Challenges to Securities Markets

NBFI Seminar

December 4-6, 2002

Santiago, Chile

Peter Tropper

International Finance Corporation

2

Panelists

Mr. Jose Luiz Osorio, Former CVM Chairman, Brazil

Mr. Hernan Rodriguez, Bank of New York

Mr. Sergio Luiz de Cerqueira Silva, Bovespa, Brazil

Mr. Sergio Undurraga, President, Moneda Asset Management, Chile

Mr. Scott Swensen, Managing Director, DB Capital Partners

Mr. Camilo Arenas, Corporación Andina de Fomento

3

Market Performance, Jan. – Nov. 2002

-60

-50

-40

-30

-20

-10

0

10

20

30

S&

P/IF

CG

Ind

ex

Argentina Brazil Chile Colombia Mexico Peru Venezuela

-58%

-36%

-16%

10%

-12%

27%

-23%

4

Market Capitalization as % of GDP, 2001

020406080

100120140160

Uni

ted

Sta

tes

Japa

nC

hile

Sou

th A

frica

Arg

entin

aG

erm

any

Kor

ea, R

ep.

Bra

zil

Indi

aM

exic

oP

eru

Col

ombi

aV

enez

uela

% o

f G

DP

Source: World Bank

5

Market Concentration, 2001

0%10%20%30%40%50%60%70%80%

NYSE

Santia

go

Lond

on

Sao P

aulo

Lim

a

Mex

ico

Bueno

s Aire

s

Source: FIBV

6

Foreign investments can provide

CashBest practices catalytic roleTransfer of financial , managerial, operational

technologies

BUT: Successful countries finance their own economic development

7

ResponsesSet up 2nd tier marketsEncourage cross-listings, including ADRs & GDRsEnsure greater transparency thru corporate governance rulesPermit institutional investors to invest more in listed and unlisted equitiesReduce trading costs: move to electronic trading floors drop stamp taxes & transaction taxes permit negotiated commissions create on-line trading by investors

8

Private Equity Investments in Latin America

0

1

2

3

4

5

6

1998 1999 2000 2001 2002

$b

illio

ns

(Jan-Jun)

$5b

$3.6b

$2.8b

$0.8b$0.4b

source: Venture Equity LA

9

IFC INVESTMENT IN PRIVATE EQUITYIN LATIN AMERICA

$314 million committed in 22 funds$314 million committed in 22 funds

IFC commitment Breakdown by country (2001)

-

20

40

60

80

100

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

0

2

4

6

8

10

$ m

illio

ns

No. of

Fun

ds Regional

30%

Argentina

20%

Brazil

20%

Mexico

10%

Other

20%

10

Benefits of Private Equity 87 % of UK PE-backed companies felt PE firms

contributed far more than money. Financial advice

Strategic guidance

Management recruitment

Time Frame: Market investors: Short Term Classic owners: Long Term Private equity: Medium Term

15% of the UK workforce is in a company backed by private equity

11

Other Impacts

Job creation

Productivity enhancement

Economic growth

Ownership transfer, diversification (including professionalizing family companies)

Corporate governance

12

Basic Investment Theses1) EBITDA expansion

• Organic growth• Roll-ups/M&A, especially in consolidating sectors• Bring business concept from U.S./Europe to new markets

2) Multiple expansion• Re-rate company / redefine industry• Shed non-core assets and refocus

3) Margin improvement• Better production, distribution, products• Better use of labor and inputs• Branding

4) Transparency and governance• Remove “governance discount”• Increase worker productivity and customer loyalty through

transparency• Professionalize family businesses

5) Restructuring• Financial; including leverage

13

Private Equity ChallengesFocus often is on small companies Dominance of family owned business Lack of professional management Weak corporate governance Limited access to debt financing Lack of reliable financial information Maybe 10% of small companies ever grow;

means IPOs are unlikely

Currency devaluation riskWeak regulatory environmentEconomic and political uncertainty

=> DIFFICULT EXITS

14

Little Shop of Horrors

The management contract allows investors to fire the manager any time…but only with his permissionThe manager buys shares of investee first then brings Fund in later at a higher priceBoard doesn’t notice $13 mm in cash sitting idle in $26 mm fundManager of an E. European country fund decides to move to London. “It’s easier.”

15

Top Quartile Managers vs Average Managers

(U.S. Private Equity, 1980-1995)

15

2.3

1.1

0 5 10 15 20

Private Equity

Listed Equity

Fixed Income

Spread (Percentage Points)

source: McKinsey

16

Final hard lesson

Manager

Manager

Manager

You can’t structure around a bad manager