Challenges to Securities Markets

1. 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, Corporación Andina de Fomento

3. Market Performance, Jan. – Nov. 2002 27% 10% -16% -12% -23% -36% -58%

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

9. IFC commitment Breakdown by country (2001) IFC INVESTMENT IN PRIVATE EQUITYIN LATIN AMERICA No. of Funds $ millions $314 million committed in 22 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, 1980-1995) source: McKinsey

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