OPIC: Low Write-Offs in Emerging Markets Investments

William Pearce

What organization do you represent?

Overseas Private Investment Corporation, the U.S. Government’s development finance institution.

In your experience or view, is the invest in Africa story hype or reality? Explain your view using worked examples investment situations, good and bad news.

The investment opportunities in Africa are very real and very significant. However, it is important to recognize that Africa is composed of 54 countries and therefore the opportunities will vary across each country. One of the statistics most often cited to illustrate the overall opportunity, is the fact that most of the world’s ten fastest-growing economies are in Africa. However, to better understand the investment opportunity, you have to look beyond this headline. One of the reasons so many countries in Africa are enjoying strong economic growth is because many governments have adopted reforms that have fostered more friendly business environments. Another, related reason is that Africa is seeing explosive growth in its middle, or consumer class. From OPIC’s perspective, I think the size of the opportunity is illustrated by the variety of projects we support. OPIC financing includes support for major power plants, water desalination facilities, agribusiness, as well as lending programs for small and medium -sized businesses. We recently provided financing to help a Tennessee businessman introduce a plant propagation technology in Rwanda to help improve crop yields and boost food production. We also provided financing for the expansion of a geothermal power plant in Kenya to double its operating capacity.

Is your fund currently invested in Africa? If yes, what amount in U.S. dollars at most recent date, from what date, and in what asset classes, regions, sectors, companies. What percent of your total portfolio is Africa today? What will it be in 2020?

As the U.S. government’s development finance institution, OPIC invests around the world in three ways: financing, political risk insurance, and support for investment funds focused in emerging markets. In 2012 alone, OPIC committed $907 million to projects in Sub-Saharan Africa. Today, projects in Africa account for almost a quarter of OPIC’s $16.4 billion global portfolio, up from six percent a decade ago. While we cannot predict what this will be in the future, Africa continues to be a major area of focus.

What peer learning about your Africa investment approach would you share with investment professionals in Africa? What wisdom would you share about Africa, what pitfalls to avoid or some smart decision you made that helped you invest better.

The overall investment opportunity is varied, and investors still need to rigorously review each potential investment. One of the reasons OPIC has been successful investing in emerging markets around the world – in 2012 our write offs were less than 1% — is that we apply the rigor of a private business to all our investments and only support projects with strong business plans. It is also important to understand local demographics and how they are evolving. While Africa continues to face major challenges related to poverty such as malnutrition and limited housing, there is also a growing consumer class, and an increasingly urban population, which has created demand for modern infrastructure, advanced mobile technology, modern healthcare as well as support for small businesses.

What advice would you give to Africa-based investment managers competing with global managers for mandates? How should African investment professionals think about competing with foreign-based peers?

We have witnessed and will likely continue to witness a transition towards local investment managers. The ever evolving political, social and economic landscape that exists within the African continent requires a local presence. Without such a presence, the ability to capitalize on the Africa investment thesis becomes quite difficult.

We have also found that collaboration among managers creates strong proposals for equity fund and traditional financing requests. When considering funding requests, OPIC carefully considers a fund’s past track record. On the ground knowledge and local team presence are valuable when coupled with the ability to access capital on a global scale.

Choose three most important factors in deciding how to be investing in Africa today?

For OPIC, track record or performance, integrity, and social impact are key decision drivers. However, it is important to note that OPIC’s purpose for investing in emerging markets will not always align with those of a private institution. Therefore it is incumbent upon each organization to first determine its own investment objectives and understand its risk/return profile.

Taking all of the above into consideration, one should first understand the broader macro-economic drivers (e.g. young demographic; commodity discovery; stabilizing political environment) that make the continent an attractive investment opportunity. From there, take the approach that Africa is comprised of 54 countries each with its own idiosyncratic risks and opportunities, and deconstruct the broader opportunity set. From this more micro vantage point an organization can then best align its investment objectives with the risks and opportunities of the African market.

Lastly, and as a general rule, patient capital (e.g. 5-15 years) is a requisite for the African market.

In what way is your investment in Africa similar or different to your investment in other emerging markets? How does your approach compare and contrast to investment in S. America, E. Europe, Middle East, SE Asia, India, or China?

