The role of private equity and debt funds in SME and ...documents.worldbank.org/curated/en/439801468198530073/pdf/101684...mobilizing private equity and debt funds for sme and infrastructure

MOBILIZING PRIVATE EQUITY AND DEBT

FUNDS FOR SME AND INFRASTRUCTURE

FINANCE IN EMERGING MARKETS AND

DEVELOPING COUNTRIES

Investment Funds Group Team11-11-2015

101684

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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 409563

8061,011 1,075 1,067 993 1,007 941

1,074 1,144418 374 360 465 554

675

898

1,265 1,2041,413

1,7832,029

2,332

2,5462,644

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

Dec-0

0

Dec-0

1

Dec-0

2

Dec-0

3

Dec-0

4

Dec-0

5

Dec-0

6

Dec-0

7

Dec-0

8

Dec-0

9

Dec-1

0

Dec-1

1

Dec-1

2

Dec-1

3

Ju

n-1

4

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

Po

wd

er

($b

n)

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

-

5.00

10.00

15.00

20.00

25.00

30.00

2009 2010 2011 2012 2013 2014

Evolution on PE investments in Emerging Markets by region, in US$ billion

Emerging Asia China India

CEE and CIS Russia Latin America

Brazil MENA Sub-Saharan Africa

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

Po

wd

er

($b

n)

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

1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

2006 2007 2008 2009 2010 2011 2012 2013 2014

Aggre

ga

te E

xit V

alu

e ($

bn

)N

o. o

f E

xits

Private Equity-Backed Exits by TypeQ1 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%

Pub

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ivid

uals

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ap

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mit

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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

An

nu

ali

ze

d R

etu

rns

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

8691 94

141

108

23

3946

58

79

64

0

20

40

60

80

100

120

140

160

2009 2010 2011 2012 2013 2014

Year 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

po

rtio

n o

f F

un

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





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 in 2012 and 2013 followed by another peak in 2014.

14


52.4

27.0 26.5

42.2

38.1

31.2

45.7

0.0

10.0

20.0

30.0

40.0

50.0

60.0

2008 2009 2010 2011 2012 2013 2014

Evolution of Venture Capital Fundraising, 2008 – 2014 (US$ billion)

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

Pro

po

rtio

n o

f To

tal

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


* 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

Pro

po

rtio

n o

f A

gg

reg

ate

Dea

l V

alu

e

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

Pro

po

rtio

n o

f To

tal

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





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

3761 63 64 68

90 82 87105

4 56 9

16

3349

60

92

127 149157

191

0

50

100

150

200

250

300

350

Dec-0

2

Dec-0

3

Dec-0

4

Dec-0

5

Dec-0

6

Dec-0

7

Dec-0

8

Dec-0

9

Dec-1

0

Dec-1

1

Dec-1

2

Dec-1

3

Ju

n-1

4

As

se

ts u

nd

er

Ma

na

ge

me

nt

($b

n)

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


As

se

ts u

nd

er

Ma

na

ge

me

nt

($b

n)

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

Pro

po

rtio

n o

f D

eals

Breakdown of Infrastructure Deals by Industry, 2008-2014

Other

Telecoms

Utilities

Energy

Social

Transport

Renewable 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%

Su

pe

ran

nu

atio

n S

ch

em

e

En

do

wm

ent

Pla

n

Pu

blic

Pe

nsio

n F

un

d

Pri

va

te S

ecto

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ensio

n F

un

d

Fo

un

datio

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Asse

t M

ana

ger

Ave

rag

e I

nfr

astr

uc

ture

All

oca

tio

n

(As

a P

rop

ort

ion

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

7

Ma

r-0

8

Ju

n-0

8

Sep

-08

De

c-0

8

Ma

r-0

9

Ju

n-0

9

Sep

-09

De

c-0

9

Ma

r-1

0

Ju

n-1

0

Sep

-10

De

c-1

0

Ma

r-1

1

Ju

n-1

1

Sep

-11

De

c-1

1

Ma

r-1

2

Ju

n-1

2

Sep-1

2

De

c-1

2

Ma

r-1

3

Ju

n-1

3

Sep

-13

De

c-1

3

Ma

r-1

4

Ju

n-1

4

Ind

ex R

etu

rns

(R

eb

ase

d t

o 1

00

as o

f 3

1 D

ece

mb

er

200

7)

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

1.81.2

3.5 3.6

0.2

1.3

6.2

3.4

7.5

0

2

4

6

8

10

12

199

8-2

00

5

200

6

200

7

200

8

200

9

201

0

201

1

201

2

201

3

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 4037

3936 35

42

6

5

8

1 5 2 10

2

13

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

. o

f F

un

ds

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


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


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 AssistantHavard Halland

Economist

Honglin (Holly) Li

Learning Analyst

mailto:[email protected]

Documents

The role of private equity and debt funds in SME and ...documents.worldbank.org/curated/en/439801468198530073/pdf/101684...mobilizing private equity and debt funds for sme and infrastructure