Professional Documents
Culture Documents
CLEMENTE DEL VALLE World Bank / IFC Capital Markets Advisory Nigeria, March 6 2008
medium to long-term finance provided in return for an equity stake in potentially high growth unquoted companies (BVCA)
VC/ PE includes quasi-equity transactions, which rely on hybrid equity/debt instruments involving a stream of dividends dependent on firm performance as returns.
Market scope:
Europe
United States
Venture Capital
Expansion Capital
Buy-outs
Private Equity
Venture Capital
Specialization
Pre-investment (focus in the process)
PE/VC firms are very specialized in selecting investments because they excell in two process: Screening process Due dilligence
Globally
Source: HM Treasury & SBS Report: Bridging the finance gap, 2004; Lerner 2005.
Mezzanine
50M UP
Private Equity
Equity Gap
2M 50M
750k 2M
250k - 750k
Seed Capital Project Idea Stable Production Pre- IPO AIM, OTC
Corporate Stages
Prototype Commercialization
Source: BBAA, UK HMTC & SBS, Stratus Risk Capital, Team analysis.
Equity Gap
2M 50M
750k 2M
250k - 750k
Seed Capital
Project Idea
PIPES
Corporate Stages
Prototype
Commercialization
Stable Production
Pre- IPO
Emerging Markets
Size
Private Equity
Venture Capital
early
Start-up
Expansion/Growth
Middle Market1
Buy-out
Middle market: Firms well beyond early/start up stage, seeking financing to grow / expand
The equity and debt gaps are much larger in the EMs PE industry: Seed & Startup Capital coming primarily from family and friends and VC: at very low levels
PE: high dependency on foreign capital + Fund management expertise very limited
Financial system constraints: absence of medium/long term credit But simultaneously: High Saving Rates how to tap these savings? Growing interests from governments but still very few cases of structured interventions ( e.g. South Africa, Brazil)
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Reasons behind the Equity Gap 1 - due to sluggish growth in the early development of VC/PE industry
Source: HM Treasury & SBS Report: Bridging the finance gap, 2004; Lerner 2005.
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Reasons behind Equity Gap in VC/PE market 2 - due to migration towards late stage (economies of scale)
as PE industry develops & grows, tends to become concentrated on the later stage of market
which offers better risk-adjust returns, due to the economies of scale of this activity
UK - Total VC/PE Investment, 1990 - 2002 Relationship between fund size and deal size, 1984 2000 UK
Source: HM Treasury & SBS Report: Bridging the finance gap, 2004; Lerner 2005.
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One Year Five Year Ten Year 26.8% 19.2% 18.5% 53.2% 25.8% 32.6% 15.8% 4.3% 12.8% 2.3% 10.5% 27.1% 17.6% 27.0% 6.2% 5.1% 6.1% (2.3%) 4.9% 15.3% 13.8% 9.4% 8.4% 6.2%
15.0%
S&P 500 Midcap US Corp Bonds NYSE Willshire 500 NASDAQ Microcap
10.0% 5.0%
0.0%
-5.0% -10.0%
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Government Interventions: the importance of private sector expertise ! Persistency- Success in Private Equity is not Luck, it is Skill.
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Government Interventions: the importance of investment expertise ! Skill is More Valuable in VC/PE than in other asset classes In private equity, the spread between top performers and average performers is large. If you are not with a top fund manager, you would do better investing in bonds.
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Government Interventions:
Typology
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Government Interventions:
Enabling Regulation
Avoiding overregulation as if it was mutual fund product Improving protection and rights of VC/PE investors Regulation on minority rights, standards of disclosure and fund management.
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Government Interventions:
Tax framework
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Government Interventions:
Public/Private Investment Programs
Funds of Funds
Government capital provided to PE/VC funds that invest in other PE/VC funds
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Emerging Markets
Liberalizing investment restrictions on local institutional investors Pension funds & Insurance Cos largest source of capital in OECD US: legislation change 1979 ERISA start of explosive growth in PE/VC Brazil: 2000 Pension funds allowed to invest up to 20% of assets in PE/VC Brazil: since liberalization: strong growth in PE/VC & IPOs of PE/VC-backed firms
Supervision Supervising the professionalism of the manager but not regulating the vehicle (FSA in UK) Allowing only qualified investors to access VC/PE vehicles [ Brazil ] Taxation
Reducing tax and capital controls on the repatriation of (long-term) capital gains Brazil (0% rate, no capital controls), South Africa (reducing capital controls)
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Emerging Markets
But low rates of return continued participation of governments, foundations, IFIs Successful e.g Business Partners (South Africa) and SEAF (emerging markets).
Asymmetric allocation of returns rewarding more private investors than government Incentive not yet explored in most emerging economies. Requires careful calibration, Good results in US, UK, Australia, Israel ]
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Emerging Markets
Investment Programs: - Professional fund management capacity and investor expertise - Governance and Evaluation
Evaluation of impact & returns, and accountability of private agents managing funds where public resources are invested
UK: involving external professionals and academic experts monitoring of public resources expenditure & learning Brazil (Inovar Program): periodic evaluation is required by the Inter-American Development Bank.
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Emerging Markets
Final Remarks
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Evidence of an equity gap PE/VC development fills the gap & boosts growth Governments have a role in developing the market
Enable appropriate Regulation (incl Taxation)
Build Capacity/Expertise
Attract private funds through Co-investment Stimulate Innovation (R&D, education) & Entreperneurship
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