1. Private Equity in Emerging Markets: An Introduction context, contribution, recent developments, and lessons learned Michael Barth, CEO, Netherlands Development Finance Company (FMO)

2. Private Equity: What and Why?

3. Clarifying the terminology PRIVATE EQUITY--medium to long- term financial commitment (equity or quasi-equity) in illiquid securities, with the expectation that future company performance will generate liquidity and opportunity to exit with substantial returns.

4. Private Equity is the Risk Capital “in Between” Sponsor Financing - Start-up/ early stage - Absence of liquidity - High risk (no track record) - Lack of information base - No transparency - Family-run/ closely held Public Market - At least 3 to 5 years’ track record - Profitability - Acceptable accounting standards - Legal documentation - Professional management - Significant size

5. Who are prime PE candidates? Annual Sales Publicly trade companies Medium*-size Companies, many family-owned Target for Private Equity Small*, family-owned, informal economy US $ 250 MM $ 15 - $ 250 MM < $ 15 MM *Size definitions vary significantly depending on country’s size and level of economic development Large* Too small

6. The importance of private equity to emerging markets Professionally managed Private Equity (PE) fills an important financing gap PE stands at the apex of development finance; it is not just about financing business, but about building businesses PE can have substantive effects on corporate professionalization, employment and export growth;support for the SME sector PE is a potential building block for developing a stronger, more balanced financial sector

7. Context: Capital Mobilization Trends

8. Source: IIF, e=estimate Financial flows to emerging markets has seen a downward trend in recent years

9. Only FDI has been a stable, growing component Source: Global Development Finance, e= estimate

10. Capital mobilization in most emerging equity markets has been depressed in recent years Source: FIBV data for sample countries comprising Latin America -Mexico, Brazil, Chile, Argentina,Peru; Europe and Central Asia - Turkey,Poland. Hungary, Czech Republic,Estonia, Lithuania; Middle East -Egypt, Bahrain, Jordan, Oman, Kuwait; East Asia- Taiwan, Korea, Malaysia, Indonesia, Thailand, Philippines; Africa- South Africa, Mauritius, Ghana, Namibia, Swaziland

11. IPO markets have mirrored this downward trend Number of New Firms Listed, Emerging stock markets, 1997-2001 Source: FIBV data, New issue data for Nigeria in 2000-2001 and Kenya 1999 unavailable

12. Focus on private equity: funds raised and invested; performance

13. ASIA (ex-Japan, Australia) Sources: Compiled by Cambridge Associates from multiple sources including AVCJ, internal proprietary fund manager database, VE-LA Publications, and 3i/PWC. LATIN AMERICA Fund raising and investment trends

14. MIDDLE EAST (Israel only) & AFRICA (South Africa only) Sources: Compiled by Cambridge Associates from multiple sources including IVC, SAVCA/KPMG, EVCA, 3i/PWC and internal proprietary fund manager database. CENTRAL & EASTERN EUROPE (incl. Russia) Fund raising and investment trends

15. Emerging markets private equity investments by region Latin America Central & Eastern Europe 2% Russia/NIS Africa (S. Africa only) Russia/NIS Central & Eastern Europe Middle East (Israel only) 13% Africa 3% 0% 3% Latin America 11% Emerging Asia (ex. Japan,) 70% Emerging Asia (ex. Japan) 59% 18% 3% 4% Middle East (Israel only) 14% Cumulative 1998-2001 2001 Sources: Compiled by Cambridge Associates from multiple sources including EVCA, AVCJ, MITI/Japan, VE-LA Publications, SAVCA/KPMG, IVC, 3i/PWC and internal proprietary fund manager database.

16. Returns on VC and PE funds (%) Note: Pooled end to end return, net of fees, expenses and carried interest Source: Cambridge Associates, LLC As of September 30, 2002 Preliminary Emerging Markets VC and PE index US Venture Capital Index US Private Equity Index 1 Qtr (6.0) (9.1)(5.2) 1 Year(13.1)(29.4)(9.2) 3 Year(5.3)25.1(4.0) 5 Year(1.6)46.73.7 10 Year0.235.911.4

17. A broader look at returns - Public Markets *Commenced November 1, 1984, **Returns of the one year period ending September 30, 2002. Source: Bloomberg, Venture economics Annualized returns as of Dec 31 2002 (%) 1 year3 year5 year10 year20 year Public equity S&P 500(22.1)(14.6)(0.6)9.312.7 NASDAQ(30.2) (2.4)8.210.6 EAFE(15.9)(17.2)(2.9)4.010.2 FTSE*(13.9)(15.1)(3.2)7.36.5 Private equity Venture capital** (22.1) 15.026.726.016.5 Buyouts(8.2)(4.2)1.69.112.6 Total private equity(12.1)1.28.415.214.5

18. Performance: “Management matters” US 1980-95US Private equity (%) US Listed Equity (%) US Fixed Income (%) Upper 25%21.917.012.6 Median14.015.912.0 Lower 25%6.914.811.5 Spread between top and bottom 15.02.31.1 European PE 1993- 1999 Spread between top and bottom 25% 25.2 Source:Teresa Barger, International Finance Corporation "What is a Private Equity fund?”

19. Some of the important “lessons learned”

20. Private equity in Emerging Markets- Lessons Learned Apparent critical need to adapt PE operations to the local environment Management x 3; private equity is a craft, not a commodity; focus on additionality Issues of critical mass, incentives Deal flow, timing, acquisition prices Issues of instrumentation, exit planning Environmental issues, esp. those related to poor investor protection/corporate governance, basic domestic capital markets

21. A Closer Look: Different Perspectives on Private Equity Analytical perspective Dr. Roger Leeds, Johns Hopkins University School of Advanced International Studies Practitioner ’ s perspective Mr. Alejandro Schwedhelm, Managing Director, Darby Overseas Investments, Ltd. Domestic/policy perspective Mr. Alvaro Gonçalves, Managing Partner of Stratus (Brazil), Board Member, Venture Capital Association of Brazil Investor ’ s perspective Dr. Patricia Dinneen, Consultant, Cambridge Associates