Financing Emerging Market Businesses and Industries

Tuesday, May 3, 2010

11:00 AM – 12:15 PM

Solid recovery

World real GDP grew by 5 percent in 2010

-6

-4

-2

0

2

4

6

8

10

1980 1985 1990 1995 2000 2005 2010 2015

Emerging and developing economies

Advanced economies

World

Real GDP growth, percent

Source: World Economic Outlook, International Monetary Fund, April 2011 update.2

World trade volume

World trade volume increased by 12 percent in 2010

Source: IMF WEO database 2011.

-15

-10

-5

0

5

10

15

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

Percent change, year on yearProjected

3

World real GDP growth in 2010Annual percent change

Source: International Monetary Fund.

10% or more

6-10%

3-6%

0-3%Less than 0%No data

World real GDP growth in 2011Annual percent change

Source: International Monetary Fund.

10% or more

6-10%

3-6%

0-3%Less than 0%No data

Growth forecasts for developing countries

Percent change from previous year

Source: IMF WEO database 2011. 6

-3.6

7.2

-1.7

1.82.8

4.2

9.5

6.1

3.85.0

3.7

8.4

4.74.1

5.5

-6

-4

-2

0

2

4

6

8

10

12

Central and Eastern Europe

Developing Asia Latin America and the Caribbean

Middle East and North Africa

Sub-Saharan Africa

2009

2010

2011

-10

-5

0

5

10

15

20

1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

BRIC growth forecasts

Source: IMF WEO database 2011.

Percent change from previous year

Advanced EconomiesBrazilRussia

China

India

Projected

7

Foreign investment inflows to

emerging markets

Source: IMF WEO database 2011.

-300

-200

-100

0

100

200

300

400

500

600

700

800

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

US$ bn

Direct investment

Portfolio flows

Other financial flows

8

US$ billions

Investment has increased across

all emerging market regions since 2000

9Source: McKinsey Global Institute.

21.4

n.a.

20.318.5

28.8

14.6

n.a.

19.321.4

19.623.6

35.2

23.620.2

24.126.4

21.9

26.4

43.939.5

22.1

05

101520253035404550

Africa Eastern Europe

Latin America Emerging Asia

excluding China and

India

China India Other emerging countries

1970

2000

2008

Investment,percent of GDP

(

)

Performance of world equity marketsTop 10 returns in 2010 (U.S. dollar-adjusted)

Source: Bloomberg 2011.

Percent change, 2010

10

0

20

40

60

80

100

120

140

160

180

200

Emerging markets: Equity markets are

returning to pre-crisis level

Source: Bloomberg.

0

25

50

75

100

125

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

US$ index, 2007=100

Latin America

Eastern Europe

Emerging Asia

11

Performance of emerging bond marketsTotal return of JPMorgan EMBI Global indexes

Sources: DataStream, Milken Institute.

-1.7

22.4

-14.2

20.9

-6.7

17.3

-10.2

17.2

-11.1

16.7

-20

-15

-10

-5

0

5

10

15

20

25

2008 2009 to Q1 2011

Middle East Europe

Asia Africa

Latin America

Annualized total return, percent

12

Emerging market bond yield spreadsAs of April 8, 2011

9.57

5.534.88 4.61 4.55 4.49 4.27 3.88 3.47 3.19

2.59

0.62 0.52 0.32 0.210

2

4

6

8

10

12

Percent

Sources: Bloomberg, Milken Institute. 13

Emerging markets bond spreads:

Still above pre-crisis level

0

500

1000

1500

2000

2500

2007 2008 2009 2010 2011

B rated

BB rated

Investment grade

Basis points

Sources: DataStream, JPMorgan.14

Emerging countries have tightened monetary policy

in fear of inflation

Target interest rates of central banks

Source: Bloomberg.

