What does the IFC look for in GPs when making commitments?
We tend to invest in regions where other investors don’t go. Our due diligence is sometimes painful, but it’s very thorough. We have a lot of people on the ground and they know the bankers, the accountants, the lawyers, so we have a good idea of what’s happening in the markets in which we invest. When you look at our equity portfolio; 90 percent of it is private equity, less than 10 percent is listed [equity]. We believe that private equity is the place we need to be. As a development finance institution this is where we add the most value. Once a company is listed, they have the corporate governance right, they have done a lot of things right and have understood the regulatory environment. So our impact is a lot higher when we invest in private equity.
How important is corporate governance versus some of your other investment criteria?
GPs sign up to our rules and regulations on what they can do and can’t do. For example; our GPs cannot invest in hard liquor, they cannot invest in guns and arms manufacturers. Sometimes we ask GPs – for the first couple of investments – for the right to look at it, especially in difficult sectors, such as natural resources. We are involved with their deal due diligence. But with fund investments we cannot control everything. We give money to the manager and the manager makes the decisions.
How attuned to ESG-issues and responsible investing are companies in emerging markets?
Mining and oil and gas are sectors very much attuned to the ESG issues. They have been working with NGOs for the last 20 years and have been under pressure about responsible investment. There are also areas where people aren’t really getting it yet. Agribusiness is an example of that. Businesses there are often family-owned and have not thought about responsible investment. We see a huge value add in ESG. A lot of emerging market managers in these sectors come to us and say: we don’t need your money, but we need your ESG expertise.
Do you get a sense that ESG-efforts are increasing?
I think more and more managers are thinking about how to invest responsibly. And it shows up in the valuations. We have done a study recently where we looked at all the portfolio companies and direct investments and we wanted to see if there was a correlation between worsening ESG reporting and financial performance. It turns out, there is a correlation. The data couldn’t give the specific causality, but we did find it was closely correlated. Think about it: if a company is facing financial pressures, how are they going to save money? They are often going to trim back their expenses on ESG. Yet companies that do get ESG, tend to be better performing businesses.