

13.4%

The Emerging Market Index has outperformed the Asia-only Index, although close to 70% of the Emerging Market Index is Asia. IFC has out-performed the Emerging Market Index with a much more geographically diversified exposure.

Cambridge EM Index

Source: * All Private Equity funds invested by IFC since 2000, calendar year. Excludes debt, infrastructure & real estate funds. Numbers differ from early presentation due to mistaken Inclusion of two non-PE funds and omission of closed fund, now corrected. ** Matching cash flows to IFC Private Equity Funds invested/divested from MSCI. Cambridge Numbers from Cambridge Associates.

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Summary

Good deal flow over a very broad geography Scope for further growth EM returns challenging developed markets Strong returns outside Asia Benefits from Diversification

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The Nature of the Opportunity

- Different to Developed Market PE
- Minority Positions - Growth Focus

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Minority/Majority Driven by Motivation of Sellers

Positive Motivation to Sell Neutral Motivation to Sell - Strong growth situation - Pre-Listing Clean-Up - Geographic Expansion - Generational Change -Conglomerate focusing on Core Business selling non-Core - Privatization - Distressed business - Distressed owners
Minority Minority Minority Majority Majority Majority Majority Majority

Negative Motivation to Sell

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Motivation of Sellers Differs Across Countries

Growth
LBO + Growth + Gen Change + Consolidation + Growth Gen Change + Growth

China India

Vietnam

Non core

Brazil

South Africa

Turkey SSA
Consolidation + Gen Change + Growth

Egypt

Minority

Majority

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Drivers of Return in Private Equity

A PE fund can achieve the same IRR through any of four basic strategies: leverage, multiple expansion, growth and efficiency. Most funds use a blend of the four. In EMs IRR is driven by growth & efficiency
IRR Equity Cash out by Dividend , P/E at Entry Stock Purchase etc 55% 10% 10% 85% 6 6 6 6 P/E at Exit Margin Holding Revenue Improves from Period Growth p.a 5% to x% Years 0% 0% 20% 0% 5% 5% 5% 30%

Leverage Multiple Expansion Growth Efficiency

25% 25% 25% 25%

30% 75% 75% 75%

6 14 6 6

5 5 5 5

Source: IFC model

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Returns on Private Equity in Emerging Markets are Driven More by Growth than Leverage
Higher growth and lower leverage makes the source of risk in EM PE less cyclical and more operational

Companies in IFC-invested Funds:

Median Annual revenue growth * Debt-to-equity ratio ** 19.5% 0.33 Average 37.8% 0.74

Sample: * 527 companies in IFC-invested funds with holding time of at least one year ** 604 companies in IFC-invested funds, not including financial services

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Growth Focus, With Variants

Brazil
South Africa

SSA

China

Egypt

Vietnam

India

Growth + Leverage

Organic + Inorganic Growth

Organic Growth

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Summary

Many Minority Positions Growth-Driven Returns Variation in Local Conditions

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Selecting GPs
- How local? - Market segments? - What skills? - Change the constant in EM PE

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Summary of Opportunity
Good deal flow over a very broad geography Scope for further growth EM returns challenging developed markets Strong returns outside Asia Benefits from Diversification Many minority positions Growth-driven returns Variation in Local Conditions
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Being Local is Very Important

Company Sophistication

Fly-In, Fly-Out Used to Work. Now much more competitive.

International

Large Local

MidCap SME

Fly-In, Fly-Out has Never Worked.

Deal Size

Access, reputation checking, due diligence, management, acquiring talent, acquiring leverage All are Highly Local
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Ways of Being Local

GP Type
Local GP

How Become Local?

Fully local operation

Issues
Good access to transactions, talent, due diligence. Funding typically limits access to largest deals need to syndicate. (This is slowly changing) Access to largest deals with full local skill set. Not access deals local affiliate can do for itself. Local skills + broader deal access. Expensive. Need to ensure alignment and influence with HQ.

Foreign GP

Affiliation with local GP

Foreign GP

Local office

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GP Experience Required Skills Depend on Model

Return Driver
Arbitrage

Source of profit
Pricing multiple differential between private market and public/M&A markets Leverage a company with stable earnings Increase earnings through expansion or acquisition. Increased profits via improved efficiency or shifting product to higher margin niche. Earnings attract a higher price, as buyers feel more informed and protected. Earnings of company attract a higher price / earnings multiple

Skill Required
Investment or Merchant Banking Consultancy Investment Banking Corporate Operations, Entrepreneurial, Consulting Corporate Operations, Entrepreneurial, Consulting Corporate Operations, Entrepreneurial, Consulting Private Equity acquire based on what you can sell

Leverage Earnings growth Margin expansion

Improved transparency and governance Multiple expansion due to growth or profits

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Successful Minority Requires Partnership

Partnership reduces risk where the legal system does not easily support enforcement Partnership comes from high value-add High Value-Add is also needed to - Access transactions - Influence company direction - Influence Exit High Value-Add = active advice and hand-holding based on own experience = sitting on the Board as a general sounding board

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Partnership has lead to Good Performance from Minority Positions

Minority positions (blue) have performed well in all forms of exit, indicating that the risks associated with minority positions can be managed effectively.
Median IRR Average IRR

50% 40% 30% Majority 20% 10% 0% IPO/Listing Trade Sale MBO Structured Exit Minority

50% 40% 30% 20% 10% 0% IPO/Listing Trade Sale MBO Structured Exit

Sample: Exits of 61 majority positions and 251 minority positions from IFC invested funds

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What We Have Not Looked For

Well known brand Fund III+ with full-exit track record Top Quartile Record Outside the Target Market

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Change the Guaranteed Constant

Possible future changes: Increased competition = risk profile of 1st time funds increases Increased deal flow via greater access to leverage = expansion of key GP skill set = increasing risk profile Increased local funding, LP comfort with local GPs = less syndication available for Foreign GPs
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Summary its quite simple

Select GPs with: - Local presence - Strong value-add capacity Watch for on-going changes

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Thank You
For further information on IFCs experience investing in emerging market private equity please see our website http://www.ifc.org/funds under the publications tab

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