Financing Emerging Market Businesses and Industries
Tuesday, May 3, 2010
11:00 AM – 12:15 PM
Solid recovery
World real GDP grew by 5 percent in 2010
-6
-4
-2
0
2
4
6
8
10
1980 1985 1990 1995 2000 2005 2010 2015
Emerging and developing economies
Advanced economies
World
Real GDP growth, percent
Source: World Economic Outlook, International Monetary Fund, April 2011 update.2
World trade volume
World trade volume increased by 12 percent in 2010
Source: IMF WEO database 2011.
-15
-10
-5
0
5
10
15
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
Percent change, year on yearProjected
3
World real GDP growth in 2010Annual percent change
Source: International Monetary Fund.
10% or more
6-10%
3-6%
0-3%Less than 0%No data
World real GDP growth in 2011Annual percent change
Source: International Monetary Fund.
10% or more
6-10%
3-6%
0-3%Less than 0%No data
Growth forecasts for developing countries
Percent change from previous year
Source: IMF WEO database 2011. 6
-3.6
7.2
-1.7
1.82.8
4.2
9.5
6.1
3.85.0
3.7
8.4
4.74.1
5.5
-6
-4
-2
0
2
4
6
8
10
12
Central and Eastern Europe
Developing Asia Latin America and the Caribbean
Middle East and North Africa
Sub-Saharan Africa
2009
2010
2011
-10
-5
0
5
10
15
20
1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016
BRIC growth forecasts
Source: IMF WEO database 2011.
Percent change from previous year
Advanced EconomiesBrazilRussia
China
India
Projected
7
Foreign investment inflows to
emerging markets
Source: IMF WEO database 2011.
-300
-200
-100
0
100
200
300
400
500
600
700
800
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
US$ bn
Direct investment
Portfolio flows
Other financial flows
8
US$ billions
Investment has increased across
all emerging market regions since 2000
9Source: McKinsey Global Institute.
21.4
n.a.
20.318.5
28.8
14.6
n.a.
19.321.4
19.623.6
35.2
23.620.2
24.126.4
21.9
26.4
43.939.5
22.1
05
101520253035404550
Africa Eastern Europe
Latin America Emerging Asia
excluding China and
India
China India Other emerging countries
1970
2000
2008
Investment,percent of GDP
(
)
Performance of world equity marketsTop 10 returns in 2010 (U.S. dollar-adjusted)
Source: Bloomberg 2011.
Percent change, 2010
10
0
20
40
60
80
100
120
140
160
180
200
Emerging markets: Equity markets are
returning to pre-crisis level
Source: Bloomberg.
0
25
50
75
100
125
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
US$ index, 2007=100
Latin America
Eastern Europe
Emerging Asia
11
Performance of emerging bond marketsTotal return of JPMorgan EMBI Global indexes
Sources: DataStream, Milken Institute.
-1.7
22.4
-14.2
20.9
-6.7
17.3
-10.2
17.2
-11.1
16.7
-20
-15
-10
-5
0
5
10
15
20
25
2008 2009 to Q1 2011
Middle East Europe
Asia Africa
Latin America
Annualized total return, percent
12
Emerging market bond yield spreadsAs of April 8, 2011
9.57
5.534.88 4.61 4.55 4.49 4.27 3.88 3.47 3.19
2.59
0.62 0.52 0.32 0.210
2
4
6
8
10
12
Percent
Sources: Bloomberg, Milken Institute. 13
Emerging markets bond spreads:
Still above pre-crisis level
0
500
1000
1500
2000
2500
2007 2008 2009 2010 2011
B rated
BB rated
Investment grade
Basis points
Sources: DataStream, JPMorgan.14
Emerging countries have tightened monetary policy
in fear of inflation
Target interest rates of central banks
Source: Bloomberg.