0

2

4

6

8

10

12

14

16

2008 2009 2010 2011

Policy interest rates, percent

China

Brazil

India

India

15

End of the era of cheap capital?Consensus forecasts: Central bank rates will increase in the next 12 months

0.0

0.5

1.0

1.5

2.0

2.5

Q1 10

Q2 10

Q3 10

Q4 10

Q1 11

Q2 11

Q3 11

Q4 11

Q1 12

Q2 12

Percent

U.K.

U.S.

Eurozone

2.0

4.0

6.0

8.0

10.0

12.0

14.0

Q1 10

Q2 10

Q3 10

Q4 10

Q1 11

Q2 11

Q3 11

Q4 11

Q1 12

Q2 12

Percent

Russia

China

Brazil

India

16

Source: Bloomberg.

Capital raised: Developing Asia attracts

the greatest funding after the crisis

17

Europe31%

Developing Asia27%

Western Hemisphere

24%

Middle East and North

Africa14%

Sub-Saharan

Africa4%

2002-2006

Developing Asia45%

Western Hemisphere

23%

Europe19%

Middle East and North

Africa10%

Sub-Saharan

Africa3%

20102002 - 2006 2010

Sub-Saharan

Africa

3%

Specific financing opportunities

18

Examples of more specific market opportunities:

• Derivatives

• Can bring in cash flow but also exacerbate volatility

• Deposit Receipts

• Internationalize shareholder base

• Can have negative spillovers

• Expertise

• Overseas Private Investment Corporation (OPIC)

• Impact investment fund

• Not just funding, but also network access, expertise

Source: Milken Institute.

Possible side effects of rapid growth:

• Inflation (or hyper-inflation)

• Bubbles

• Previous financial crises

• Credit crunch of ’08 (easy credit led to housing bubble and toxic debt)

• Asia 1997 (excessive speculation, burdening debt, currency crash)

• Mexico 1994 (loose fiscal/monetary policy, hyperinflation, devaluation)

Effects of rapid economic growthWhat can go wrong?

19Source: Milken Institute.

The persistence of sovereign defaults

Argentina Ecuador Paraguay Uruguay Venezuela

• 1830

• 1890

• 1915

• 1930s

• 1982

• 2001

• 1832

• 1868

• 1911

• 1914

• 1931

• 1982

• 1999

• 2008

• 1827

• 1874

• 1892

• 1920

• 1932

• 1986

• 2003

• 1876

• 1891

• 1915

• 1933

• 1983

• 2003

• 1832

• 1878

• 1892

• 1898

• 1932

• 1998

20

Sovereign defaults in selected countries, 1824 to 2008

Sources: Sturzenegger and Zettelmayer (2006), Moody‘s, Milken Institute.

21

A map of world sovereign default

1932

1935

1932

1991

1991

19851983

2001

1812

18771892

19321981

1986

20041983

1983

1939

1972

2002

1932 2000

2008

19841982

2004

1984

2003

2003

‘87

1940

1932 1942

2002

1981

1982

1993

2000

Sovereign debt most likely to default in five

years As of Q1 2011

Rank Country

Five-year cumulative

probability of default

(%) Rank Country

Five-year cumulative

probability of default

(%)

1 Greece 57.7 6 Ukraine 27.7

2 Venezuela 51.8 7 Dubai 24.7

3 Ireland 43.0 8 Lebanon 21.9

4 Portugal 40.1 9 Iraq 21.1

5 Argentina 34.7 10 Egypt 21.1

22Source: CMA Global Sovereign Credit Risk Report.

Note: Ranked by five-year cumulative probability of default.

Stability, infrastructure and growth potentialWhat affects these crucial economic factors?