While all of these markets have their own unique challenges and opportunities, there are really more similarities than differences throughout the developing world. All of these regions can be quite challenging places to do business, and all of them face multiple development challenges that present opportunities for experienced investors. Regardless of the market or region, OPIC applies the same rigorous due diligence process to each project.

What positive role can asset owners play to improve governance and build Africa’s fund management professionalism?

The responsibility to improve governance cannot be exclusively addressed by asset managers. However, what one tends to find is a predominate share of asset managers on the African continent (e.g. private equity fund managers) have either been trained or schooled in Europe or the United States, and as such many of the governance principles that are now commonplace in those more advanced markets have been replicated and instituted within the African private equity industry.

Additionally, limited partners, predominately development finance institutions such as OPIC, have historically encouraged and often times require the implementation of best practices not only as they relate to governance but also transparency (e.g. reporting). The eventual inclusion of more institutional equity participants will help to further this current trend.

DFIs demand a high standard of professionalism and frequently meet with local and state leaders to insure that the best in governance in the location as well as in the project will be available to the project to help to ensure a favorable outcome. We have found that going through a DFI selection process often results in rewards to the managers, and governance at many levels whether or not the proposal is selected.

Can you name an investment activity where integrating environmental, social and governance (ESG) factors helped your Africa investment. Suggest examples from any asset class, country or on any issue for example corporate governance in Nigerian banks or corruption in construction companies in South a Africa, etc.

OPIC has a due diligence process that incorporates all aspects of ESG and SRI parameters. Application of international best practices in ESG can help manage investment risks while at the same time potentially improving exit potential. It is much easier for a small company to attract a well-established strategic investor if they can demonstrate that they are able to meet the high standards that such investors look for to ensure better performance and lower reputational risk.

Do you expect that investment in Africa by institutional investors will grow in the next 5 years. Using 2013 as a baseline, growth measured in size of assets or number of deals.

OPIC looks at the life cycle of companies. It supports SMEs (small and medium enterprises) with the knowledge that as these scale, these companies become the target candidates for larger investments from larger funds and individual investors. As aggregation occurs in sectors and particularly along supply chains, the door to opportunity for small institutional investments will open.

Also contributed to this interview: Margaret Kuhlow, Vice President. OPIC Office of Investment Policy.

About Mr Pearce

William (“Bill”) Pearce was named Acting Head of OPIC’s Investment Funds Department (IFD) in December, 2012. Previously, he served as a Managing Director in IFD, which presently manages approximately $2.5 billion in commitments to over 35 funds. Within IFD he originated new fund opportunities, and managed the entire investment process to provide capital to emerging market private equity funds. He has managed funds that are: focused globally, or regionally on Africa, Asia, Latin America, and the Middle East; and that focus on general growth/expansion strategies, real estate, or renewable energy & resources.

Prior to OPIC, Bill made direct investments as a Director with EMP Global, manager of the AIG Infrastructure Funds. Prior to EMP he focused on U.S. direct investments, first with W.R. Grace & Co., and then with EXOR America, the U.S. family office of the Agnelli family. Bill also worked: in a line capacity in project finance with a portfolio company of EXOR, ICF Kaiser International; and as a High-Yield Bond Analyst with Oppenheimer & Co.

Bill is a graduate of the Wharton School at the University of Pennsylvania, and received his MBA from the Darden School of Business at the University of Virginia.

About OPIC

OPIC is the U.S. Government’s development finance institution. It mobilizes private capital to help solve critical development challenges and in doing so, advances U.S. foreign policy. Because OPIC works with the U.S. private sector, it helps U.S. businesses gain footholds in emerging markets catalyzing revenues, jobs and growth opportunities both at home and abroad. OPIC achieves its mission by providing investors with financing, guarantees, political risk insurance, and support for private equity investment funds.

Established as an agency of the U.S. Government in 1971, OPIC operates on a self-sustaining basis at no net cost to American taxpayers. OPIC services are available for new and expanding business enterprises in more than 150 countries worldwide. To date, OPIC has supported nearly $200 billion of investment in over 4,000 projects, generated $74 billion in U.S. exports and supported more than 275,000 American jobs.