the role of private equity and debt funds in sme and...

MOBILIZING PRIVATE EQUITY AND DEBT FUNDS FOR SME AND INFRASTRUCTURE FINANCE IN EMERGING MARKETS AND DEVELOPING COUNTRIES

Investment Funds Group Team

Outline Part I: Global evolution of private equity and debt funds

• Section 1: Overall evolution of PE funds • Section 2: Emergence of private debt funds • Section 3: Venture capital funds • Section 4: Infrastructure funds

Part II: Mobilizing PE and debt funds in emerging markets and developing countries (EMDEs)

• Section 1: Developing ecosystem for PE/VC in EMDEs • Section 2: Developing the PPP framework in EMDEs • Section 3: The role of Strategic Investment Funds (SIFs)

1

Section 1: Private equity funds assets under management (AUM) have grown from US$ 716 billion in 2000 to US$ 3.8 trillion in 2014.

2

298 377 407 402 409 563 806

1,011 1,075 1,067 993 1,007 941 1,074 1,144 418 374 360 465 554 675

898

1,265 1,204 1,413

1,783 2,029 2,332

2,546 2,644

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

Dec

-00

Dec

-01

Dec

-02

Dec

-03

Dec

-04

Dec

-05

Dec

-06

Dec

-07

Dec

-08

Dec

-09

Dec

-10

Dec

-11

Dec

-12

Dec

-13

Jun-

14

Private Equity Assets under Management December 2004 - June 2014 (US$ billion)

Dry Powder Unrealized ValueSource: 2015 Preqin Global Private Equity Report

Section 1: By geographical area, the main areas of focus are the US and Europe, followed by Asia. The rest of the world is at a low level, but growing slowly.

3

Source: 2014 Preqin Global Private Equity Report

0

100

200

300

400

500

600

700

Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13

Dry

Pow

der (

$bn)

Private Equity Dry Powder by Primary Geographic Focus 2003 – 2013 (US$ billion)

North America Europe Asia Rest of World

Section 1: Among emerging markets, emerging Asia is the main geographical focus area (with China and India leading), followed by Latin America (with Brazil leading)

4

Source: EMPEA Database

Section 1: By type of fund, buyout funds dominate, followed by real estate, venture capital and infrastructure. Mezzanine debt represents a small share of the total, but is growing.

5

0

200

400

600

800

1,000

1,200

1,400

Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14

Dry

Pow

der (

$bn)

Private Equity Dry Powder by Fund Type 2003 – 2014 (US$ billion)

Buyout Distressed Private Equity GrowthInfrastructure Mezzanine Real EstateVenture Capital Other


Section 1: After dropping following the international financial crisis in 2008, private equity-backed exits have rebounded sharply in the 2010-2014 period.

6


0

20

40

60

80

100

120

140

160

0

50

100

150

200

250

300

350

400

450Q

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4

2006 2007 2008 2009 2010 2011 2012 2013 2014

Aggregate E

xit Value ($bn) N

o. o

f Exi

ts

Private Equity-Backed Exits by Type Q1 2006 – Q4 2014

IPO Restructuring Sale to GP Trade Sale Aggregate Exit Value ($bn)

Section 1: The investor base for private equity funds has undergone major transformation over the past 6 years.

7


28%

13%

3%

8% 7%

4% 6% 6%

5% 4%

1% 2%

22%

13%

10%

6%

10%

6%

3%

12%

3%

5%

2% 3%

0%

5%

10%

15%

20%

25%

30%P

ublic

Pen

sion

Fund

s

Fund

of F

unds

Man

ager

s

Hig

h-N

et-W

orth

Indi

vidu

als

End

owm

ent

Pla

ns

Priv

ate

Sec

tor

Pen

sion

Fun

ds

Fam

ily O

ffice

s

Foun

datio

ns

Insu

ranc

eC

ompa

nies

Ban

ks &

Inve

stm

ent B

anks

Gov

ernm

ent

Age

ncie

s

Cor

pora

teIn

vest

ors

Sov

erei

gn W

ealth

Fund

s

Prop

ortio

n of

Cap

ital C

omm

itted

Investor Type

Make-up of LPs in the Average Fund by LP Type (Capital Committed to Funds Closed in 2009-2014)

2009-2011

2012-2014

Section 1: In terms of performance, private equity horizon IRR outperformed major market indices in 2014. However, this performance was driven by buyout funds, while venture capital underperformed market indices.

