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Challenges to Securities Markets

Challenges to Securities Markets. NBFI Seminar December 4-6, 2002 Santiago, Chile Peter Tropper International Finance Corporation. Panelists. Mr. Jose Luiz Osorio, Former CVM Chairman, Brazil Mr. Hernan Rodriguez, Bank of New York Mr. Sergio Luiz de Cerqueira Silva, Bovespa, Brazil

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Challenges to Securities Markets

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  1. 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 27% 10% -16% -12% -23% -36% -58%

  4. Market Capitalization as % of GDP, 2001 Source: World Bank

  5. Market Concentration, 2001 Source: FIBV

  6. Foreign investments can provide • Cash • Best practices catalytic role • Transfer of financial , managerial, operational technologies • BUT: Successful countries finance their own economic development

  7. Responses • Set up 2nd tier markets • Encourage cross-listings, including ADRs & GDRs • Ensure greater transparency thru corporate governance rules • Permit institutional investors to invest more in listed and unlisted equities • Reduce 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 $5b $3.6b $2.8b $billions $0.8b $0.4b (Jan-Jun) source: Venture Equity LA

  9. IFC commitment Breakdown by country (2001) IFC INVESTMENT IN PRIVATE EQUITYIN LATIN AMERICA No. of Funds $ millions $314 million committed in 22 funds

  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 Theses 1) 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 Challenges • Focus 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 risk • Weak regulatory environment • Economic 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 permission • The manager buys shares of investee first then brings Fund in later at a higher price • Board doesn’t notice $13 mm in cash sitting idle in $26 mm fund • Manager 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) source: McKinsey

  16. Final hard lesson • Manager • Manager • Manager You can’t structure around a bad manager

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