INVESTMENT FUNDS FOR DEVELOPMENT
PROGRAM
Fin4Dev Investment Funds Group
December 2015
101598
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Outline
• Program development objective
• Intermediate outcomes
• Strategic relevance
• Program context/description
• Program risks
• Roles of clients and partners
• Dissemination and outreach strategy
1
Program development objective
The development objective of the Investment Funds for Development (IFD)
program is to enable EMDE governments and regional economic
communities to create the conditions to mobilize investment fund
resources for SMEs and infrastructure finance, with the objective to
contribute to the achievement of the SDGs of growth and employment
(SDG8), resilient infrastructure (SDG9), and climate adaptation and
mitigation (SDG13).
2
Intermediate outcomes
• Increase in penetration of private equity and venture capital assets under
management (AUM) invested in EMDEs by 10% by 2020
• Increase in private equity and debt funds AUM invested in infrastructure
in EMDEs by 10% by 2020
• Increase private equity and debt funds assets AUM invested in climate
mitigation and adaptation in EMDEs by 15% by 2020
3
Strategic relevance: Role of investment funds in SME
finance for growth and employment
• Young SMEs are primary source of job creation
• Young SMEs (less than 5 years) = 17% of employment 42% of job creation 22% of job
destruction (OECD)
• Positive correlation between entrepreneurship and job creation across Indian states (WB)
• Resource flows to young patenting firms stronger in countries with more developed
markets for seed and early-steage venture capital (OECD)
• Increasing access of young patenting firms to seed and venture capital is critical to support
innovation
• Private equity participation increases number of citations of patent by 30% (EVCA)
• Private equity backing improves operational performance of portfolio companies by 4.5%
to 8.5% (EVCA)
• Private equity participation improves productivity by 6.9% on average (EVCA)
4
Strategic relevance: Role of investment funds in SME
finance for growth and employment
Globally private equity funds assets under management (AUM) have grown rapidly over
the last 10 years, reaching US$ 3.8 trillion in 2014
5
298 377 407 402 409563
8061,011 1,075 1,067 993 1,007 941 1,074 1,144418 374 360 465 554
675
898
1,265 1,2041,413
1,7832,029
2,332
2,5462,644
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
Dec-0
0
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1
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8
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9
Dec-1
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Dec-1
1
Dec-1
2
Dec-1
3
Ju
n-1
4
Private Equity Assets under Management December 2004 - June 2014 (US$ billion)
Dry Powder Unrealized Value
Source: 2015 Preqin Global Private Equity Report
Strategic relevance: Role of investment funds in SME
finance for growth and employment
by type of fund, buyout funds are the leading asset class (37% of dry powder), followed
by real estate funds (17%), venture capital funds (11%), and infrastructure funds (9%)
6
0
200
400
600
800
1,000
1,200
1,400
Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14
Dry
Po
wd
er
($b
n)
Private Equity Dry Powder by Fund Type 2003 – 2014 (US$ billion)
Buyout Distressed Private Equity Growth
Infrastructure Mezzanine Real Estate
Source: 2015 Preqin Global Private Equity Report
Strategic relevance: Role of investment funds in SME
finance for growth and employment
Among exit strategies, trade sales represented 53% of exit transactions in Q4 2014,
followed by sales to general partners (31%) and IPOs (15%)
7
0
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40
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160
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2006 2007 2008 2009 2010 2011 2012 2013 2014
Aggre
ga
te E
xit V
alu
e ($
bn
)N
o. o
f E
xits
Private Equity-Backed Exits by TypeQ1 2006 – Q4 2014
IPO Restructuring Sale to GP Trade Sale Aggregate Exit Value ($bn)
Source: 2015 Preqin Global Private Equity Report
Strategic relevance: Role of investment funds in SME
finance for growth and employment
The investor base of PE funds has undergone significant transformation over the last 6 years:
8
28%
13%
3%
8%7%
4%
6% 6%5%
4%
1% 2%
22%
13%
10%
6%
10%
6%
3%
12%
3%
5%
2% 3%
0%
5%
10%
15%
20%
25%
30%
Pu
blic
Pe
nsio
nF
unds
Fu
nd
of F
und
sM
ana
ge
rs
Hig
h-N
et-
Wo
rth
Indiv
idua
ls
En
do
wm
ent
Pla
ns
Priva
te S
ecto
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ensio
n F
un
ds
Fam
ily O
ffic
es
Fou
nd
atio
ns
Insura
nce
Co
mp
an
ies
Ba
nks &
Investm
ent
Ba
nks
Go
vern
me
nt
Ag
en
cie
s
Co
rpo
rate
Investo
rs
Sovere
ign
We
alth
Fu
nds
Pro
po
rtio
n o
f C
ap
ital C
om
mit
ted
Investor Type
Make-up of LPs in the Average Fund by LP Type (Capital Committed to Funds Closed in 2009-2014)
2009-2011
2012-2014
Source: 2015 Preqin Global Private Equity Report
Strategic relevance: Role of investment funds in SME
finance for growth and employment
Private equity IRRs outperformed major market indices, generating a return of 18.9% at the 10 year
2014 horizon. This performance is driven primarily by buyout funds, while venture capital funds
underperformed major market indices at those horizons
9
-5%
0%
5%
10%
15%
20%
25%
30%
35%
1 Year to Jun 2014 3 Years to Jun 2014 5 Years to Jun 2014 10 Years to Jun 2014
An
nu
ali
ze
d R
etu
rns
Private Equity Horizon IRRs vs. Public Indices as of 30 June 2014
All Private Equity
Buyout
Venture Capital
S&P 500
MSCI Europe
MSCI EmergingMarkets
Source: 2015 Preqin Global Private Equity Report
Strategic relevance: Role of investment funds in SME
