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, Corporac ión Andina de Fomento

3 Market Performance, Jan. – Nov % -36% -16% 10% -12% 27% -23%

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 2 nd 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 $billions (Jan-Jun) $5b $3.6b $2.8b $0.8b $0.4b source: Venture Equity LA

9 IFC INVESTMENT IN PRIVATE EQUITY IN LATIN AMERICA $314 million committed in 22 funds IFC commitmentBreakdown by country (2001) $ millions No. of 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, ) source: McKinsey

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