–Unlocking Private Finance and Investment in EMDEs with Vipul Bhagat
Hello my name is Vipul Bhagat. I work at the international finance corporation or IFC assist organization of the World Bank and member of the group which is the largest development financial institution or DFI focused exclusively on the private sector in developing countries. With over six decades of investment experience we are the largest private oriented investor in the emerging markets. In fact an IFC staff member actually coined the term emerging markets in the late eighties to denote those countries that were previously referred to as developing or lesser developed or third world who had great investment potential for financial returns and profitability for foreign investors from an institution that was established by government as shareholders in nineteen fifty six with the seed capital of only a hundred million dollars today we have a balance sheet of ninety five billion dollars. In the last fiscal year ending in June twenty eighteen IFC invested over twenty three billion including nearly twelve billion mobilize from other investors in over three hundred sixty six companies I which one point six billion was an equity requires equity investments typically referred to as private equity.
The simplest definition of private equity is that it is equity shares representing ownership of or an interest in an entity that is not publicly listed or traded. A source of investment capital private equity in developed markets actually derives from high net worth individuals and firms that purchase shares of private companies or acquired control of public companies but plans to take them private eventually delisting them from public stock exchanges. Most of the private equity industry is made up of large institutional investors such as pension funds and large private equity firms funded by a group of accredited investors. In the emerging markets or EM the asset class remains relatively underdeveloped.
In EM especially outside the large economies of China India Brazil sources of capital for private equity are scarce and scanned. IFC and other DFI remain a large source of private investment followed by local high net worth individuals and companies moreover control is often not a prerequisite nor readily available as it is in the developed markets. Since the base is a private equity investment is direct investment into a firm often to gain a significant level of influence over the firm’s operations quite a large capital outlay is required which is why larger funds with deep pockets to dominate the industry. The underlying motivation for such commitments is of course the pursuit of achieving a positive return on investment significantly above what can be achieved through public markets investing partners at private equity firms to raise funds and manage these moneys to yield favorable returns for their shareholder clients typically with an investment horizon between four and seven years.
IFC aims to balance financial return would develop an impact and practices at approach that is referred to as triple bottom line investing namely financial returns development impact and sustainability. This is now often referred to as impact investing. In two thousand eighteen private equity which includes venture capital private credit and private infrastructure real estate contributed to three hundred and seventy five billion dollars in total investment in the US. In Western Europe this figure was approximately a hundred and fifty billion at another develop markets about forty billion.
By comparison with over fifty percent of the world’s GDP emerging markets attracted only seventy billion dollars in total up from forty billion just five years ago. In the UK private equity represents a little over two percent of GDP while in the US is a little under two percent the largest penetration in emerging markets is in India at just under point five percent which is almost four times less than the UK. For China which is of course now the second largest economy and other emerging markets the penetration is even smaller. Suggesting perhaps potential for significant growth again in two thousand eighteen emerging markets received only seventy billion a private capital though that was up twenty seven percent from the previous year spread across approximately twenty five hundred individual transactions or investments. Regionally by far emerging Asia was the largest recipient with almost sixty billion of the seventy billion.
Of course the economies of China and India account for a lion’s share of this number. Latin America was next with about six billion with Brazil is the largest recipient central Eastern Europe and the CIS countries with about two billion and smallest share going to Africa at one point five billion of the Middle East and only five hundred million or point five billion At IFC we are focused on increasing the quantum of investments in Africa and the Middle East and those economies that are lagging by asset class growth private equity received about sixty billion of the seventy billion and private credit at just under two billion. The next largest sector is technology with almost twenty five percent followed by financial services healthcare who are these private equity investors? Besides DFIs like IFC that invest directly Investors in the emerging markets and through fund structures you also have other groups like high net worth individuals family offices institutional investors such special purpose vehicle as pension funds insurance companies asset management companies sovereign wealth funds and fund of funds.
Within the DFI community IFC has a portfolio of equity inquires equity investments in emerging markets about fifteen billion dollars out of a total balance sheet of ninety five billion as of end June in twenty eighteen you may ask how is private equity investment different from other investments. Well private equity benefits from those sources of capital that have a medium to long term investment horizon. So an entity that is a going concern and can make direct investments from its balance sheet is ideal. Also with the fine structure where you have several co mingle sources of capital a typical period is a ten to twelve year life therefore capital needs to be locked up essentially for that period of time. So it is not for those investors who need easy liquidity quick returns or are interested in short term trades Pension funds and life insurance companies would long dated liabilities that can match the longer tenure of being locked into a vehicle or high net worth individuals also look to generate higher returns through these private equity investments and are able to allocate a portion of their assets to this class In emerging markets the institutional investor class is often missing or underdeveloped.
Hence a large component of PE investors in emerging markets are outside investors. High net worth individual’s family offices and local corporates tend to play a larger role in the E. M. private equity universe than in developed markets. Some of the global recognize private equity fund managers are also active in emerging markets. They include UK based act is partners group CVC to name a few Some US based entities like the Carlyle group TPG Advent Blackstone and Warburg and other European and Asian private equity groups especially based in China and India. Some of the larger direct investors besides IFC include some Actis and GIC of Singapore the Abu Dhabi investment authority and several Canadian based pension fund such as CPPIB and OTTP.
Let me take a minute to present a recent private equity investment by IFC in this case in sub Saharan Africa actress which I mentioned earlier as a private equity group that we work with they had established a renewable energy platform to make investments in wind and solar projects in Africa. Within Ireland based partner called Mainstream look Kayla was established to deliver one thousand megawatts or gig watt of utility scale wind and solar power in Africa. IFC was requested to invest in this platform alongside Actis and Mainstream which we did In twenty eighteen we invested sixty million dollars of equity source from our own balance sheet and IFC’s asset management company for a meaningful stake in this platform Since investment it has gone to operationalize assets in South Africa Senegal and developing projects in Egypt and Ghana. We also have a board seat in this entity and a plan to either list or sell over time to a strategic investor hopefully for a nice return while providing strong development impact and generating clean energy for Africa.
In closing I believe this asset class is a growth area for investing in emerging markets and developing economies. Contributing to financial returns for investors and helping attain the sustainable development goals.