8

-5%

0%

5%

10%

15%

20%

25%

30%

35%

1 Year to Jun 2014 3 Years to Jun 2014 5 Years to Jun 2014 10 Years to Jun 2014

Annu

aliz

ed R

etur

ns

Private Equity Horizon IRRs vs. Public Indices as of 30 June 2014

All Private Equity

Buyout

Venture Capital

S&P 500

MSCI Europe

MSCI Emerging Markets


Outline

Section 1: Overall Evolution of PE Funds

Section 2: Emergence of Private Debt Funds

Section 3: Venture Capital Funds

Section 4: Infrastructure Funds

9

Section 2: Since the international financial crisis in 2008, private debt funds (including mezzanine funds) have grown rapidly.

10

Source: 2015 Preqin Global Private Debt Report

60

86 91 94

141

108

23

39 46

58

79

64

0

20

40

60

80

100

120

140

160

2009 2010 2011 2012 2013 2014Year of Final Close

Annual Private Debt Fundraising 2009 - 2014

No. of Funds Closed

Aggregate Capital Raised($bn)

Section 2: By geographical area, the main areas of focus are North America, followed by Europe and Asia and the rest of the world.

11

Source: Preqin Special Report: Private Debt Report, November 2014

17% 17%

15% 17% 13% 14%

22%

22%

20% 26%

21% 33%

62%

31%

65% 57%

66% 52%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2009 2010 2011 2012 2013 2014 YTD

Pro

porti

on o

f Fun

ds

Year of Final Close

Breakdown of the Number of Private Debt Funds Closed by Primary Geographic Focus 2009 - 2014 YTD (As at 11.20.2014)

North America

Europe

Asia & Rest of World

Section 2: By type of fund, mezzanine funds dominate, followed by direct lending and distressed debt.

12

Source: 2015 Preqin Global Private Debt Report

23%

16%

42%

15%

4%

Primary Strategy of Private Debt Fund Managers Established Since 2008

Direct Lending

Distressed Debt

Mezzanine

Special Situations

Venture Debt

Outline



Section 3: Venture Capital Funds Section 4: Infrastructure Funds

13

Section 3: After reaching a peak in 2008, venture capital fund raising dropped significantly following the international financial crisis in 2009 and 2010. It rebounded significantly in 2011, but has tapered off since then.

14


59% 54% 67%

56% 43%

31% 42%

22% 22%

18% 36%

35% 49%

40%

19% 24% 15%

8% 22% 20% 18%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2008 2009 2010 2011 2012 2013 2014

Aggr

egat

e C

apita

l Rai

sed

($bn

)

Year of Final Close

Annual Venture Capital Fundraising by Primary Industry Focus 2008 – 2014 (US$ billion)

Healthcare

Information Technology

Other

Section 3: By stage, venture capital deal flow is led by angel/seed deals, followed by round 1 deals and round 2 deals, showing the critical role played by private equity at early stages of development of SMEs. Venture debt represents less than 7% of the total.

15

22%

2%

25%

3%

20%

1%

13%

10%

13%

10%

16%

7%

8%

12%

8%

12%

9%

11%

4%

12%

3%

9%

5%

9%

3%

13%

3%

12%

3%

13%

2% 5% 2% 3%

3%

2%

1% 2% 1% 2%

1%

1%

32% 27% 32%

30% 31%

22%

6% 5%

6% 9%

6%

4%

8% 13%

7% 10% 8%

31%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

No. of Deals Aggregate DealValue



2012 2013 2014

Prop

ortio

n of

Tot

al

Proportion of Number and Aggregate Value of Venture Capital Deals by Stage 2012 – 2013

Angel/Seed Series A/Round 1 Series B/Round 2 Series C/Round 3

Series D/Round 4 and Later Growth Capital/Expansion PIPE Unspecified Round

Venture Debt Add-on & Other

Source: Preqin Global Private Equity Reports, 2014 & 2015

Section 3: By geographical area, venture capital deal flow is highly concentrated in North America, followed by Europe and China. The rest of the world represents a small share of the total.

