A trailblazer for some of the less explored frontier markets, the World Bank’s International Finance Corp. has invested $5.4 billion in private equity funds in emerging markets since 2000. So what does it take for a private fund to partner with the IFC? Frontera’s Managing Editor Gavin Serkin asked Maria Kozloski, chief investment officer of the IFC’s private equity funds group, in our latest
Gavin: How do you go about finding private funds to partner with?
Maria: First of all, we’re seeking partners that believe in the World Bank Group’s goals of making the world a better place in the emerging markets.We’re looking for fund managers that can deliver both on the financial side, because that means they’re sustainable, but that also have real development impact. Usually they help companies grow and expand and, by doing so, that creates jobs, develops the local ecosystem, and these local partners are very important financial intermediaries for us to support.
Gavin: You mention having an impact on development. Impact investing is an area that seems to be gaining traction in emerging markets. Why do you think that is, and how is it affecting your world?
Maria: Actually, if you look at our own results, we’ve seen very strong correlation between financial returns and the development impact. Now investors are really catching on, and it’s such a valuable contribution. When development impact comes together with a return element, there are a lot of investors out there that want to push that initiative. It’s an excellent thing for the World Bank Group because it’s kind of been in our DNA for a very long time, and to see investors really emphasizing the development impact side of things is terrific.
Gavin: What are the kinds of project that you’re particularly proud of?
Maria: We back fund managers across all regions but, just as an example, we’re working with a group that initially was a fund manager based in Mauritius and did Mauritius investments. The IFC started working with them and now they work with small and mid-cap companies in Mauritius, Madagascar, the Indian Ocean. The companies they work with are also now not just in their own country’s market, but starting to expand, not necessarily globally, but across their own region of Africa, and that can be a very powerful thing. We worked this year with a slightly larger manager, focusing on Colombia, Chile, Peru. We’ve done something in Indonesia. We’ve got a venture capital group in Southeast Asia. So we touch on many markets. We try to be active in all of our regions in emerging markets.
Gavin: Which regions are picking up the most at the moment? Where are you getting more involved? Which are the sectors where you’re seeing more interest?
Maria: One thing that’s particularly interesting right now: it used to be when you went to Africa, people were only investing in South Africa. Then it became South Africa, Nigeria, maybe Kenya – the largest economies. But now you’ve got managers who are looking for deals in Côte d’Ivoire and in Ghana, maybe doing a deal in Senegal. When you see investment activity picking up across the continent, that’s something that’s really worth taking note of.
I happened to be in Ethiopia recently. All of a sudden, we’ve got several new Ethiopia fund managers. It’s still early days, very nascent, but when we start to see managers around new frontier markets, we get there early. We try to watch what’s going on in those markets.
Gavin: What’s prompting that expansion? Because it’s counter-intuitive when you think of the news that we’ve been seeing, particularly from the public markets during the last couple of years. It’s been very negative. With the commodities shock, Africa hasn’t been a great place to put your money, in the public arena at least.
Maria: The end of the commodities cycle has certainly impacted not just Africa but across all of our emerging markets. Commodity producers have been hit hardest. That has a much more immediate impact in the public markets and currencies. In aggregate, the end of the commodities boom, global uncertainty generally, the strength of the US dollar, and the weakness of other currencies as a result – that’s taken a hold on emerging markets.
But on the flip side of that, there’s the demographics – that evolution. Urbanization continues to pick up. Mobile technology alone is fundamentally changing how populations access things – increasing access in much lower income states, for much wider reaches of populations. These themes are real and they aren’t going to change. Even if we’re in a tough couple of years on the macro front in some of these markets, I would say the demographic push continues to be a driver. The power of the consumer is pretty strong.
Investors might be more selective, but they’re looking for opportunities, and I think the more they look and the more they spend their time getting familiar with the opportunity set, hopefully we’ll still see the numbers hold up. We may not see a big pick up in capital flowing into private equity funds in emerging markets, but if the numbers hold up, I think this could be a good next few years to invest.
Gavin: It’s an interesting split though. Just in Africa, we’ve seen a record number of exits last year from private equity, and there does seem to be a disconnect with the public markets. Is that purely because they’re just more correlated with everything going on in the macro environment– the Fed, China, etc.?
Maria: For the public markets, if the macro changes, investor sentiment can follow quite quickly, and investors move back to markets that they feel more comfortable with. Private equity, just by its nature, has to be sticky. But I can tell you for the IFC, our own private equity funds portfolio this year is contributing a meaningful amount to the IFC’s aggregate cash income, and that has been picking up.