Data rom IFC’s Development Outcome racking System (DOS) show strong job growth or companies nanced throughIFC-supported private equity (PE) unds. Te nearly 500 companies covered in this analysis — in which the unds hadinvested about $4.0 billion, o which more than $400 million or 10% in nancing came rom IFC — created nearly 300,000 jobs between 2000 and 2010. Tough job growth rates1 were higher or smaller companies, most jobs were created by largercompanies. Job creation was also strongly and positively correlated with the returns o the unds, showing that good nancialperormance did not come rom cutting jobs, but rom expanding companies — their valuations, revenues, and jobs. Te best job creation occurred when und managers worked with companies with which they were amiliar.
Measuring the job creation eects o IFC-supported private equity unds
1
ASSESSING PRIVATE SECTOR CONTRIBUTIONSTO JOB CREATION:
IFC OPEN SOURCE STUDY
Te sample or the Development Outcome racking System (DOS) consists o:
•69PEfundsclassifiedasgrowthequityfunds.•596companiesinwhichthesefundshadinvestedbetween1/1/2000and12/31/2010.•494ofthesecompaniesthathadreportedinformationonjobs(83%ofinvestments).•Totalinvestmentsbythefundsinthesecompanieswere$4.0billion.•TheportionofIFCinvestmentinthesecompanieswas$405million,or10%ofthetotal.
Here a small or medium-size enterprise (SME)
2
is dened as a company with at least two o three characteristics:
•Lessthanorequalto$15millioninrevenues.•Lessthanorequalto$15millioninassets.•Fewerthanorequalto300employees.
SUMMARY OF STATISTICS FROM THE SAMPLE
STATISTICS SMEs LARGER FIRMS TOTAL
Numberofcompanies 306 188
494
Fundinvestment
3
$1.3billion $2.7billion $4.0billionIFCportionofinvestment $158million $247million $405million Jobscreated 54,643 239,149 293,792Fundinvestmentperjobcreated
3
$25,000 $12,000 $14,000IFCportionperjobcreated
3
$3,000 $1,100 $1,400 Jobgrowthrate 18.0% 9.7% 14.7%
Sources: IFC’s management inormation systems, including DOTS
2
Investment by PE undshelped stimulate signif-cant job creation
DOS data were available or 494 com-panies, representing $405 million o IFC investment capital. Tese compa-nies have created 293,792 jobs and cur-rently provide, or at the time o exit by the unds provided, 724,478 jobs. For asubset o companies, employment databy gender were available. Tis subseto companies employed about 170,000 women, which represented 41% o jobs.PE unds have been able to leverageIFC’s nancial resources to drive jobgrowth and to extend IFC’s reach by providing capital to SMEs (which ac-counted or 306 o the 494 companies).In Sub-Saharan Arica and South Asia,three-quarters o investments by PEunds were in SMEs (gure 1). Te PEunds have produced strong nancialreturns that compare avorably with theCambridge Associates Private Equity Benchmark.
Expansion-stage companiescreated the most jobs
Te companies that created the most jobs in absolute terms tended to be es-tablished businesses in an expansionary stage. In the portolio o PE unds, thebiggest job creators were in services. Telargest job creation occurred in a retailchain or women’s shoes in China. Itcreated more than 70,000 jobs in oversix years, starting at 17,000 and grow-ing to over 87,000 employees (with anannualized job growth rate o 29.5%). Another investee, a commercial bank inChina, created more than 22,000 jobs, more than doubling employment rom ewer than 21,000 employees to more than43,000 in just over ve years (job growth rate o 14.8%). A third, a restaurant ranchise operator in Latin America, createdmore than 22,000 jobs, starting with about 64,000 employees and growing to more than 86,000 in less than two years (jobgrowth rate o 22.1%).Collectively, the 114,000 jobs represented by these three companies account or more than one-third o the jobs created by the PE unds in the portolio. Tis group also accounted or the largest employer o women, with the restaurant ranchisereporting 49,000 women employees (57%). Given the nature o the business, it is not surprising to see this sector accountor the most jobs created. All these companies started with many employees and high revenues. Te companies were established and operating whenthey raised money rom the investment unds. IFC capital was leveraged and supported by other investors’ money to achievethe impressive job creation results. While these companies did not experience the high job growth rate that many start-upsexperienced, they did create more jobs than other companies in the dataset (gure 2). Job creation in the portolio mirrored regional economic activity during the timerame. Te three highest job creators werein China and Latin America. Tese companies took advantage o economic growth happening in their locations to supportthe expansion o their businesses.