16

Source: 2015 Preqin Global Private Equity Report * Figures exclude add-ons, grants, mergers, secondary stock purchase and venture debt

73% 69% 73% 69% 67% 71% 67% 62%

14% 13%

15% 14%

11% 12% 17%

11%

8% 12%

8% 12% 17% 11% 7%

15%

3% 2% 2% 3% 2% 3% 3% 6%

1% 1% 1% 1% 1% 1% 1% 1% 1% 1% 1% 2% 1% 2% 4% 5%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2007 2008 2009 2010 2011 2012 2013 2014

Prop

ortio

n of

Agg

rega

te D

eal V

alue

Proportion of Aggregate Value of Venture Capital Deals by Region, 2007 - 2014*

North America Europe China India Israel Other

Section 3: By industry, venture capital deal flow is led by internet, followed by software, healthcare and telecoms.

17

Source: Preqin Global Private Equity Reports, 2014 & 2015

27% 22% 25% 23% 26% 29%

18%

14% 21% 20% 20% 17%

18% 25%

16% 22% 15% 15%

12% 9%

14% 10% 15% 16%

8% 8%

8% 9% 9% 7% 2% 2%

3% 2% 3% 3% 4% 9% 3% 3% 3% 3% 4% 2% 3% 4% 3% 3% 3% 2% 2% 1% 2% 2% 3% 3% 2% 3% 2% 2% 3% 3% 3% 3% 2% 3%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%




2012 2013 2014

Prop

ortio

n of

Tot

al

Proportion of Number and Aggregate Value of Venture Capital Deals by Industry 2012 – 2014

Internet Software & Related Healthcare Telecoms

Other IT Business Services Clean Technology Consumer Discretionary

Industrials Semiconductors & Electronics Other

Outline



Section 3: Venture Capital Funds

Section 4: Infrastructure Funds

18

Section 4: Unlisted infrastructure funds AUM have grown from US$ 7 billion in 2002 to US$ 296 billion in 2014.

19

Source: 2015 Preqin Global Infrastructure Report

3 4 11 15 37

61 63 64 68 90 82 87

105

4 5 6 9

16

33 49 60

92

127 149 157

191

0

50

100

150

200

250

300

350D

ec-0

2

Dec

-03

Dec

-04

Dec

-05

Dec

-06

Dec

-07

Dec

-08

Dec

-09

Dec

-10

Dec

-11

Dec

-12

Dec

-13

Jun-

14

Asse

ts u

nder

Man

agem

ent (

$bn)

Unlisted Infrastructure Assets under Management December 2002 - June 2014

Unrealized Value($bn)

Dry Powder ($bn)

Section 4: By project stage, infrastructure fund deals are led by secondary stage, followed by greenfield and brownfield.

20


59% 28%

13%

Breakdown of Unlisted Infrastructure Deals by Project Stage 2008 – 2013

Secondary Stage

Greenfield

Brownfield

Section 4: By geographical area, the main areas of focus are North America, followed by Europe and Asia.

21


53 32

11 9

93

59

20 19

0

20

40

60

80

100

120

140

160


Asse

ts u

nder

Man

agem

ent (

$bn)

Fund Primary Geographic Focus

Unlisted Infrastructure Assets under Management by Fund Primary Geographic Focus as of June 2014

Unrealized Value ($bn)

Dry Powder ($bn)

Section 4: By industry, infrastructure fund deal flow is led by renewable energy, followed by transport, social infrastructure and energy.

22


39% 35% 33% 34% 36% 39% 41%

15% 14% 17% 14% 13%

17% 19%

8% 17% 11% 16%

18% 14%

15% 13% 10%

14% 15% 13%

13% 8%

19% 17% 20% 16% 15% 12% 14%

3% 4% 3% 3% 2% 4% 1% 2% 3% 2% 1% 2% 2% 1%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2008 2009 2010 2011 2012 2013 2014

Prop

ortio

n of

Dea

ls

Breakdown of Infrastructure Deals by Industry, 2008-2014

OtherTelecomsUtilitiesEnergySocialTransportRenewable Energy

Section 4: By type of investor, superannuation schemes dominate, followed by endowment plans, public pension funds and private sector pension funds.

23


7.0%

4.4%

3.3%

2.7% 3.1%

4.4%

9.0%

6.6%

5.2% 4.9% 4.5% 4.4%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

Sup

eran

nuat

ion

Sch

eme

End

owm

ent

Pla

n

Pub

licP

ensi

on F

und

Priv

ate

Sec

tor

Pen

sion

Fun

d

Foun

datio

n

Ass

et M

anag

er

Aver

age

Infr

astr

uctu

re A

lloca

tion

(A

s a

Prop

ortio

n of

AU

M)

Average Current and Target Allocations to Infrastructure by Investor Type, 2014

Average CurrentAllocation

Average TargetAllocation

Section 4: Since 2007, infrastructure investment funds have outperformed the private equity class.

