GROWTH AND DEVELOPMENT
By Udayan Gupta
David Wilton is chief investment officer and manager, global private equity, at theWorld Bank’s IFC, with responsibility for its investment program in emerging markets funds globally. He is a member of the Pension Finance Committee of the World Bank Group, chairman of the advisory board of the Emerging Markets Private Equity Association (EMPEA) and was acting CEO of the IFC Asset Management Company in its establishment phase.
Global Finance : Why has the IFC been so involved with emerging markets private equity?
David Wilton: One of IFC’s main goals is to provide capital to promote economic growth and development where development capital is scarce. One of the ways we do that is by seeding private equity funds that then invest in companies that are capable creating jobs, developing a more contemporary style of governance and also developing management systems and management teams that are sustainable. Currently IFC has commitments of over $3 billion to around 180 private equity (PE) funds in emerging markets. On average IFC’s commitment accounts for about 12% to 15% of each fund. And in the last decade the average annual returns have exceeded 20%.
GF: Why have emerging markets private equity funds performed so well?
Wilton: It wasn’t always this way. In the 1990s, as a generalization, minority investors did not get their full share of the upside. There were not good formal ways to enforce contracts, and GPs [general partners] were not bringing enough value to the table to be seen as partners, so they did not have the relationship leverage to enforce. Back we went to the drawing board and developed a growth investing strategy that required not just capital but also working as partners in business development. While developed markets’ PE funds are seen as financial engineers, emerging markets’ PE funds have focused on growth and development.
GF: Where are the exits coming from?
Wilton: The exits are similar to the developed markets’—public listings, trade sales, buybacks from sponsors and strategic combinations, although with an emphasis on trade sales. With the markets as they are, much of the liquidity is coming from trade sales, strategic investors and sponsor buybacks.
GF: How do you envision the future for private equity funds in the emerging markets?
Wilton: The need continues to be as great as ever. As long as there is a shortage of domestic capital and the cost of capital continues to be prohibitively high, private equity will play an important role. There is also a significant need for the advice and hand-holding growth-focused PE firms bring.
GF: What are the challenges?
Wilton: Many institutional investors in developed countries are under pressure to produce shorter-term returns. In response they are increasingly reallocating their assets to investments near at home and often to less-risky—but also lower-yielding—corporate bonds. That may satisfy their constituents, but it could hurt their longer-term ability to meet their liabilities.
Emerging-markets PE opportunities have expanded rapidly in the last decade. If the problems in the developed world lead to increased barriers to trade and capital flows, a reversion to balkanization, it would constrain future PE growth in emerging markets. The opportunity could be expanded if legal systems in emerging markets became more efficient and transparent. Ability to trust through contract broadens the circle of people you can work with beyond those with whom you have a relationship.