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Assessing Private Sector Contributions to Job Creation: IFC Open Source Study

Assessing Private Sector Contributions to Job Creation: IFC Open Source Study

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Published by IFC Sustainability
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 equity funds had invested about $4.0 billion, and about 10% of the financing came from IFC — created nearly 300,000 jobs between 2000 and 2010. While most jobs are created by larger companies, the study shows that job growth rates are higher for smaller companies.
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 equity funds had invested about $4.0 billion, and about 10% of the financing came from IFC — created nearly 300,000 jobs between 2000 and 2010. While most jobs are created by larger companies, the study shows that job growth rates are higher for smaller companies.

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Published by: IFC Sustainability on Apr 27, 2012
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02/04/2014

 
Data rom IFC’s Development Outcome racking System (DOS) 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 nancialperormance 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 eects 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 (DOS) consists o:
•69PEfundsclassifiedasgrowthequityfunds.•596companiesinwhichthesefundshadinvestedbetween1/1/2000and12/31/2010.•494ofthesecompaniesthathadreportedinformationonjobs(83%ofinvestments).•Totalinvestmentsbythefundsinthesecompanieswere$4.0billion.•TheportionofIFCinvestmentinthesecompanieswas$405million,or10%ofthetotal.
Here a small or medium-size enterprise (SME)
2
is dened as a company with at least two o three characteristics:
•Lessthanorequalto$15millioninrevenues.•Lessthanorequalto$15millioninassets.•Fewerthanorequalto300employees.
SUMMARY OF STATISTICS FROM THE SAMPLE
STATISTICS SMEs LARGER FIRMS TOTA
Numberofcompanies 306 188
494
Fundinvestment
3
$1.3billion $2.7billion $4.0billionIFCportionofinvestment $158million $247million $405million Jobscreated 54,643 239,149 293,792Fundinvestmentperjobcreated
3
$25,000 $12,000 $14,000IFCportionperjobcreated
3
$3,000 $1,100 $1,400 Jobgrowthrate 18.0% 9.7% 14.7%
Sources: IFC’s management inormation systems, including DOTS
 
2
Investment by PE undshelped stimulate signif-cant job creation
DOS 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 Arica and South Asia,three-quarters o investments by PEunds were in SMEs (gure 1). Te PEunds 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 portolio 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 portolio. 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 accountor 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 portolio mirrored regional economic activity during the timerame. 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 portolio with many SMEs inSub-Saharan Arica
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 resultsor 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 dicultto maintain such aggressive growth, andgrowth rates ell to 11% or less.Identiying and supporting winners is a powerul 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 dwared 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 successul perormance and exit o portolio 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 portolios.Some und managers support a company in an earlier und and then ollow on with investment capital rom successiveunds. One example is an Arican 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 Arica. 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 inormation 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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