24


0

20

40

60

80

100

120

140

160

180D

ec-0

7M

ar-0

8Ju

n-08

Sep-

08D

ec-0

8M

ar-0

9Ju

n-09

Sep-

09D

ec-0

9M

ar-1

0Ju

n-10

Sep-

10D

ec-1

0M

ar-1

1Ju

n-11

Sep-

11D

ec-1

1M

ar-1

2Ju

n-12

Sep-

12D

ec-1

2M

ar-1

3Ju

n-13

Sep-

13D

ec-1

3M

ar-1

4Ju

n-14Inde

x R

etur

ns (R

ebas

ed to

100

as

of 3

1 D

ecem

ber 2

007)

PrEQIn Index: Infrastructure vs. All Private Equity December 2007 – June 2014

PrEQIn All Private EquityIndex

PrEQIn InfrastructureIndex

Section 4: Following low levels of activity until 2005, unlisted private infrastructure debt funds increased rapidly until the financial crisis in 2008. Following a sharp drop in 2009, infrastructure debt funds recovered quickly, raising US$ 7.5 billion in 2013.

25


5

3

6

9

1

6 7

10

7

1.8 1.2

3.5 3.6

0.2

1.3

6.2

3.4

7.5

0

2

4

6

8

10

12

1998

-200

5

2006

2007

2008

2009

2010

2011

2012

2013

Year of Final Close

Annual Infrastructure Debt Fund Raising, 1998-2013

No. of FundsClosed

Aggregate CapitalRaised ($bn)

Section 4: By geographical area, the main areas of concentration are North America, followed by Europe and the rest of the world

26


15

19 19

21

18.3

10.9

6.3

8.2

0

5

10

15

20

25


Breakdown of Unlisted Infrastructure Debt Fund Universe by Primary Geographic Focus, 2013

No. of FundsClosed/Raising

Aggregate CapitalRaised/Targeted ($bn)

Section 4: The number of listed infrastructure funds raised increased from 2001 to 2011 with a drop in 2012 and peaking in 2013.

27


21

27

32

39 40 37

39 36 35

42

6

5

8

1 5 2 10

2

1 3

3 5

1

3

0

5

10

15

20

25

30

35

40

45

50

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

No.

of F

unds

Listed Infrastructure Fund Launches, 2005-2014

No. of FundsDe-Listed

No. of FundsLaunched

No. of FundsAlready Trading

Section 4: Listed infrastructure funds AUM have grown from US$ 4.6 billion in 2004 to US$ 21.4 billion in 2013 (valued at vintage).

28

Source: Preqin Database and staff calculations Note: The table represents 44 listed infrastructure funds from Preqin database and AUM shown is at vintage

4.6

7.8 9

12 12 12

13.4

14.8 14.8

21.4

0

5

10

15

20

25

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

AUM of Listed Infrastructure Funds (US$ billion)

Part II: Mobilizing PE and debt funds in EMDEs

Section 1: Developing the ecosystem for PE/VC in EMDEs

Three pillars:

• Pillar 1: legal and regulatory framework for PE/VC operations

• Pillar 2: legal and regulatory framework for investments by institutional investors in asset class

• Pillar 3: business enabling environment

29

Pillar 1: legal and regulatory framework for PE/VC operations

Fund regulator and capacity PE/VC fund and fund manager regulations

• fund legal structure (incl compartments) • qualified assets • qualified investors • management company legal structure • qualification of persons who conduct the business of management company • disclosure of ultimate controllers of management company • disclosure and resolution of conflict of interest • delegation of core manager functions • own funds • asset valuation rules • content of fund prospectus • disclosure to investors • auditing • reporting • depositary rules • cooperation with supervisory agency • penalties

30

Pillar 1: legal and regulatory framework for PE/VC operations Tax treatment

• tax residency for foreign investment funds • tax pass through for fund legal structures (capital gains tax, withholding tax) • double taxation agreements Investor protection • protection of minority shareholder rights • protection for investors in funds Interest in portfolio companies • restrictions on issue or transfer of shares Buyouts • regulations on buyouts by public auction • regulations on buyouts of listed companies Protection of intellectual property rights • legal and regulatory framework for patents and trademarks • international treaties • enforcement Bankruptcy procedures/creditor rights/partner liability • legal and regulatory framework for bankruptcy