0
2
4
6
8
10
12
14
16
2008 2009 2010 2011
Policy interest rates, percent
China
Brazil
India
India
15
End of the era of cheap capital?Consensus forecasts: Central bank rates will increase in the next 12 months
0.0
0.5
1.0
1.5
2.0
2.5
Q1 10
Q2 10
Q3 10
Q4 10
Q1 11
Q2 11
Q3 11
Q4 11
Q1 12
Q2 12
Percent
U.K.
U.S.
Eurozone
2.0
4.0
6.0
8.0
10.0
12.0
14.0
Q1 10
Q2 10
Q3 10
Q4 10
Q1 11
Q2 11
Q3 11
Q4 11
Q1 12
Q2 12
Percent
Russia
China
Brazil
India
16
Source: Bloomberg.
Capital raised: Developing Asia attracts
the greatest funding after the crisis
17
Europe31%
Developing Asia27%
Western Hemisphere
24%
Middle East and North
Africa14%
Sub-Saharan
Africa4%
2002-2006
Developing Asia45%
Western Hemisphere
23%
Europe19%
Middle East and North
Africa10%
Sub-Saharan
Africa3%
20102002 - 2006 2010
Sub-Saharan
Africa
3%
Specific financing opportunities
18
Examples of more specific market opportunities:
• Derivatives
• Can bring in cash flow but also exacerbate volatility
• Deposit Receipts
• Internationalize shareholder base
• Can have negative spillovers
• Expertise
• Overseas Private Investment Corporation (OPIC)
• Impact investment fund
• Not just funding, but also network access, expertise
Source: Milken Institute.
Possible side effects of rapid growth:
• Inflation (or hyper-inflation)
• Bubbles
• Previous financial crises
• Credit crunch of ’08 (easy credit led to housing bubble and toxic debt)
• Asia 1997 (excessive speculation, burdening debt, currency crash)
• Mexico 1994 (loose fiscal/monetary policy, hyperinflation, devaluation)
Effects of rapid economic growthWhat can go wrong?
19Source: Milken Institute.
The persistence of sovereign defaults
Argentina Ecuador Paraguay Uruguay Venezuela
• 1830
• 1890
• 1915
• 1930s
• 1982
• 2001
• 1832
• 1868
• 1911
• 1914
• 1931
• 1982
• 1999
• 2008
• 1827
• 1874
• 1892
• 1920
• 1932
• 1986
• 2003
• 1876
• 1891
• 1915
• 1933
• 1983
• 2003
• 1832
• 1878
• 1892
• 1898
• 1932
• 1998
20
Sovereign defaults in selected countries, 1824 to 2008
Sources: Sturzenegger and Zettelmayer (2006), Moody‘s, Milken Institute.
21
A map of world sovereign default
1932
1935
1932
1991
1991
19851983
2001
1812
18771892
19321981
1986
20041983
1983
1939
1972
2002
1932 2000
2008
19841982
2004
1984
2003
2003
‘87
1940
1932 1942
2002
1981
1982
1993
2000
Sovereign debt most likely to default in five
years As of Q1 2011
Rank Country
Five-year cumulative
probability of default
(%) Rank Country
Five-year cumulative
probability of default
(%)
1 Greece 57.7 6 Ukraine 27.7
2 Venezuela 51.8 7 Dubai 24.7
3 Ireland 43.0 8 Lebanon 21.9
4 Portugal 40.1 9 Iraq 21.1
5 Argentina 34.7 10 Egypt 21.1
22Source: CMA Global Sovereign Credit Risk Report.
Note: Ranked by five-year cumulative probability of default.
Stability, infrastructure and growth potentialWhat affects these crucial economic factors?