finance for growth and employment
Following the international financial crisis in 2008, private debt funds have emerged as a rapidly
increasing asset class
10
60
8691 94
141
108
23
3946
58
79
64
0
20
40
60
80
100
120
140
160
2009 2010 2011 2012 2013 2014
Year of Final Close
Annual Private Debt Fundraising 2009 - 2014
No. of Funds Closed
Aggregate CapitalRaised ($bn)
Source: 2015 Preqin Global Private Debt Report
Strategic relevance: Role of investment funds in SME
finance for growth and employment
Among private debt funds, mezzanine funds represent 42% of the total, followed by direct lending
funds (23%), and distressed debt funds (16%)
11
23%
16%
42%
15%
4%
Primary Strategy of Private Debt Fund Managers Established Since 2008
Direct Lending
Distressed Debt
Mezzanine
Special Situations
Venture Debt
Source: 2015 Preqin Global Private Debt Report
Strategic relevance: Role of investment funds in SME
finance for growth and employment
After reaching a peak of US$ 52 billion in 2008, venture capital fund raising dropped significantly
following the international financial crisis. Fundraising rebounded significantly in 2011, stagnated in
2012 and 2013, and increase significantly to US$ 46 billion in 2014
12
52.4
27.0 26.5
42.2
38.1
31.2
45.7
0.0
10.0
20.0
30.0
40.0
50.0
60.0
2008 2009 2010 2011 2012 2013 2014
Evolution of Venture Capital Fundraising, 2008 – 2014 (US$ billion)
Source: 2015 Preqin Global Private Equity Report
Strategic relevance: Role of investment funds in SME
finance for growth and employment
VC investments cover a wide range of sectors, including internet, software, health care and telecoms
13
27%22% 25% 23% 26% 29%
18%
14%
21%20%
20% 17%
18%
25%
16% 22% 15% 15%
12%9%
14% 10%15% 16%
8%8%
8% 9% 9% 7%2%
2%
3% 2% 3% 3%4% 9%3% 3% 3% 3%4% 2% 3% 4% 3% 3%3% 2% 2% 1% 2% 2%3% 3% 2% 3% 2% 2%
3% 3% 3% 3% 2% 3%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
No. of Deals Aggregate DealValue
No. of Deals Aggregate DealValue
No. of Deals Aggregate DealValue
2012 2013 2014
Pro
po
rtio
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f To
tal
Proportion of Number and Aggregate Value of Venture Capital Deals by Industry 2012 – 2014
Internet Software & Related Healthcare Telecoms
Other IT Business Services Clean Technology Consumer Discretionary
Industrials Semiconductors & Electronics Other
Source: Preqin Global Private Equity Reports, 2014 & 2015
Strategic relevance: Role of investment funds in SME
finance for growth and employment
By geographical area, the main areas of focus for PE funds are North America, followed by Europe
and Asia. In recent years, PE investments have increased rapidly in EMDEs. Reaching US$ 34.7
billion in 2014, with emerging Asia leading, followed by Latin America, Sub-Saharan Africa and Central
and Eastern Europe. Despite tis progress, the PE financing gap in EMDEs is estimated at US$ 270
billion in 2014.
14
-
5.00
10.00
15.00
20.00
25.00
30.00
2009 2010 2011 2012 2013 2014
Evolution on PE investments in Emerging Markets by region, in US$ billion
Emerging Asia China India
CEE and CIS Russia Latin America
Brazil MENA Sub-Saharan Africa
Source: EMPEA Database
Strategic relevance: Role of investment funds in resilient
infrastructure and climate mitigation and adaptation finance
• Infrastructure investments have a positive impact on growth
• A 1% increase in physical infrastructure stocks temporarily raises GDP
growth by 1-2 percentage points
• Physical infrastructure in roads and telecoms facilitates spatial access
and information flows, raising labor productivity, boosting rural non-farm
incomes, and reducing the incidence of poverty in some geographical
area
• Electrification leads to rising female employment (South Africa)
• Better transportation systems and safer roads raise school attendance
• Increased access to electricity allows more time to study and the use of
computers
15
Strategic relevance: Role of investment funds in resilient
infrastructure and climate mitigation and adaptation finance
• Investments in large infrastructure required to achieve the SDGs are estimated at US$ 900 billion to US$ 1/6 trillion per year over the 2015-2030 period
• Investments in climate mitigation and adaptation are estimated at US$ 440 billion to US$ 780 billion per year over the same period
• Investments required to limit the rise in average global temperatures to no more than 2 degree Celsius are estimated to range from US$ 380 billion to US$680 billion over the period
• Investments in climate adaptation required to adapt to a 2 degree Celsius warmer world are estimated in the range of US$ 70 billion to 100 billion per year through 2050
•
16
Strategic relevance: Role of investment funds in resilient
infrastructure and climate mitigation and adaptation finance
• Energy production accounts for 2/3 of global greenhouse gas (GHG) emissions
• The full implementation of the Intended Nationally Determined Contributions (INDCs) will require the energy sector to invest $ 13.5 trillion in energy efficiency and low-carbon technologies over the 2015-2030 period
• About US$ 8.3 trillion are required to improve energy efficiency in
transport, buildings and industry sectors
• The remainder is required to decarbonize the energy sector
• However full implementation of the INDCs will lead to increase in average temperatures of 2.7 degree Celsius by 2100
• Additional investments required to limit increase to 2 degree Celsius
amount to US$ 3 trillion in energy efficiency, phasing-out least efficient
coal-fired power plants, and boosting investments in renewable-based
power generation technologies, passing-out fuel subsidies, and reducing
methane emissions from oil and gas production
