IFC's Private Equity Gamble Pays Off

Extracted 27SEP2011 from http://www.institutionalinvestor.com/Article/2904773/International-Finance-Co...

In the 1990s, IFC, a unit of the World Bank, decided to create and seed private equity funds in developing markets to increase the flow of growth capital to small- and medium-size businesses... A decade later the IFC private equity funds have, on average, returned between 18 and 19 percent, says David Wilton, IFC’s chief investment officer and head of its fund of funds.

The average rate of job creation within companies backed by IFC-supported funds since 2000 is 22 percent, well in advance of regional rates of job growth of about 3 percent. Today there are funds in countries including Brazil, Colombia, India, Indonesia and Vietnam and new funds being launched in frontier countries such as Bhutan, Nepal and Sierra Leone. IFC’s private equity fund initiative has become a vital growth tool in countries where the availability of credit is constricted and the cost of capital too high to be developmentally positive...

The key to the transformation, according to Wilton, was the IWC’s recognition that the developing markets were different... That meant taking on a new set of risks... The riskiest change probably was moving away from top-down developed-market models, where leverage and financial engineering are key to returns, to a localized – and customized – business model... What also helped was a heightened deal flow. By the late 1990s many developing-country governments were deregulating their domestic markets, allowing for the growth and expansion of existing businesses and the entry of new players.