Source: DOTS
Figure 2: Larger companies created more jobs
300,000250,000200,000150,000100,00050,0000
J o b s C r e a t e d
Less than 20Employees (117Companies)
Employees at Time of InvestmentJob Creation sinceInvestment (Net)
20-99 Employees(110 Companies)100-300Employees (107Companies)+301 Employees(160 Companies)
Source: DOTS
Figure 1: A globally diversifed portolio with many SMEs inSub-Saharan Arica
120100806040200
C o m p a n i e s
CAFCEACLACMECEUCSAWLDRegionCAF – Sub Saharan AfricaCEA – East AsiaCLA – Latin AmericaCME – Middle EastCEU – Eastern EuropeCSA – South East AsiaWLD - WorldNon SME companySME company
3
Small and medium-sizeenterprises grew astest
Tough in absolute terms larger enter-prises created more jobs, the astest jobgrowth rates came rom smaller compa-nies (gure 3). Investments by PE undsin SMEs produced a growth rate o 18%or almost twice the rate o job growth innon-SMEs (9.7%).Tere was great variation among resultsor SMEs but a clear pattern emerged,showing that as companies got larger,the growth rate slowed. Small companies(employing up to 19 workers) and me-dium-size companies (20-99 employees)had job growth o over 20%. As compa-nies got larger, it became more dicultto maintain such aggressive growth, andgrowth rates ell to 11% or less.Identiying and supporting winners is a powerul strategy or PE unds. A cosmetics company in China started with 60employees and within our years had more than 9,200 (job growth rate o 284%). Another SME, a transportation company in India, started with 99 employees and in just over two years had more than 1,500 employees (job growth rate o 239%).Tese are examples o the ast job growth rate that can be achieved by SMEs, which is one reason why investors are interestedin them. Tese two companies’ employment creation numbers are dwared by any o the expansion-stage companies discussedearlier. However, none o the high job creation companies comes close to the growth rates exhibited by these companies.
PE unds combine capital and expertise to drive returns
Fund managers’ incentives are aligned with the successul perormance and exit o portolio investee companies. Fundmanagers provide capital, guidance, contacts, and resources to support their companies. Tis alignment o incentives iscreated by the bonus structure o the PE industry. Te incentives explain why und managers are willing to put in time, net- working, talent, and capital to help their investee companies succeed. Te data show that PE unds can help drive the growthand development o their portolios.Some und managers support a company in an earlier und and then ollow on with investment capital rom successiveunds. One example is an Arican telecom company. It was a start-up in 2001 but grew to 2,200 employees with $4 billion inrevenues in 2010. Tis growth was assisted by multiple investments rom the und management team that ran several unds in Arica. Tree unds invested in the company or a total o $4.5 million. Te rst und was considered an SME und; the other
Source: DOTS
Figure 3: Smaller companies had aster job growth rates
25%20%15%10%5%0%
J o b G r o w t h r a t e ( C A G R )
Less than 20Employees (117Companies)
Employees at Time of Investment
20-99 Employees(110 Companies)100-300Employees (107Companies)+301 Employees(160 Companies)
Sources: IFC’s management inormation systems, including DOTS
Figure 4: Fund returns and job creation are positively correlated
0%-50%10%-40%20%-30%30%-20%40%-10%50%Fund Net Internal Rate of Return (IRR)6543210y = 3.438x + 2.461R
2
= 0.264Ln jobs created
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Assessing Private Sector Contributions to Job Creation: IFC Open Source Study
Using data from IFC's Development Outcome Tracking System, the study shows a strong job growth for companies financed through IFC-supported private equity funds. The nearly 500 companies covered in this analysis — in which the private…
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