17
Strategic relevance: Role of investment funds in resilient
infrastructure and climate mitigation and adaptation finance
Cumulative world energy sector investment by scenario 2015-2030
18
Source: International Energy Agency, World Energy Outlook Special Briefing for COP21
Strategic relevance: Role of investment funds in resilient
infrastructure and climate mitigation and adaptation finance
Adaptation costs vary significantly across climate scenarios
19
Source: WB EACC The economics of adaptation to climate change
Sector UNFCCC (2007)EACC Study Scenario
NCAR (wettest) CSIRO (driest)
Infrastructure 2-41 27.5 13
Coastal zones 5 28.5 27.6
Water supply and flood protection 9 14.4 19.7
Agriculture, forestry, fisheries 7 2.6* 2.5*
Human health 5 2 1.5
Extreme weather events - 6.7 6.4
Total 28-67 81.5 71.2
*Note that the costs of adaptation in the agriculture, forestry and fisheries sector have changed as compared to the estimates presented in the EACC Global Report (The Cost to Developing
Countries of Adapting to Climate Change:
New Methods and Estimates, WB 2010) in which these costs stood at $7.6Billion for the NCAR and $7.3Billion for the CSIRO scenarios. The current costs are estimated as the difference in
public spending in the scenario with climate change and adaptation as compared to the no climate change scenario, and use the same methodology as has been applied to the other sectors. In
WB 2010, the costs were incorrectly reported as reflecting the difference in public spending in the scenario with climate change and adaptation as compared to the scenario with climate change
but no adaptation. The difference lowers the EACC lower bound estimate of the global cost of adaptation from US$ 75 billion reported in WB 2010 to US$ 71.2 billion per year, rounded to
US$ 70 billion per year.
Note: NCAR is The National Centre for Atmospheric Research, and CSIRO is the Commonwealth Scientific and Industrial Research Climate.
Strategic relevance: Role of investment funds in resilient
infrastructure and climate mitigation and adaptation finance
Adaptation costs are part of broader set of resilience investments to
be undertaken as part of comprehensive disaster risk management
(DRM) strategies
Resilience investments include:
Resilience infrastructure investments by governments• Flood protection structures
• Community shelters
• Improved water supply and drainage systems
• Rehabilitation and construction of resilient public buildings
• Rehabilitation and construction of resilient energy facilities and transport
systems
• Installation of more resilient wireless communications
20
Strategic relevance: Role of investment funds in resilient
infrastructure and climate mitigation and adaptation finance
Resilience investment by enterprises
• Operational resilience (on site and through relocation)
• Development of resilience products and services value chains
production of resilient construction materials
collection, recycling and reuse of waste materials
design and installation of micro water harvesting systems
design and installation of household solar energy systems
design and delivery of disaster risk management services
21
Strategic relevance: Role of investment funds in resilient
infrastructure and climate mitigation and adaptation finance
Resilience investments by communities
• Resilient community facilities
• Community-based flood protection systems
• Resilient food storage facilities
Resilience investments by households
• Resilient housing
• Solar energy
Many resilience investments raise the quality of assets to insurable levels
22
Strategic relevance: Role of investment funds in resilient
infrastructure and climate mitigation and adaptation finance
Resilience investments yield triple dividend
• Avoid losses by saving lives, reducing infrastructure damages, and
reducing economic losses
• Unlock suppressed economic potential and stimulate economic
activity through
encouraging households to save and build assets
promoting entrepreneurship
stimulating firms to invest and innovate
• Yield co-benefits through
generating employment opportunities in environmental services
stimulating the development of value chains in protected areas
improving access to employment and services through improved resilience of transportation networks
23
Strategic relevance: Role of investment funds in resilient
infrastructure and climate mitigation and adaptation finance
Significant part of large infrastructure investment for growth, climate mitigation and adaptation, and resilience will be undertaken on balance sheet by national and sub-national governments
Amount:
• large infrastructure U$ 398 billion to US$ 844 billion/year
(53%)
• climate mitigation and adaptation US$ 140 billion to US$
225 billion/year (28%)
Financing through sovereign and sub-sovereign borrowing (loans, bonds)
24
Strategic relevance: Role of investment funds in resilient
infrastructure and climate mitigation and adaptation finance
Given fiscal constraints, remaining investments will need to be undertaken off-government balance sheet through PPP SPVs
Amount:
• large infrastructure US$ 291 billion to US$ 755 billion/year
(47%)
• climate mitigation and adaptation US$ 300 billion to US$
564 billion/year (72%)
Financing through PPP SPV equity (25%) and debt finance (75%)
25
Strategic relevance: Role of investment funds in resilient
infrastructure and climate mitigation and adaptation finance
• Global savings amount
to US$ 22 trillion per
year with high levels of
liquidity
• However, growing
mismatch between
long-term investment
needs and short-term
finance, in particular in
infrastructure
26
Source: SDSD Working Paper, Financing Sustainable Development:
Implementing the SDGs through Effective Investment Strategies and
Partnerships
Maturity composition of bank lending
Strategic relevance: Role of investment funds in resilient
infrastructure and climate mitigation and adaptation finance
• Institutional investors hold US$ 79 trillion in AUM but have only 1 percent of their portfolio directly invested in infrastructure assets. The vast majority of these investments are concentrated in home countries
• Increasing investments by EMDE pension funds in infrastructure in recent years
Out of 33 pension funds reporting investments in infrastructure in 2013, 10 are from EMDEs
EMDE pension funds invested US$ 22.3 billion in infrastructure or 5.7% of total AUM in 2013, compared to 2.0% for listed debt/equity and 1.3% for unlisted equity
EMDE pension funds have also started to invest in infrastructure equity and debt funds
27
Strategic relevance: Role of investment funds in resilient
infrastructure and climate mitigation and adaptation finance
A new class of private equity and debt infrastructure funds has emerged over the
last ten years.AUM of unlisted infrastructure funds increased from US$ 17 billion in 2004 to
US$ 296 billion in mid-2014.
28
3 4 11 1537
61 63 64 6890 82 87
105
4 5 6 9
16
3349 60
92
127 149157
191
0
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De
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Assets
un
der
Man
ag
em
en
t ($
bn
)
Unrealized Value($bn)
Dry Powder ($bn)
Source: Preqin Global Infrastructure Report 2015
Strategic relevance: Role of investment funds in resilient
infrastructure and climate mitigation and adaptation finance
The share of infrastructure fund investments in emerging markets has increased
rapidly over the period, reaching 10% of the total in 2013. By industry, the largest
sector is renewable energy, followed by utilities, transport, social infrastructure
and energy
29
Source: Preqin Global Infrastructure Report 2015
39%35% 33% 34% 36% 39% 41%
15%14% 17% 14% 13%
17%19%
8% 17%11% 16%
18%
14%
15%13%10%
14%15% 13%
13%8%
19% 17% 20%16% 15% 12% 14%
3% 4% 3% 3% 2% 4% 1%2% 3% 2% 1% 2% 2% 1%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2008 2009 2010 2011 2012 2013 2014
Pro
po
rtio
n o
f D
eals
Other
Telecoms
Utilities
Energy
Social
Transport
Renewable Energy
Strategic relevance: Role of investment funds in resilient
infrastructure and climate mitigation and adaptation finance
Superannuation schemes are the leading investor type in the infrastructure fund
class, followed by endowments plans and public pension funds
30
Source: Preqin Global Infrastructure Report 2015
7.0%
4.4%
3.3%
2.7%3.1%
4.4%
9.0%
6.6%
5.2%4.9%
4.5% 4.4%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
10.0%
Supe
rannu
ation
Sch
em
e
Endo
wm
ent
Pla
n
Public
Pensio
n F
und
Private
Secto
rP
ensio
n F
und
Fo
unda
tio
n
Asset
Man
age
r
Av
era
ge I
nfr
astr
uctu
re A
llo
cati
on
(A
s a
Pro
po
rtio
n o
f A
UM
)
Average CurrentAllocation
Average TargetAllocation
Strategic relevance: Role of investment funds in resilient
infrastructure and climate mitigation and adaptation finance
In terms of performance, infrastructure funds outperformed other private equity
funds over the 2007-2014 period
31
Source: Preqin Global Infrastructure Report 2015
0
20
40
60
80
100
120
140
160
180
De
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7
Ma
r-0
8
Jun-0
8
Sep-0
8
De
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8
Ma
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9
Jun-0
9
Sep-0
9
De
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9
Ma
r-1
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Jun-1
0
Sep-1
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De
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0
Ma
r-1
1
Jun-1
1
Sep-1
1
De
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1
Ma
r-1
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Jun-1
2
Sep-1
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De
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Sep-1
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De
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Ma
r-1
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Jun-1
4
Ind
ex R
etu
rns (
Reb
ased
to
100 a
s o
f 31
Decem
ber
2007) PrEQIn All Private
Equity Index
PrEQIn InfrastructureIndex
Strategic relevance: Role of investment funds in resilient
infrastructure and climate mitigation and adaptation finance
Since 2009 infrastructure debt funds have emerged albeit from a low base. By
January 2015, there were 31 funds on the road seeking US$ 22.7 billion,
compared to 20 funds seeking US$ 15 billion in January 2014
32
Source: Preqin Global Infrastructure Report 2015
54
6
4
9
14
1716
20
31
1.82.6 3.3
0.41.9
5.9
8.09.7
15.0
22.7
0
5
10
15
20
25
30
35
Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15
No. of FundsRaising
Aggregate TargetCapital ($bn)
Strategic relevance: Role of investment funds in resilient
infrastructure and climate mitigation and adaptation finance
In recent years, there has been a rapid increase in unlisted infrastructure funds
targeting Africa
33
130 235688
90
785376
831
2619
150
1750
0
500
1000
1500
2000
2500
3000
3500
4000
4500
5000
2004 2006 2007 2010 2011 2012 2013 2014
Source: Preqin Infrastructure Online
Primarily Africa-focused Unlisted Infrastructure Fundraising 2004 - 2014 (USD mn)
Raising Closed
Strategic relevance: Role of investment funds in resilient
infrastructure and climate mitigation and adaptation finance
Ten largest Africa-focused unlisted infrastructure funds
34
Fund Fund Manager Vintage Strategy
Final/Target
Size USD (mn) Status
Pan African Infrastructure
