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Transcript
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