Multilateral Investment Fund (MIF)

Established in 1993 to encourage the growing role of the private sector in Latin America and the Caribbean.

Equipped with funding of US $1.3 billion, for both grants and investments to support small-scale, targeted interventions that pilot new approaches and act as a catalyst for larger reforms.

Small Enterprise Investment Fund

Uses equity, loans, and quasi-equity to Uses equity, loans, and quasi-equity to promote small and microbusinesses in Latin promote small and microbusinesses in Latin America and the Caribbean.America and the Caribbean.

US$ 220mm committed in 35 venture capital US$ 220mm committed in 35 venture capital funds and 18 microfinance institutionsfunds and 18 microfinance institutions

Seeking innovative approaches to solve “old” Seeking innovative approaches to solve “old” problemsproblems

Capital Markets Case Study I

Building a microfinance industry

The experience of “donors” in making investments in Latin American

microfinance institutions?

Donors took early risks of Donors took early risks of start-up institutions which start-up institutions which private capital was private capital was unwilling to take. unwilling to take.

Current Status

Multilateral and bilateral agencies participating in Multilateral and bilateral agencies participating in specialized investment funds like Profund, Lacif, specialized investment funds like Profund, Lacif, IMI, Gateway. IMI, Gateway.

Joint ventures by “donors” with Private, strategic Joint ventures by “donors” with Private, strategic investment seen in new entities like Bangente, VZ, investment seen in new entities like Bangente, VZ, FIE, Bolivia, Ecofuturo, Haitian initiatives. FIE, Bolivia, Ecofuturo, Haitian initiatives.

Many microfinance institutions are now active, Many microfinance institutions are now active, recognized borrowers on local capital marketsrecognized borrowers on local capital markets

Challenges in mainstreaming the industry

Confused, inconsistent legal, Confused, inconsistent legal,

regulatory environments.regulatory environments.

Governance challenges caused by Governance challenges caused by

ownership structures, newness of ownership structures, newness of

the activity.the activity. Still, relatively little private Still, relatively little private

capital involved to date because capital involved to date because of high perceived risk. of high perceived risk.

But! Continued sound performance by market leaders Continued sound performance by market leaders

which are increasingly visible. Many mfi’s are the which are increasingly visible. Many mfi’s are the best performers in their financial sector - ROEs of best performers in their financial sector - ROEs of over 15%.over 15%.

Varied institutions at various stages of growth - Varied institutions at various stages of growth - healthy competition and stable, diversified funding healthy competition and stable, diversified funding sourcessources

Increasing interest by traditional banking sector.Increasing interest by traditional banking sector.

AND! More consistency in lending methodologies More consistency in lending methodologies

as best practices are proven. Actuarial as best practices are proven. Actuarial

analysis can be made.analysis can be made.

Development of new financial products that raise Development of new financial products that raise

new opportunities for investment and new opportunities for investment and

diversificationdiversification

How to bridge gap between formal capital market and the sector ?

Capital markets are increasingly globalized. Capital markets are increasingly globalized. Investors have a wide area of investment Investors have a wide area of investment opportunities and very little time to invest in opportunities and very little time to invest in choosing among alternatives. choosing among alternatives.

The industry needs to move toward The industry needs to move toward standardization in terms of legal structure, standardization in terms of legal structure, methodologies, regulatory structures, etc.methodologies, regulatory structures, etc.

Attracting capital to the sector

Transparency, consistency and high quality of Transparency, consistency and high quality of financial information.financial information.

Adviser, rating agencies, other third parties Adviser, rating agencies, other third parties should evolve which can intermediate between should evolve which can intermediate between entities and potential investors. MIF funding for entities and potential investors. MIF funding for this.this.