Development Fund II Harith 2014 Primary 1200 First Close
COMESA Infrastructure Fund PTA Bank 2014 Primary 1000 Raising
Pan African Infrastructure
Development Fund Harith 2007 Primary 630 Closed
African Infrastructure
Investment Fund II
African Infrastructure
Investment Managers 2011 Primary 500 Closed
Pembani Remgro
Infrastructure Fund
Pembani Remgro
Infrastructure
Managers 2014 Debt/Mezzanine, Primary 500 First Close
I3PA - Infrastructure PPP
Africa Fund Edifice Capital 2013 Primary 400 First Close
Encha Fund Encha Group 2014 Primary 400 Raising
Eaglestone Sub-Saharan
Africa Infrastructure Fund
Eaglestone Asset
Management 2014 Primary 350 Raising
Meridiam Infrastructure
Africa Fund Meridiam 2014 Primary 330 First Close
Mergence Renewable
Energy Portfolio
Mergence Investment
Managers 2012 Debt/Mezzanine 251 First Close
Largest Primarily Africa-targeting unlisted infrastrucutre funds by Target Size
Program context/description
• Pillar 1: developing PE/VC ecosystem
• Pillar 2: developing framework for infrastructure PPPs
• Pillar 3: developing Strategic Investment Funds (SIFs) and
the domestic component of Sovereign Wealth Funds (SWFs)
35
Program context/description: Pillar I
• tax treatment
tax residency for foreign investment funds
tax implications of alternative legal fund structures
capital gains tax
withholding tax
tax efficiency for foreign investors in domestic funds
double taxation agreements (DTAs)
• investor protection
minority shareholder rights in investor companies
investors in funds
• restrictions on issue and transfer of shares
• buyout regulations (public auctions, listed companies)
• protection of intellectual property rights
• bankruptcy procedures and creditor rights/partner liability
• exits (listing rules on main stock exchange and SME exchange)
• exchange controls (inward investments, outward transfers of profits and capital gains)
• corporate governance requirements for listed companies
• contract enforcement (court system, out-of-court dispute resolution framework)
36
1. Legal and regulatory framework for funds and fund managers
1A. Legal and regulatory framework for off-shore and on-shore PE/VC fund
operations
Program context/description: Pillar I
• fund legal structures (including fund
compartments)
• qualified assets
• qualified investors
• management company legal
structure
• qualification and disclosure of
persons who conduct the business
of the management company
• disclosure and resolution of conflicts
of interest
• delegation of core management
functions
• own funds
• asset valuation rules
• contents of fund prospectus
• disclosure to investors
• auditing and reporting
• depositary rules
• cooperation with the supervisory
agency
• penalties for non-compliance
37
1B: Legal and regulatory framework for domestic registration and supervision of
on-shore funds
Program context/description: Pillar I
• Rules-based regulatory framework
upper and lower limits on portfolio allocations
• Among 28 non-OECD countries, only 3 countries had no limits on pension n fund allocation to private investment fund investment s, 13 had limits, and 12 did not allow in the asset class (OECD 2014)
• Risk-based regulatory framework
pension funds
• Benchmark portfolio approach
• Independent body establishes benchmark portfolio based on target replacement rate
• No portfolio allocation restrictions
insurance companies
• Solvency II or equivalent approach (US insurance solvency framework; Swiss solvency framework)
• Favorable capital treatment of investments in private equity and venture capital
• Implementation of internal models leads to significantly lower capital charges for private equity investments
38
2. Legal and regulatory framework for investments by institutional investors in the
asset class
Program context/description: Pillar I
• globally innovation is underfunded even in well-functioning markets due to
information asymmetries and appropriation risks
• problem exacerbated for new entrants and start-ups because they lack
track record to signal ability to investors and because they produce
intangible asset that does not constitute collateral
• in many EMDES, the lack of robust and continuous pipeline of promising
start-ups stalls development of strong angel investor community to back
innovative companies
• this in turn hampers development of stream of promising early-stage
companies in which venture capital funs can invest
Market failure can be addressed through balanced set of demand-side and supply-side
policies aimed at supporting development of angel investor and VC fund industry
39
3. Business enabling environment for PE/VC fund operations
Program context/description: Pillar I
Supply-side policies
• tax credits
• seed funds co investing with qualified angel investor groups
• technical assistance and training for angel investor groups (platform
set-up, group management, deal sourcing and due diligence,
investment tracking, entrepreneurship mentoring, follow-on financing
and exit management
40
Policies to support development of angel investor community
Program context/description: Pillar I
Demand-side policies
• entrepreneurship training
• support to development of business incubator and accelerators
incubator creation and management (strategy, positioning and long-term sustainability,
internal organization and governance)
incubation process (admission, incubation and exit mechanisms)
performance assessment (monitoring and evaluation, value-added of incubator in fostering
business development)
• resolution of coordination failures
linkages between university an private research centers and business incubators
linkages between business incubators and accelerators and angel investor groups.
