LP view: IFC's view on emerging Asia

The International Financial Corporation’s Asia head for its financial institutions group discusses the investor's approach to debt investing in emerging Asia.

The private-sector investment arm of the World Bank Group, the International Finance Corporation (IFC), is the largest multilateral source of loan and equity financing for private sector projects in the developing world. PDI caught up with the IFC’s financial institutions group manager for East Asia and the Pacific, Adel Meer, to find out how the investor views the current market opportunity in Asia.

What are the considerations you need to make when investing in emerging markets?
Adel Meer: The philosophy of IFC is that there has to be a meeting of minds between the client, its shareholders, the macro environment and our objectives. The measure of success is based on making sure that the legal and regulatory environment in the country is conducive and open to what we are trying to do. We can only make a difference when the government is supportive of our efforts to address a market gap. Secondly, you have to be certain that the market fundamentals are making sense. As an example, life insurance products are most likely to be purchased by people with an annual net income of over $2000. People do not have the disposable income will not be able to afford it, so timing an investment in an insurance company has to match market reality. Thirdly, you need to have the right sponsor, you really need to have the right shareholders mix who know the market well enough and want to partner with an institution such as IFC.
That’s why association with the World Bank helps. The World Bank deals directly with the government to implement legal & regulatory reform and lends to government to make those changes. Only when those regulations are in place, IFC can successfully come in to invest. It is a very coordinated approach.

What are the differences in investing among the Asian countries?
AM: Myanmar has the lowest financial penetration rate in Asia, which is the percentage of credit available as of the percentage of GDP. They would like to see their financial penetration to go up and we have taken up two equity investments and have set up two micro financial institutions to help Myanmar to get more credit in the sector. For China, we spend a lot of time in digital finance as Alibaba, Baidu, they would like to use their digital footprint to offer loans. They are looking to offer credit and lend to those who don’t have formal access to bank accounts. In Philippines, we look at rural banks because the market is very dispersed, you have a few metropolitan areas and in many rural areas people don’t have the same infrastructure and access to big banks.

Do you usually work with a local or international sponsor?
AM: We can never be a majority shareholder, our mandate is always to be a minority shareholder and a facilitator. In many infrastructure projects we aim not to directly fund more than 50 percent of the project cost. We work with both local and international shareholders. It depends on the market needs and the project shareholding.

Do you invest in more debt or equity?
AM: For financial institutions, in terms of volume, we do more debt than equity. Equity investment require a more hands on approach. As a shareholder you often have to sit on the board of the company and work on the business plan and strategic goals together with other partners. For a debt investment, it can be targeted, as an example we provided $300 million debt to Thai banks after the flooding in 2011, the purpose of that funding was to provide the USD liquidity their SME clients needed to rebuild the inventory damaged by the flood water. In many cases a debt investment can be processed much faster that an equity injection which could take a bit longer.

What is the typical time commitment for IFC’s investments?
AM: There is usually a seven-year holding period for equity investment on average, for debt, it really depends on the market. For more sophisticated markets like Thailand, you can go up to 10 years but for less developed markets such as Myanmar, it tends to be shorter.

Do you see more international players going into Asia?
AM: In fact, I see more regional players. With the current low interest rate environment, there has obviously been a shift for high yield investments in emerging markets. Japanese, Korean, Chinese and Taiwanese banks are stepping up the game by doing a lot of the project financing in the region.

Which country in Asia do you have the most exposure?
AM: China is where We have the biggest volume in terms of capital commitment. However, we are looking actively in Myanmar. Countries like Myanmar, are a top priority for us and we have to do more, anything you do in the country will have a huge impact as their baseline in terms of financial services offerings is so low.

Meer will be speaking at PDI’s Asia Forum in October this year. Click here
http://events.privatedebtinvestor.com/events/private-debt-investor-asia-forum/event-summary-bbbca4eb629846d890242ba8c89c1195.aspx#sthash.qR4L7xby.dpuf