IFC preparing emerging-market public fund mandate

The International Finance Corporation (IFC), the private-sector arm of the World Bank, is preparing a $500 million fund to invest in the public equities and debt of up to 50 emerging markets, according to documents seen by AsianInvestor.

The ‘N-50’ RFP indicates that this is the first time the IFC is establishing a fund to invest in public equity markets in over two decades.

"The documents forwarded to you represent the very early stage of RFPs, and any decisions and investments by IFC would need to go through due process and board approval," says an IFC spokesman in Washington, DC.

"IFC is seeking preliminary proposals from asset managers interested in sponsoring a fund that would invest predominantly in publicly traded equity securities of private sector firms in a set of emerging market countries. IFC is fully committed to increasing capital flows into emerging markets in order to bring about growth and create jobs, and is often the first private equity investor is some of the world's poorest countries, such as Sierra Leone and Liberia." 

The group has a long track record of financing third-party private-equity and other specialist investors in emerging markets, via affiliate IFC Asset Management. In the 1980s it was an early investor in Korea and Mexico public equity funds; that experience succeeded in both generating profits, and in catalysing co-investment by institutions into these markets, and the IFC wants to do the same broadly across the frontier and emerging-markets world.

It is not clear whether this new initiative is from the asset-management company or directly from IFC.

Although the documents say the IFC is not beholden to investing in 50 markets, it is aimed at the frontier end of the universe: “We might contemplate a proposal that has a cap on the 14 larger EM countries” if that helps the fund become larger and attract third-party institutions to come in as co-investors; the IFC ultimately can assume no more than 20% of the fund’s raised capital.

That assumes its $500 million is meant to catalyse total investments of $2.5 billion or more. “We concluded the absorptive capacity of the N-50 markets as a group is significantly larger than the fund size,” says the IFC document. “Our goal was to have the total capital be large enough to be impactful to the N-50 markets and to be attractive to large institutions.

"In this respect, larger funds presumably would have lower fees and greater secondary market liquidity…Existing funds investing in N-50 or frontier markets have not been successful in attracting significant interest from large institutions and that a new fund is required, tailor-made to address needs of these investors.”

Although fund managers may be active or passive, the IFC’s objective is to seed strategies that will be attractive to co-investors, such as large pension funds. The IFC intends a minimum of 75% of the funds to go to equities, as it has concerns about the liquidity of corporate bonds – although this is flexible, if manager proposals argue strongly for a greater weight to bonds.

A limited carve-out is also possible for investments into companies that are not listed in the N-50 universe, but whose primary business is conducted there. But the IFC’s objective is to develop emerging capital markets.

Similarly, its preference is to invest in funds that are listed and closed-end, so that it provides liquidity to secondary markets.