Source: Milken Institute
23
• Government regulations
• Social stability
• Investment infrastructure, e.g. stock exchange (size of market, trade
volumes, international access), bond market
• Fundamentals of growth
Marc Pagano
Managing Director, Citigroup
Pros and cons of emerging markets
• Great time to be a Corp in EM
• Low issuance from the Sovereign sector eliminating the historical crowding out
• An investor base hungry for yield and not overly concerned with short term liquidity
• Desire from investors to take lower part of the capital structure on transactions, with
many preferring equity kickers
• Yields are at pre 2007 levels for many companies
• Accommodative commodity and global rates story
• Global spread compression in all of Credit markets leading to a search for yield
• Global EM issuance is nearing levels of the US HY market (800mm)
•Tough time to be an EM Corp investor
• Reduced risk appetite from sell side due to B/S, capital and return restrictions
• Crowed field looking for assets, 10x oversubscribed books the norm
• Limited number of good analysts and PMs with history in EM corps (outside of quasi
svgns)
• EM historically a sovereign game
• Market is running to catch up
• Spread compression forcing people in lower quality and illiquid names 25
Questions
• Is the traditional buy and hold loan market really coming into capital markets (are
people turning a blind eye to the real lack of liquidity)?
• Yes, I think people are underestimating the illiquidity in the market
• Can the game continue past QE2 ending?
• Yes, but much more credit differentiation
• What if there is an EM crisis as the 2007/2008 left most of EM in tact?
• The market is not prepared for this today (felt the pain in Kazak banks,
Russian and Chinese property, Indian CBs)
• What are the factors that will lead to an end game or evolution of the asset class?
• Cheap money and risk indifference with no EM blow ups
• Is the traditional sovereign focused institutional investor base moving fast enough
on credit capacity to keep up with actual investing actions taking today?
• There are smart people working hard to absorb the issuance and names, but
the task is daunting and there is not a huge talent pool
• Start of disintermediation of sell side with direct lending from Investors to
corporates, is this the new trend or short term dynamics?
• Yes, this is the new normal with direct lending in the 100-300mm sizing 26
John Coombe
Head of Consulting, Sydney, and Executive Director,
JANA Investment Advisers
Expanding investment
28
Equity risk premium
29
Strong growth and fiscal improvement
30
Reversal of debt positions
31
• Liquidity crunch in 2009
• Slow recovery in fund raising despite significant acceleration in deal flow ($16.8 billion
deployed versus $8.7 billion raised through Q3 2010)
• Terms improved for LPs
• Best funds will still be oversubscribed
0
5
10
15
20
25
30
2003 2004 2005 2006 2007 2008 2009 2010P
$ B
illio
ns
Brazil Russia India China
Source: EMPEA. 2010P PE fundraising is based upon a run rate from reported data as of 9/30/10.
BRICs – PE fundraising
32
• Minimal activity from Q4 2008 - 1H 2009
• Most new deals completed 2H 2009
• Strong acceleration in pace for 2010
0
5
10
15
20
25
30
2003 2004 2005 2006 2007 2008 2009 2010P
$ B
illio
ns
Brazil Russia India China
Source: EMPEA. 2010P PE investment is based upon a run rate from reported data as of 9/30/10.
BRICs – PE investment
33
• The BRICs led the recovery in IPOs
• 2010 was a very strong year for emerging market IPOs. The BRICs accounted for more than half of global
capital raised
Sources: CapitalIQ, Dealogic, Thomson Reuters, Ernst & Young
$0
$20
$40
$60
$80
$100
$120
$140
$160
$180
$200
2003 2004 2005 2006 2007 2008 2009 2010
Ann
aul P
ublic
Mar
ket I
PO
Pro
ceed
s ($
Bill
ions
)
Brazil Russia India China USA
$0
$50
$100
$150
$200
$250
$300
$350
$400
$450
2003 2004 2005 2006 2007 2008 2009 2010
Ann
aul M
&A
Pro
ceed
s ($
Bill
ions
)
Brazil Russia India China
Emerging market exchanges
rapidly expand IPO offerings
BRIC-based companies became much
more attractive acquisition targets
Annual IPO Offerings
Annual Mergers &
Acquisitions
Exit environment
34
Bonds have rallied on ratings upgrades
35
Local bond and currencies attractive
36
Attractive versus other markets
37
China equity raisings - IPOs
$0
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
$70,000
$80,000
US
D m
illi
on
Capital raised, IPO
B Shares
H Shares
A Shares
Source: Wellington38
China equity raisings – Secondary’s
$0
$5,000
$10,000
$15,000
$20,000
$25,000
$30,000
$35,000
$40,000
$45,000
$50,000
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
US
D M
illio
n
Capital Raised: Secondary Offering
B Share
H Share
A Share: Reoffered
A Share: Rights Issued
A Share: Warrant Exercised
Source: Wellington39
Overseas Private Investment Corporation
Milken Institute Global Conference
May 3, 2011
John Morton
Vice President of Investment Policy
As the U.S.