Risk sharing with private sector – DFL bond issueRisk sharing with private sector – DFL bond issue

Capital Markets Case Study II

Building a venture capital industry

Building a Venture Capital Industry: the starting point

Huge unmet demand by cash-strapped SMEsHuge unmet demand by cash-strapped SMEs Incipient v/c industry with no track recordIncipient v/c industry with no track record Poor regulatory environment accompanied by, in Poor regulatory environment accompanied by, in

some places, poor rule of lawsome places, poor rule of law Investors could invest in high yielding government Investors could invest in high yielding government

paper – why invest in illiquid high risk instruments?paper – why invest in illiquid high risk instruments? Scarce pool of experienced v/c managersScarce pool of experienced v/c managers Poor exit environment – small, illiquid stock Poor exit environment – small, illiquid stock

exchanges - and lack of upside potentialexchanges - and lack of upside potential

Building a Venture Capital Industry - The Goals

Increase the pool of local v/c managers with track Increase the pool of local v/c managers with track recordrecord

Develop “success-stories”, “best-practices”, new Develop “success-stories”, “best-practices”, new locally-based models, market standards and locally-based models, market standards and benchmarksbenchmarks

Attract private and institutional investors by Attract private and institutional investors by demonstrating potentialdemonstrating potential

Raise awareness and v/c culture among businessmen Raise awareness and v/c culture among businessmen and governments and governments

Improve regulatory environmentImprove regulatory environment

Building a Venture Capital Industry – Steps Taken

A large portfolio of targeted v/c investments looking for strong demonstration effects – 7 funds in Brazil, 6 in Mexico, 9 regional vehicles, rest are country funds throughout LAC

An increasing number of grant projects targeting structural and regulatory barriers

Raising awareness among governments and key-players – conferences Mexico, Brazil, Argentina

Disseminating “best-practices” and lessons-learned

Bridging the gap between formal capital markets and the sector ?

Closing the financial cycle by providing seed capital Closing the financial cycle by providing seed capital for the future LAC “winners”for the future LAC “winners”

Providing the needed critical mass of v/c funds and Providing the needed critical mass of v/c funds and managers to attract larger playersmanagers to attract larger players

Helping to put in place a more conducive regulatory Helping to put in place a more conducive regulatory environmentenvironment

Helping to develop new vehicles and instruments – Helping to develop new vehicles and instruments – SBIC type models, quasi-equity finance, etc.SBIC type models, quasi-equity finance, etc.

Building a Venture Capital Industry - FINEP Case Study

Brazil – Early 1990sBrazil – Early 1990s

v/c industry incipientv/c industry incipient Huge unmet demandHuge unmet demand No intermediaries to assist entrepreneursNo intermediaries to assist entrepreneurs Very few investorsVery few investors No organized marketNo organized market

Building a Venture Capital Industry - FINEP Case Study (Cont’d)

Government paper paid very high ratesGovernment paper paid very high rates No experienced v/c managersNo experienced v/c managers Overly regulated legal vehicleOverly regulated legal vehicle Poor exit environment – small, illiquid stock Poor exit environment – small, illiquid stock

exchangesexchanges Poor protections for minority investorsPoor protections for minority investors

Building a Venture Capital Industry - Steps taken by MIF and its partners

Finep/Sebrae/MIF/private participants signed an agreement Finep/Sebrae/MIF/private participants signed an agreement to co-invest in new venture vehicles – a “funds incubator”to co-invest in new venture vehicles – a “funds incubator”

Finep Venture Capital Web portal to provide entrepreneurs/Finep Venture Capital Web portal to provide entrepreneurs/managers with market infomanagers with market info

Conduct a series of Venture forums for matchmakingConduct a series of Venture forums for matchmaking Provide trainingProvide training Associate with other investors to document regulatory Associate with other investors to document regulatory

reformsreforms Interface with Bovespa on creation of Nuovo MercadoInterface with Bovespa on creation of Nuovo Mercado

Modest but important results since program began one year ago

Five new funds created out of thirty three proposals – MIF committed $7mm.

Funds had support of MIF, SEBRAE, FINEP but also at least 20 private investors.

Awareness program hugely successful – MIF provided $1.2mm

Joint due diligence has resulted in a cohesive approach to recommending reforms in local fund legislation.

Remittances – channeling informal capital flows

IDB estimates that $33 billion in remittances flow into Latin America and the Caribbean from international migrant workers

Increasing opportunities for financial institutions to tap into these resources

Opportunities for securitization of such funds – Mexico and El Salvador

MIF goals – improve consumer welfare by reducing transaction costs and channeling funds into formal system. .

Remittances – MIF activities

Research and awareness

Brokering new relationships – Japan/Brazil; Ecuador/Spain; US/El Salvador; etc.

Promoting new financial products, use of technology and expanding outreach.