In which markets have you been the most active in recent years?
In the last few years we have been shifting our emphasis towards markets that are emerging in the private equity industry. Our portfolio [in Africa] has grown very much [recently] when historically it was heavier in Asia and Latin America. You see TPG going into Indonesia, KKR going to India, and Carlyle entering Sub Saharan Africa. There’s clearly a signal and a trend when you see the large firms going to these markets. They have been so focused on their domestic markets and now they are realising growth will be coming from other regions. It’s very encouraging.
With some of the big firms entering these countries what is the role of development finance institutions such IFC today in those markets?
We try to go in early as an investor so that we send a signal to the investor community that we have faith in the manager. Hopefully our participation will convince other investors that it’s worthwhile looking at this fund. It’s not that we have not made mistakes – we have – but generally speaking with the average 20 percent IRR we achieve – the IFC has been pretty good and prudent in manager selection.
Would you back the big funds you mentioned?
Most of these funds invest globally and by mandate we are not allowed to invest in the US. Most of them have access to large pools of capital and therefore there’s less of a need for an IFC coming in,but we would certainly consider it. We are currently looking at a global fund based in the US which is focuses on investments in climate change related investments.
Nigerian pension funds are now slowly allowed to invest some of their capital in private equity in Africa. Do you see a trend of local money becoming more available?
There’s definitely a trend of local money becoming more active. Latin America paved the way with this, with the authorisation of the Chilean pension funds, the Peruvian and then Columbian and Mexican pension funds. Finally we are starting to see large pools of capital being able to diversify into assets other than government bonds or stocks. Pension funds often prefer to invest in their own countries first, rather than investing abroad. This is why we saw the emergence of local GPs, some of whom went on to be very successful and managed to raise capital internationally after the first round of local funding. This is a great trend.
A lot of these local pension funds are new to the asset class. Can that create potential problems?
Because the local pension funds are new to the asset class, they tend to request non-market terms. In some of these countries you see the local pension funds requesting to sit on the investment committee of the fund, which we don’t think is good governance practice. Plus you select a manager, you pay fees, and want them to be able to make the investment decisions, so this is really sometimes something that has deterred international investors to work with local pension funds in some countries. If they go with a manager that is very risky and it doesn’t work out and they get burned, there’s a risk of them turning their backs on the asset class. That’s a very big concern for us.