Source: Milken Institute

23

• Government regulations

• Social stability

• Investment infrastructure, e.g. stock exchange (size of market, trade

volumes, international access), bond market

• Fundamentals of growth

Marc Pagano

Managing Director, Citigroup

Pros and cons of emerging markets

• Great time to be a Corp in EM

• Low issuance from the Sovereign sector eliminating the historical crowding out

• An investor base hungry for yield and not overly concerned with short term liquidity

• Desire from investors to take lower part of the capital structure on transactions, with

many preferring equity kickers

• Yields are at pre 2007 levels for many companies

• Accommodative commodity and global rates story

• Global spread compression in all of Credit markets leading to a search for yield

• Global EM issuance is nearing levels of the US HY market (800mm)

•Tough time to be an EM Corp investor

• Reduced risk appetite from sell side due to B/S, capital and return restrictions

• Crowed field looking for assets, 10x oversubscribed books the norm

• Limited number of good analysts and PMs with history in EM corps (outside of quasi

svgns)

• EM historically a sovereign game

• Market is running to catch up

• Spread compression forcing people in lower quality and illiquid names 25

Questions

• Is the traditional buy and hold loan market really coming into capital markets (are

people turning a blind eye to the real lack of liquidity)?

• Yes, I think people are underestimating the illiquidity in the market

• Can the game continue past QE2 ending?

• Yes, but much more credit differentiation

• What if there is an EM crisis as the 2007/2008 left most of EM in tact?

• The market is not prepared for this today (felt the pain in Kazak banks,

Russian and Chinese property, Indian CBs)

• What are the factors that will lead to an end game or evolution of the asset class?

• Cheap money and risk indifference with no EM blow ups

• Is the traditional sovereign focused institutional investor base moving fast enough

on credit capacity to keep up with actual investing actions taking today?

• There are smart people working hard to absorb the issuance and names, but

the task is daunting and there is not a huge talent pool

• Start of disintermediation of sell side with direct lending from Investors to

corporates, is this the new trend or short term dynamics?

• Yes, this is the new normal with direct lending in the 100-300mm sizing 26

John Coombe

Head of Consulting, Sydney, and Executive Director,

JANA Investment Advisers

Expanding investment

28

Equity risk premium

29

Strong growth and fiscal improvement

30

Reversal of debt positions

31

• Liquidity crunch in 2009

• Slow recovery in fund raising despite significant acceleration in deal flow ($16.8 billion

deployed versus $8.7 billion raised through Q3 2010)

• Terms improved for LPs

• Best funds will still be oversubscribed

0

5

10

15

20

25

30

2003 2004 2005 2006 2007 2008 2009 2010P

$ B

illio

ns

Brazil Russia India China

Source: EMPEA. 2010P PE fundraising is based upon a run rate from reported data as of 9/30/10.

BRICs – PE fundraising

32

• Minimal activity from Q4 2008 - 1H 2009

• Most new deals completed 2H 2009

• Strong acceleration in pace for 2010

0

5

10

15

20

25

30

2003 2004 2005 2006 2007 2008 2009 2010P

$ B

illio

ns

Brazil Russia India China

Source: EMPEA. 2010P PE investment is based upon a run rate from reported data as of 9/30/10.

BRICs – PE investment

33

• The BRICs led the recovery in IPOs

• 2010 was a very strong year for emerging market IPOs. The BRICs accounted for more than half of global

capital raised

Sources: CapitalIQ, Dealogic, Thomson Reuters, Ernst & Young

$0

$20

$40

$60

$80

$100

$120

$140

$160

$180

$200

2003 2004 2005 2006 2007 2008 2009 2010

Ann

aul P

ublic

Mar

ket I

PO

Pro

ceed

s ($

Bill

ions

)

Brazil Russia India China USA

$0

$50

$100

$150

$200

$250

$300

$350

$400

$450

2003 2004 2005 2006 2007 2008 2009 2010

Ann

aul M

&A

Pro

ceed

s ($

Bill

ions

)

Brazil Russia India China

Emerging market exchanges

rapidly expand IPO offerings

BRIC-based companies became much

more attractive acquisition targets

Annual IPO Offerings

Annual Mergers &

Acquisitions

Exit environment

34

Bonds have rallied on ratings upgrades

35

Local bond and currencies attractive

36

Attractive versus other markets

37

China equity raisings - IPOs

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

$80,000

US

D m

illi

on

Capital raised, IPO

B Shares

H Shares

A Shares

Source: Wellington38

China equity raisings – Secondary’s

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

$40,000

$45,000

$50,000

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

US

D M

illio

n

Capital Raised: Secondary Offering

B Share

H Share

A Share: Reoffered

A Share: Rights Issued

A Share: Warrant Exercised

Source: Wellington39

Overseas Private Investment Corporation

Milken Institute Global Conference

May 3, 2011

John Morton

Vice President of Investment Policy

As the U.S.