• treatment of foreign and domestic creditors • partner liability

• enforcement

31

Pillar 1: legal and regulatory framework for PE/VC operations Exits

• listing rules on main exchange • listing rules on SME exchange

Exchange controls • regulations on inward investments • regulations on outward transfers of profits and capital gains

Corporate governance requirements • corporate governance requirements for funds • corporate governance requirements for investee companies

Contract enforcement • contract enforcement through court system • contract dispute resolution framework

Perceived corruption • transparency international index • doing business index

Accounting • IFRS implementation

32

Pillar 2: Legal and regulatory framework for investments by institutional investors in asset class

Laws/regulations for investments by pension funds in PE/VC asset class

• rules-based regime: limits on investment in asset class • risk-based regime: benchmark portfolio

Laws/regulations for investments by insurance companies in PE/VC asset class

• rules-based regime: limits on investment in asset class • risk-based regime: roadmap to Solvency II/risk-based regulatory regime

33

Pillar 3: Business enabling environment

Supply side • Business incubators • Business accelerators • Angel investors • Angel investor groups

Demand side • Seed co-investment funds • Hybrid PE/VC funds

34

Section 2: Developing the PPP framework in EMDEs

Legal framework

• enable contract form encompassing multiple obligations (DBFOM: design-build-finance-operate-maintain)

• enable DBFOM contract for both user-pay and government-pay models • enable tender model based on dialogue with prospective bidders

Selection, preparation and appraisal • guidelines to assess and select PPP projects at all levels of government

• focus on affordability, commercial feasibility and value for money Fiscal management

• relevance for government-pay projects • valuation of contingent liabilities • public debt limits Institutional framework and architecture • roles of procuring agency, promoter, treasury, general attorney • creation of specialized bodies

35

Section 2: Developing the PPP framework in EMDEs (cont’d)

Key drivers for mobilization of institutional investors including infrastructure PE/debt funds

• Significant project pipeline • Successful track record including resolution of disputes • Strong process management framework • Clarity of legal framework (PPP legality, enforceability and procurement

transparency) • Strong political commitment and support • Public acceptability • Fiscal sustainability

36

Section 3: The role of Strategic Investment Funds (SIFs)

•SIFs being created by increasing number of governments and regional economic communities to serve as anchor investors for international and domestic institutional investors in domestic projects

•Sectors: SOE turnaround, infrastructure PPP projects, SMEs

•Original inspiration: Singapore Temasek, Malaysisa Khazanah, South Africa Public Investment Corporation

•More recent examples:

• EU: European Fund for Strategic Investments (EFSI)

• Sénégal: Fonds Souverain d’Investissement Stratégique (FONSIS)

• Chile: Strategic Investment Fund

•Under preparation

• Indonesia, Congo, Côte d’Ivoire, Morocco

37

Section 3: The role of SIFs (cont’d)

SIF Feasibility: key elements

governance structure: • separation between ownership and management functions • fund board defining overall investment strategy • fund management company responsible for investment and exit

decisions • funds/compartments targeting specific sectors/investor risk profile

regulatory framework

• funds regulated by capital market authority

investment strategy • SIF to invest as GP in infrastructure fund • SIF to invest as LP in SME PE/VC funds managed by private manager

and GP

38

Section 3: The role of SIFs (cont’d)

human resource strategy • recruitment from private sector (investment banking, project finance,

private equity/venture capital) through international private recruitment agency

project selection criteria

• double trigger: IRR/ERR

fund manager remuneration • fund management fees, share of carry, hurdle rate

preliminary market sounding • international and domestic institutional investors incl pension funds,

insurance companies, sovereign wealth funds (SWFs), private equity and debt funds

39

Investment Funds Group Team

40

Contact information: Michel Noel [email protected] 202-203-0874

Samuel Schneider Consultant

Patrick J. McGinnis Consultant

Sevara Atamuratova Research Analyst

Shanthi Divakaran Sr. Financial Sector Specialist

Michel Noel Head

Thelma Ayamel Program Assistant

Havard Halland Economist

mailto:[email protected]

the role of private equity and debt funds in sme and...

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