Download Asia Deadwood Equity

Challenges to Securities
Markets
NBFI Seminar
December 4-6, 2002
Santiago, Chile
Peter Tropper
International Finance Corporation
Panelists
Mr. Jose Luiz Osorio, Former CVM Chairman, Brazil
Mr. Hernan Rodriguez, Bank of New York
Mr. Sergio Luiz de Cerqueira Silva, Bovespa, Brazil
Mr. Sergio Undurraga, President, Moneda Asset
Management, Chile
Mr. Scott Swensen, Managing Director, DB Capital
Partners
Mr. Camilo Arenas, Corporación Andina de Fomento
2
Market Performance,
Jan. – Nov. 2002
27%
30
10%
20
S&P/IFCG Index
10
0
-10
-16%
-20
-12%
-23%
-30
-36%
-40
-50
-60
-58%
Argentina
Brazil
Chile
Colombia
Mexico
Peru
Venezuela
3
Afr
ic
a
Arg
en
ti
Ge n a
rm
a
Ko
re a ny
,R
ep
.
Bra
z il
Ind
ia
Me
x ic
o
Pe
ru
Co
lom
bia
Ve
ne
zu
ela
So
uth
tat
es
Ja
pa
n
Ch
ile
Un
ited
S
% of GDP
Market Capitalization as % of
GDP, 2001
160
140
120
100
80
60
40
20
0
Source: World Bank
4
Market Concentration, 2001
Source: FIBV
5
Foreign investments can provide
Cash
 Best practices catalytic role
 Transfer of financial , managerial, operational
technologies

BUT: Successful countries finance their
own economic development
6
Responses
Set up 2nd tier markets
Encourage cross-listings, including ADRs &
GDRs
Ensure greater transparency thru corporate
governance rules
Permit institutional investors to invest more in
listed and unlisted equities
Reduce trading costs:




move to electronic trading floors
drop stamp taxes & transaction taxes
permit negotiated commissions
create on-line trading by investors
7
Private Equity Investments in
Latin America
6
5
$5b
$3.6b
4
$2.8b
3
2
$0.8b
1
$0.4b
0
1998
source: Venture Equity LA
1999
2000
2001
2002
(Jan-Jun)
8
IFC INVESTMENT IN PRIVATE EQUITY
IN LATIN AMERICA
IFC commitment
Breakdown by country (2001)
100
10
80
8
Ot her
20%
Regional
30%
60
6
Mexico
10%
40
4
20
2
-
0
Brazil
Argent ina
20%
20%
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
$314 million committed in 22 funds
9
Benefits of Private Equity
 87 % of UK PE-backed companies felt PE firms
contributed far more than money.
 Financial advice
 Strategic guidance
 Management recruitment
 Time Frame:
 Market investors:
 Classic owners:
 Private equity:
Short Term
Long Term
Medium Term
 15% of the UK workforce is in a company
backed by private equity
10
Other Impacts
 Job creation
 Productivity enhancement
 Economic growth
 Ownership transfer, diversification (including
professionalizing family companies)
 Corporate governance
11
Basic Investment Theses
1) EBITDA expansion
•
•
•
Organic growth
Roll-ups/M&A, especially in consolidating sectors
Bring business concept from U.S./Europe to new markets
2) Multiple expansion
•
•
Re-rate company / redefine industry
Shed non-core assets and refocus
3) Margin improvement
•
•
•
Better production, distribution, products
Better use of labor and inputs
Branding
4) Transparency and governance
•
•
•
Remove “governance discount”
Increase worker productivity and customer loyalty through
transparency
Professionalize family businesses
5) Restructuring
•
Financial; including leverage
12
Private Equity Challenges
Focus often is on small companies






Dominance of family owned business
Lack of professional management
Weak corporate governance
Limited access to debt financing
Lack of reliable financial information
Maybe 10% of small companies ever grow;
means IPOs are unlikely
Currency devaluation risk
Weak regulatory environment
Economic and political uncertainty
=> DIFFICULT EXITS
13
Little Shop of Horrors
The management contract allows investors to
fire the manager any time…but only with his
permission
The manager buys shares of investee first
then brings Fund in later at a higher price
Board doesn’t notice $13 mm in cash sitting
idle in $26 mm fund
Manager of an E. European country fund
decides to move to London. “It’s easier.”
14
Top Quartile Managers vs Average
Managers
(U.S. Private Equity, 1980-1995)
Fixed Income
1.1
Listed Equity
2.3
Private Equity
15
0
5
10
15
20
Spread (Percentage Points)
source: McKinsey
15
Final hard lesson
Manager
Manager
Manager
You can’t structure around a bad
manager
16