41
Policies to support development of angel investor community
Program context/description: Pillar I
Supply-side policies
• Hybrid funds to stimulate equity finance to early-stage enterprises
government participates as LP together with institutional investors as LPs.
Private fund manager and GP has full autonomy investment and exit decisions
(ex US, UK, Australia, Israel, Brazil)
structuring of investor return enhancing mechanisms
differential timing of investment draw-downs of public vs private investors
leveraging returns of private investors with debt
caps on public investor return partial guarantee of loss for private investor
Demand-side policies
• Comprehensive entrepreneurship policies
• Enterprise for all online training platform (SME Finance Forum)
42
Policies to support development of VC fund industry
Program context/description: Pillar II
43
Definition of Private Finance PPP
A long term contract between a public party and a private party, for the
development (or significant upgrade or renovation) and management of a public
asset (including potentially management of a related public service), in which
the private party bears significant risk and management responsibility through
the life of the contract, provides a significant portion of the finance at its own
risk, and remuneration is significantly linked to performance and/or the demand
or use of the asset or service so as to align the interest of both parties.
Source: World Bank, op.cit, (2015)
Program context/description: Pillar II
44
PPP framework includes
Objectives
• enabling more investment in infrastructure by increasing investment financing options
• improving accountability in provision of infrastructure and public services
• harnessing private sector innovation and efficiency
• stimulating growth and contribute t poverty reduction
Scope
• unified PPP framework across all sectors and multiple jurisdictions (national and sub-national levels)
Advantage: efficiency and predictability for private sector
Disadvantage: lack of flexibility to adapt to unique infrastructure challenges in specific sectors
• sector-specific and jurisdiction-specific PPP frameworks
• minimum size of PPP projects
• types of PPP contracts allowed in country (user-pay or concession PPP contract, government-pay PPP contract)
Program context/description: Pillar II
45
Legal and administrative instruments
• concession contracts in civil law countries
• investor-owned utilities with user-pay infrastructure services in common law
countries
• government-pays PPP model in common law countries
• mixed models: user-pays PPP model with some level of government
payment
• policy documents in common law countries
• PPP law in civil law countries
• common law countries may pass PPP laws to override existing laws that
prevent PPP transactions
Program context/description: Pillar II
46
PPP framework procedures and decision criteria
Project identification and preparation• Scoping of projects in the public investment program (central government and
sub-national entities) and SOE investment program for PPP suitability;
• Confirmation of fit with sectoral strategies
• Confirmation of fiscal responsibility
• Submission of project documentation for approval by relevant agencies
Project appraisal• Preparation of PPP business case incl economic, financial, fiscal, technical ESG
and legal feasibility
• Submission of project documentation for approval by relevant agencies
Program context/description: Pillar II
47
PPP framework procedures and decision criteria (cont.)
Structuring of procurement process and project contract• Preparation of risk matrix and allocation of risks• Development of risk management plans• Drafting of contracts• Submission of contracts for approval by relevant agencies• Development of procurement strategy• Submission of procurement strategy for approval by relevant procurement agency
Project tender and award• Marketing of PPP• Undertaking OI• Shortlisting of qualifying firms• Development of criteria for proposals• Selection of proposals based on VFM criterion• Reaching financial close and sign contract
Source: World Bank, op.cit. 2015
Program context/description: Pillar II
48
Cost of preparation of PPP projects is substantial: share of preparation cost in total
project cost varies from 2-3 % in middle-income countries and experience low-income
countries to5%-10% in new sectors in low-income countries
Source: Fay, op.cit. 2011
Program context/description: Pillar II
49
• Cost of preparation may act as binding constraint for development of PPP
transactions in many EMDES
• EMDE governments considering establishing infrastructure PPP venture funds
together with private institutional investors including private equity infrastructure
funds
funds responsible for managing all stages of preparation of PPP
transactions up to financial close
funds take equity and/or mezzanine stake in PPP project SPV
possible compartment of SIF
Program context/description: Pillar II
50
PPP framework needs to integrate procedures for management of unsolicited
proposals (USP)
• inclusion of USP in best and final offer round under two-stage bid
processes
• developer fee paid by government or winning bidder
• bid bonus for USP (Chile)
• USP has option to match winning bid and win contract (Swiss
challenge)
Program context/description: Pillar II
51
