IFC to set up $500m secondaries fund

The global development organisation sees an opportunity to help grow private equity secondaries in emerging markets.

The International Finance Corporation is planning on making a big move in emerging markets secondaries, and is looking to raise at least $500 million for the effort. The IFC is partnering with an as-yet unnamed private firm to manage the secondaries fund. The plan needs final approval from the IFC board, with fundraising launched by the end of June.

“It’s difficult to estimate the size we’ll need. Secondaries in the emerging markets is a new market,” according to Mark Alloway, the IFC’s head of business development for financial sector in Western Europe. The IFC could choose to raise a larger subsequent fund depending on the success of the debut fund, he said.

[quote]We do want to spread more widely and do secondaries investments in Latin America, Africa, the Middle East and Central and Eastern Europe.[/quote] IFC believes the creation of a robust secondaries market for the developing nations will be beneficial to the growth of the primary private equity markets in those countries, Alloway said.

A thriving secondaries market will allow limited partners, including those from developed nations, to have a way out if they need to get out of a fund.Secondaries are only a tiny piece of the investment universe in the emerging markets. Very few secondaries firms have emerging markets capabilities. Paul Capital is one firm that operates in developing countries, with offices in Hong Kong and Sao Paulo, Brazil.

IFC will be an “anchor” investor in the fund, Alloway said.
The strategy will be to not only focus on the more popular emerging economies in Asia like China and India, but to target smaller markets in Africa, and Southeast Asia, he said.
“We do want it to spread more widely and do secondaries investments in Latin America, Africa, the Middle East and Central and Eastern Europe,” Alloway said.

This option should relieve some of the concern developing markets LPs have in gaining exposure to the emerging markets in general, Alloway said.

“You’re providing liquidity, and a way out,” he said. “If investors know they can get out [if they have to], then they’re more likely to invest.”

Also, secondaries operations would give more traditional LPs looking to get exposure to emerging markets a path to earlier diversification, Alloway said.

“This would give a window into a number of funds in a number of areas in a sort of vehicle that by its nature should be lower risk, but with slightly lower returns,” Alloway said.

Last year, the IFC set up the IFC Asset Management Company, which functions as a fund manager of third party capital. The asset management division was created to manage $1 billion private equity fund, which allowed national pensions, sovereign funds and other sovereign investors from IFC’s shareholder countries to co-invest in IFC deals in Africa, Latin America and the Caribbean.

The division also manages the IFC’s $3 billion IFC Recapitalisation Fund, which protects “systemically important emerging markets banks”, from the fallout of the global financial crisis.