Funds Portfolio Review Meeting

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Funds Portfolio Review Meeting
October 23, 2001

• Operations Evaluation Group

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Funds evaluation sample

• 25 funds evaluated in 1996-2000
• 18 private equity and venture capital funds
• 5 portfolio funds
• 2 mutual funds

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Funds vs. all evaluated projects
Funds have done worse
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Funds vs. all evaluated projects
even when IFCs work was satisfactory
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Private equity funds vs. non-fundsDifferences
not (yet) statistically significant
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Private equity funds vs. non-fundsBut, notably
worse development outcomes
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Private equity funds vs. non-funds Good for
others, Bad for investors
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Private equity funds vs. non-funds including
the IFC
PEF success rate 22 ? Non-fund equity success
rate 32 ? The difference is not statistically
significant
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Private equity funds vs. non-fundsIFCs
Effectiveness cannot explain differences
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Portfolio funds

• Only 5 funds in sample
• Development outcome 4/5 ?
• Investment outcome 4/5 ?
• IFCs effectiveness 5/5 ?

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Mutual funds

• Two funds in sample (both in India)
• DO, IO, IFCs effectiveness all ? in both

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Sample Private equity funds
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Sample Private equity funds
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Sample Private equity funds
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Evaluation sample Portfolio funds
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Sample Mutual funds
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Lessons learned private equity funds
Fund manager is key to success

• Good track record
• Local knowledge
• Local foreign managers ?
• Flexibility to respond to changes
• Ability to replace manager

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Lessons learned private equity funds
Improving fund structuring and fees

• Staged disbursement ability to cancel
• Ability to withdraw if fund under-invested
• Post-commitment period fees based on disbursed
  amount
• Immediate disbursement of proceeds to s/h
• Exit considerations
• IPO unlikely
• Put to sponsor rarely works
• Trade sale bigger stakes are better

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Lessons learned private equity funds
Improving fund structuring and fees

• Staged disbursement ability to cancel
• Ability to withdraw if fund under-invested
• Post-commitment period fees based on disbursed
  amount
• Immediate disbursement of proceeds to s/h
• Exit considerations

• One strong sponsor better than many

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Lessons learned private equity funds
Governance issues need greater attention

• Conflict of interest red flag
• Sponsor investing directly
• Investment manager voting for projects

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Lessons learned private equity funds
Governance issues need greater attention

• Conflict of interest red flag
• Sponsor investing directly
• Investment manager voting for projects

• Small stakes problem
• Little leverage, little incentive
• Governance at investee cos can be an issue

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Lessons learned private equity funds
Governance issues need greater attention

• Conflict of interest red flag
• Sponsor investing directly
• Investment manager voting for projects

• Small stakes problem
• Little leverage, little incentive
• Governance at investee cos can be an issue

• Audited accounts help set track record

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Lessons learned portfolio funds

• Again, fund manager is key to success
• Fees based on fund returns (not transaction
  closure)
• Ongoing marketing helps maintain fund size
• Company-based investment selection better than
  country allocation in inefficient markets
• IFCs ability to divest may be constrained

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Lessons learned summary
Success good fund manager
Track record Experience in similar
markets Reputation and good contacts for
marketing Appropriate incentive structure