PPP framework needs to include detailed procedures for renegotiation of
contracts
3.07 3.223.59
3.95
4.62
5.38
6.31
0
1
2
3
4
5
6
7
0
1
2
3
4
5
6
7
Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Mar-15
Agg
rega
te S
WF
Ass
ets
un
der
Man
agem
ent
($ t
n)
Other
Hydrocarbon
Total
Source: The 2015 Preqin Sovereign Wealth Fund Review
Program context/description: Pillar III
52
Rationale for developing domestic investment component of SWFs
• Permanent income hypothesis-> countries should save enough of
revenues from non-renewable resources abroad to maintain
permanent income flow for indefinite future
• Dynamic stochastic general equilibrium (DSGE) model -> if returns
are higher at home than abroad, or if future generations can be
expected to be wealthier than current one, it may be optimal to save
less abroad and invest more at home now
Program context/description: Pillar III
53
• A number of SWFs have been established since the beginning of the 2000s with
the objective to undertake domestic investments in key sectors of the economy:
several SWFs in the Gulf, Samruk-Kazyna in Kazakhstand, Kazanah in Malaysia
• In the last four years, Nigeria and Angola have joined funds with domestic
investment function
• SWFs with a domestic investment function are being discussed in several
countries including Bangladesh, Kenya, Myanmar, Mongolia, Mozambique,
Sierra Leone, Tanzania, and Uganda, to be capitalized from revenues of oil and
mineral exports
Program context/description: Pillar III
54
• In parallel with increased allocation by oil or mineral-based SWFs to domestic
investment, a growing number of EMDEs are establishing Strategic Investment
Funds (SIFs) funded through fiscal surpluses, asset transfers and/or borrowing
• SIFs objective: to act as anchor investor for international and domestic
institutional investors, including private equity and debt funds, in domestic
projects, in particular for PPP infrastructure projects and SME funds
Program context/description: Pillar III
55
Challenges specific to SWFs
• SWFs are capitalized by inflows of foreign exchange from oil and mineral sales
• Key macroeconomic challenges:
exchange rate appreciation (Dutch disease)
macroeconomic volatility
• Need for coordination with overall monetary and fiscal policy
• Need for optimizing allocation of natural resource surpluses between foreign
savings and domestic investment
Program context/description: Pillar III
Legal and regulatory environment
• Legal and regulatory framework for private equity and debt funds operations (see above)
• Legal and regulatory framework for inward investment and outward repatriation of distributions and dividends
• Double taxation treaties (DTAs)
Governance structure
• clear separation between fund ownership and fund management functions
• investments through regulated investment equity and debt funds (infrastructure, SMEs)
• co-investments with private investors
• investments subject to double IRR/ERR trigger
• professional staff remunerated at market rates
• disclosure and reporting rules
56
Challenges common to domestic investment component of SWFs and SIFs
Program activities
57
• Manage a global focus point for investment professionals in the SWF/SIF and PE/VC space, through the Investment Funds CoP and its two open online platforms. Co-hosts for the two open platforms are, respectively, The Fletcher Network for Sovereign Wealth and Global Capital at Tufts University (SWF C4D platform), and the Emerging Markets Private Equity Association (EMPEA (PE/VC C4D platform).
• Jointly with TRE, manage the Sovereign Wealth Funds Secretariat, which functions as an internal one-stop shop for CMUs requiring support for SWF activities through the cross-GP Sovereign Wealth Fund Advisory Group.
• Developing global knowledge to directly support operations in the evolving field of SWF’s domestic investments, SIFs, and PE/VC funds, in particular:
Global review of SIFs
Guidelines for the design of SIFs
• Partnering with the International Forum of Sovereign Wealth Funds (ISWF) to further develop the Santiago Principles to include principles for domestic investment.
• In partnership with the GFDRR/DRFI Program and SURRGP, carry out a feasibility study for the establishment of a Global Infrastructure Resilience Fund (GRIF), with the objective of increasing commercial investment in climate resilient infrastructure and SMEs
Global engagements
Program activities
58
Global engagements
Engagement Partnerships Status LSI SDG
Investment Funds CoP EMPEA, Tufts University C - SDG8, SDG9
SWF Secretariat TRE C - SDG8, SDG9
Global review of SIFs PPIAF P - SDG8, SDG9
SIF design guidelines PPIAF P - SDG8, SDG9
Santiago principles for domestic
investments by SWFs
IFSWF P - SDG8, SDG9
GRIF GFDRR/DRFI
SURRGP
P GRIF TA and
financing
operation
SDG 8, SDG9,
SDG13
Program activities
59
At the sub-regional and country levels, the Investment Funds Group
team supports Regional FM GP and TC GP teams on three business
lines: (i) development of PE/VC ecosystems; (ii) development of SWFs
in LICs; and (iii) development of SIFs in low and middle-income
countries. In each business line, ongoing and planned country
engagements are selected on the basis of four fundamental criteria:
• Sub-regional/country demand through CMU
• Partnership across WBG (IFC, TRE, GPs, CCSAs)
• Partnership outside WBG (RAS, MDTFs, Multilateral TFs, Bilateral TFs,
etc..)