Government’s

development finance

institution, OPIC

mobilizes the

participation of U.S.

private capital to

support sustainable

economic development

in emerging markets

The Agency

OPIC currently manages a ~$13.5B portfolio of projects in over 150 countries and

operates on a self-sustaining basis at no net cost to the American taxpayer

Shading denotes

OPIC-eligible

countries

41

Total Staff 210

Eligible Countries > 150

FY 2010 Figures― Projects Approved 97― Contribution to Budget $352M― Current Exposure $13.5B*

Agency facts

Each OPIC employee generates $1.7

million in revenue for the

federal government

Historical OPIC contribution to Federal budget

*As of December 31, 2010

US$ millions

42

0

100

200

300

400

500

600

700

800

2006 2007 2008 2009 2010

OPIC by the numbers

From 2006 to 2010, OPIC contributed over $2bn to the federal budget

Foreign

policyDevelopment

US

business

OPIC

OPIC’s unique position Administration priorities

“We’re changing how we define development…we

need to harness all the tools at our disposal—from

our diplomacy to our trade and investment policies.”

~President Obama, 9/22/10

Supporting broad-based, sustainable economic

growth

Proactively targeting specific countries, regions,

sectors, and technologies

Mobilizing private sector investment

Elevating development as a central pillar of

national security policy 43

Administration development priorities

OPIC works in close alignment with the administration’s development strategy

OPIC’s current portfolioOPIC offers innovative financial solutions to support private investors, including debt financing, insurance, and investment funds

Current portfolio* Products

Debt financing

― Large structured finance to small business loans

― Up to $250M, fixed rate terms, up to 20 years

Insurance

― Coverage for expropriation, political violence,

and currency inconvertibility

― Other insurance including regulatory risk, carbon

credits

Investment funds

― Debt that is matched by privately raised equity to

support funds investing in emerging markets

Other financial products

― Designs hybrid financial products to help private

investors mitigate risk

$13.5B Current exposure; $29B Capacity

Investment

funds

Insurance

Debt

financing

*As of December 31, 2010

US$ billions

44Total exposure

Nonprofits and impact investors

Our clients and alliances

OPIC partners with other U.S. government agencies and

international entities

Current clients Strategic alliances

― Departments of State, Defense,

Commerce, and Treasury

― USAID, MCC

― Ex-Im Bank, TDA and SBA

― IFC and MIGA

― Regional development banks

(IDB, ADB, AfDB, EBRD)

― CDC, FMO, DEG

― Chambers of Commerce

― Impact investors

― NGOs & Nonprofits

― Diaspora investors

US Gov’t

Development

finance

institutions

Other

partners

Multinationals and small/medium businesses

45

Matthew Crakes

Managing Partner, Greenheart Capital Partners

0

2,000,000

4,000,000

6,000,000

8,000,000

10,000,000

12,000,000

14,000,000

16,000,000

US, Europe and EM market exchangesTotal market capitalization 2010

Source: World Federation of Exchange Members

USD million

EM bond issuanceNet supply by sector (US$ billion)

Source: Morgan Stanley

USD billion

$0

$20

$40

$60

$80

$100

$120

$140

$160

2007 2008 2009 2010 2011 YTD

Sovereigns

Corporates

$0

$5

$10

$15

$20

$25

$30

$35

$40

$45

Gov't

Non FIs

HHs

FIs

Total debtby segment (US$ trillion)

Source: McKinsey Global Institute, Global Finance Magazine, and World Bank (latest figures based on 2009)

USD trillion