Government’s
development finance
institution, OPIC
mobilizes the
participation of U.S.
private capital to
support sustainable
economic development
in emerging markets
The Agency
OPIC currently manages a ~$13.5B portfolio of projects in over 150 countries and
operates on a self-sustaining basis at no net cost to the American taxpayer
Shading denotes
OPIC-eligible
countries
41
Total Staff 210
Eligible Countries > 150
FY 2010 Figures― Projects Approved 97― Contribution to Budget $352M― Current Exposure $13.5B*
Agency facts
Each OPIC employee generates $1.7
million in revenue for the
federal government
Historical OPIC contribution to Federal budget
*As of December 31, 2010
US$ millions
42
0
100
200
300
400
500
600
700
800
2006 2007 2008 2009 2010
OPIC by the numbers
From 2006 to 2010, OPIC contributed over $2bn to the federal budget
Foreign
policyDevelopment
US
business
OPIC
OPIC’s unique position Administration priorities
“We’re changing how we define development…we
need to harness all the tools at our disposal—from
our diplomacy to our trade and investment policies.”
~President Obama, 9/22/10
Supporting broad-based, sustainable economic
growth
Proactively targeting specific countries, regions,
sectors, and technologies
Mobilizing private sector investment
Elevating development as a central pillar of
national security policy 43
Administration development priorities
OPIC works in close alignment with the administration’s development strategy
OPIC’s current portfolioOPIC offers innovative financial solutions to support private investors, including debt financing, insurance, and investment funds
Current portfolio* Products
Debt financing
― Large structured finance to small business loans
― Up to $250M, fixed rate terms, up to 20 years
Insurance
― Coverage for expropriation, political violence,
and currency inconvertibility
― Other insurance including regulatory risk, carbon
credits
Investment funds
― Debt that is matched by privately raised equity to
support funds investing in emerging markets
Other financial products
― Designs hybrid financial products to help private
investors mitigate risk
$13.5B Current exposure; $29B Capacity
Investment
funds
Insurance
Debt
financing
*As of December 31, 2010
US$ billions
44Total exposure
Nonprofits and impact investors
Our clients and alliances
OPIC partners with other U.S. government agencies and
international entities
Current clients Strategic alliances
― Departments of State, Defense,
Commerce, and Treasury
― USAID, MCC
― Ex-Im Bank, TDA and SBA
― IFC and MIGA
― Regional development banks
(IDB, ADB, AfDB, EBRD)
― CDC, FMO, DEG
― Chambers of Commerce
― Impact investors
― NGOs & Nonprofits
― Diaspora investors
US Gov’t
Development
finance
institutions
Other
partners
Multinationals and small/medium businesses
45
Matthew Crakes
Managing Partner, Greenheart Capital Partners
0
2,000,000
4,000,000
6,000,000
8,000,000
10,000,000
12,000,000
14,000,000
16,000,000
US, Europe and EM market exchangesTotal market capitalization 2010
Source: World Federation of Exchange Members
USD million
EM bond issuanceNet supply by sector (US$ billion)
Source: Morgan Stanley
USD billion
$0
$20
$40
$60
$80
$100
$120
$140
$160
2007 2008 2009 2010 2011 YTD
Sovereigns
Corporates
$0
$5
$10
$15
$20
$25
$30
$35
$40
$45
Gov't
Non FIs
HHs
FIs
Total debtby segment (US$ trillion)
Source: McKinsey Global Institute, Global Finance Magazine, and World Bank (latest figures based on 2009)
USD trillion
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