• Line of sight instrument (LSI) towards relevant SDG(s)
Sub-regional and country engagements
Program activities
60
Sub-regional and country engagements
Country Engagement Partnerships Stat LSI SDG
Croatia Innovation/VC Project EU TF C Innovation/VC Project 8
West Balkans PE/VC Development
Program
EU TF C PE/VC Development Program 8
Morocco Seed/VC Development
Project
IFC Funds Group C Seed/VC Development Project 8
Turkey PE/VC Market Analysis SIDA (CM deep
dive)
C SIF Project (TBD) 8,9,13
Bangladesh Prog. Approach
PE/VC Ecosystem Analysis
FIRST/ IFC SME
Ventures
C IPPF2 Project (P) 8,9,13
Ghana PE/VC Ecosystem
Analysis
C Fin Sector Development Project
(TBD)
8
Jamaica PE/VC Market Development
Program
IDB P Financial Inclusion Project (P) 8
DRC PE/VC Market Analysis FIRST/IFC SME
Ventures
P SIF Project (TBD) 8,9,13
Program activities
61
Sub-regional and country engagements
Country Engagement Partnerships Stat LSI SDG
Republic of
Congo
Feasibility Study of
SWF/SIF
Gov. RAS C SIF Project (TBD) 8,9,13
Bangladesh Prog Approach
SWF/SIF Advisory
PPIAF C IPPF2 Project (P) 9,13
Kenya Prog Approach
SWF/SIF Advisory
DFID TF P SIF Project (TBD) 9,13
Program activities
62
Sub-regional and country engagements
Country Engagement Partnerships Stat LSI SDG
Caribbean Caribbean Diaspora
Initiative/Fund
CDB/DFID (P) C Carib Regional PPP Infra
Fund (TBD)
Carib SME Co-investment
Facility (TBD)
8,9,13
Morocco Morocco Investment Authority Gov RAS
(pilot)
C NA 8,9,13
Sénégal Support to Fund for Strategic
Investments (FONSIS)
PPIAF/FIRST C FONSIS Financing Project
(TBD)
8,9,13
Cameroon Support to SIF PPIAF P SIF Financing Project (TBD) 8,9,13
Côte d’Ivoire Support to Infra PPP Venture
Fund (I4PVF)
PPIAF P I4PVF Financing Project
(TBD)
8,19,13
Gabon Support to SIF PPIAF P SIF Financing Project (TBD) 8,9,13
Program risks
The key risk to the program is rapidly growing demand for advisory and project support in the investment funds space vs small size of core Investment Fund Group (IFG) team in Fin4Dev.
To mitigate this risk, the team is taking the following measures:
• Strengthen the core IFG team through partnerships with senior staff from
Governance GP (DA assignment) and Energy and Extractives GP (cross-support)
• Assign country engagement TTLship to Regional FMGP and TCGP colleagues and
retain TL and/or co-TTL role only in core IFG team
• Build cross-Group, cross-Practice and cross-CCSA task teams based on
engagement technical and operational scope in particular with IFC Funds Group/SME
Ventures, TRE, TCGP, SURRGP, Governance GP, Energy and Extractives GP, CC
CCSA and PPP CCSA
• Build strong cadre of senior consultant experts in PE/VC, SWF and SIF spaces to
contribute to specific advisory and operational engagements
63
Roles of clients and partners
At the global level, critical partnerships are:
• The Public-Private Infrastructure Advisory Facility (PPIAF), as multi-donor
forum for building ownership and for supporting the preparation of the global
review of SIFs and the preparation of guidelines for the design of SIFs.
• The International Forum of Sovereign Wealth Funds (ISWF), as
international standard setter for SWFs governance (Santiago Principles)
• The Emerging Markets Private Equity Association (EMPEA), as co-manager
of the PE/VC C4D platform
• The Fletcher Network for Sovereign Wealth and Global Capital (FNSWGC),
as co-manager of the SWF C4D platform
64
Roles of clients and partners
At the sub-regional and country level, critical partnerships are:
• The Global Fund for Disaster Reduction and Recovery (GFDRR), as multi-donor forum for
building ownership and funding mobilization for GRIF;
• The Public-Private Infrastructure Advisory Facility (PPIAF), as multi-donor forum for
building ownership and funding mobilization for the SIF business line
• The FIRST Initiative, as multi-donor forum for building ownership and funding mobilization
for the development of PE/VC legal and regulatory frameworks and reforms under the
PE/VC business line
• The European Union Commission, as partner and donor for PE/VC development programs
in EU candidate countries and in EU Eastern Partnership countries
• The UK Department for International Development (DFID), as partner and donor for the
proposed Caribbean Regional Infrastructure PPP Finance Fund (CRIP3F) and for the
Kenya SWF/SIF advisory
• The Caribbean Development Bank (CDB), as partner in the proposed CRIP3F and in the
proposed regional diaspora co-investment facility
65
Dissemination and outreach strategy
• The core of the dissemination and outreach strategy for the investment
fund for development program is the Investment Funds for Development
Community of Practice (CoP), and its two dedicated C4D platforms co-
managed and open to outside stakeholders in the investment funds
space (see Section IV.2.1 above).
• In addition, the IFG core team and regional engagement task team
leaders and team members will participate actively through speaking and
panel engagements in selected international forums and conferences, in
particular the IFSWF Annual Meeting, the EMPEA/IFC Annual
Conference, and the Fletcher Network Annual Infrastructure Forum.
66
Investment Funds Group Team
68
Contact information:
Michel Noel
202-203-0874
Samuel Schneider
Consultant
Patrick J. McGinnis
Consultant
Sevara Atamuratova
Research Analyst
Shanthi Divakaran
Sr. Financial Sector Specialist
Michel Noel
Head
Thelma Ayamel
Program Assistant
Havard Halland
Sr. Economist
Honglin (Holly) Li
Learning Analyst
Jacob Owens
Consultant
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