IFC finds success by looking for the next big emerging market

The IFC is saying “no” to BRIC.

International Finance Corp., a member of the World Bank, is known for investing in debt in developing countries but for two decades, it also has been quietly investing in private equity funds that target emerging markets. But while institutional investor interest in the hot markets of Brazil, Russia, India and China began to boil in the past few months, IFC took a cool contrarian view and looked elsewhere in the developing world.

Emerging markets private equity has produced a 13.5% internal rate of return since the IFC took massive write-downs in March to mirror the decline of the world’s stock markets. That diversification beyond the BRIC countries helped produce IFC’s double-digit return, a feat in a year when many private equity investors would be thrilled with a single-digit positive return.

“Returns have been reasonably robust in the crisis,” said David Wilton, CIO of Washington-based IFC’s private equity private equity and investment funds department.

That’s even with a relatively conservative view of returns. Until the March write-downs, the portfolio produced a net annualized IRR of 21% since 2000, he said. Recognizing that private equity fund managers’ return data lag by a number of quarters, in March the IFC reduced their private equity return estimates to approximate the declines in the worldwide listed markets, he explained.

“We conducted the exercise in March, and we will continue to do so until the managers catch up,” Mr. Wilton said.

The IFC creates opportunities for people to escape poverty by connecting pools of capital to help development projects in emerging nations, with the goal of promoting productivity, growth and jobs.

Seventy-five percent of the IFC’s $16.2 billion in investments is in debt, with about a quarter of the remainder invested in private equity funds, he explained. IFC committed more than $1.9 billion in 135 funds as of June 30, 2008, the end of its last fiscal year.

For the fiscal year ending this coming June 30, the IFC will most likely end up committing between $400 million and $550 million in 20 private equity funds, somewhat shy of the $800 million committed to roughly 30 private equity funds in the prior fiscal year.

IFC is also committing capital to infrastructure funds as well as climate mitigation, bringing the expected private equity total to about $600 million, Mr. Wilton said.

And over the last 12 months, IFC began posting about 14 professional staff in locales in which IFC is investing, including Cairo, Johannesburg and Jakarta, Indonesia.

He attributes the IFC’s double-digit positive returns, in part, to the low amounts of leverage used by private equity managers in the emerging markets.

“They are not using a leveraged buyout model. We look for managers that use a growth model,” he said.

Although the IFC has been investing in funds since the early 1990s, the portfolio grew large enough that in 2000, the IFC created a separate portfolio management team to oversee the portfolio.

The IFC was among the first private equity investors in Asian and African funds.

Also, IFC hasn’t stayed out of BRIC countries. It was an early investor in Baring Vostok Capital Partners, which invests in companies in the former Soviet Union, when it launched its first private equity fund in 1994.

And unlike other institutional private equity investors, IFC must stop investing with a new private equity manager once it becomes accomplished, Mr. Wilton said. Once a private equity firm becomes successful, the IFC must bow out because it cannot displace commercial capital in opportunities, he said.

As a result, last fiscal year, 78% of its private equity investments were in first-time fund managers.

These days, IFC tends to focus on frontier regions. Some 60% of the private equity funds in which it has invested are based in the countries assisted by the World Bank’s International Development Association, which supports countries with the lowest gross domestic products.

More than 25% of the IFC’s investments are in sub-Saharan African countries as of June 30, 2008. For example, IFC was a lead investor in Emerging Capital Partners’ AIF Infrastructure Fund, a $407 million private equity fund.

And over the last two months, IFC committed $25 million to Citadel Capital’s MENA Joint Investment Fund, which has a $500 million fundraising target. The private equity fund will invest in Egypt and other countries in the region. (Citadel will invest $250 million alongside the MENA Joint Investment Fund.)

IFC also committed $17 million to Citadel’s Sphinx Turnaround Fund, aimed at investing in smaller Egyptian businesses with distressed assets.