In response to the critical shortfall of private equity capital in developing countries, OPIC provides support for the creation of privately-owned and managed investment funds. These funds make direct equity and equity-related investments in new, expanding or privatizing emerging market companies. OPIC-supported funds assist emerging market economies to secure long-term growth capital, access management skills, and secure the financial expertise, all of which are key factors in expanding economic development.
OPIC-supported funds are among the largest providers of private equity capital to emerging markets. Since the inception of its investment funds program in 1987, OPIC's funding commitments (as of FY 2009) have totaled $3.6 billion to more than 50 private equity funds. These funds in turn have invested $4.6 billion in over 470 privately-owned and managed companies, the vast majority of which are small and medium-sized entities, located across 53 developing countries that are eligible for OPIC support. The beneficial impact of OPIC’s credit support of funds that invest in companies is significantly greater than the amount of capital that OPIC contributes directly to the funds: private equity direct investment creates a multiplier effect as new capital attracts additional investment and financing in companies.
OPIC mobilizes risk capital for emerging markets by providing, through guaranties, long-term debt capital to private equity funds. OPIC’s involvement often serves to encourage institutional investors who may not routinely invest in emerging markets to participate in such funds. OPIC’s support, in addition to the equity raised by fund managers from private sector institutions, is directly invested in private companies in emerging markets. OPIC provides in most instances approximately one-third of the fund’s total capital. The debt is structured similar to that of a zero coupon bond: most of the interest expense is capitalized until the fund liquidates its investments, with the tenor often in parallel to the fund’s life, and repayment occurring in the later stages of a fund’s life.
In addition to mobilizing capital, OPIC Investment Funds also support economic development by mobilizing expertise. OPIC-supported fund managers provide knowledge and experience to the companies in which they invest. These fund managers guide the strategic direction of portfolio companies, participate actively on company boards, and help companies recruit experienced operational managers. The result is enhanced productivity, reliable financial controls, improved corporate governance, modern business practices, and improved worker health and safety conditions. Fund managers also serve as active advocates for the improvement of the local legal and regulatory environment, protection of private property and shareholder rights, and the expansion of robust capital and financial markets.
No element of an OPIC Investment Fund is more important than identifying fully qualified and successful fund managers. To accomplish this, OPIC utilizes an open, competitive process in selecting fund managers initiated periodically through the publication of a “call for proposals” in private equity trade journals and on OPIC’s Web site. Teaming with a prominent private equity advisory consultant, which is also selected through a competitive process, a selection committee established within OPIC conducts extensive manager evaluations and due diligence prior to recommending any proposal to OPIC’s Board of Directors. Any fund manager meeting the selection criteria published in the call will be considered, but only the managers that best fulfill such criteria are selected.
To ensure that OPIC’s Investment Funds portfolio operates on a self-sustaining basis, reflects current policy priorities, and addresses the dynamics of the private equity market, OPIC utilizes asset allocation planning to coordinate its response to policy initiatives and market needs while maintaining a diversified portfolio of funds. In addition, OPIC actively monitors and conducts periodic reviews of the funds it supports as well as their portfolio company investments to ensure compliance with OPIC’s Investment Policy requirements with respect to environmental guidelines, human and workers’ rights, and to ensure that projects supported by OPIC do not have a negative impact on the U.S. economy.
How Funds Work
In general, the funds are organized by experienced sponsors of previous investment vehicles who raise the funds’ equity capital through private placement of equity interests with sophisticated institutional, corporate, and other qualified investors. Funds are typically managed by an affiliate of the sponsor(s) with a proven track record in direct equity investments, portfolio management, and relevant regional or sectoral experience. The fund manager is expected to add value to the portfolio investments by providing management expertise, improved marketing, and access to international manufacturing technologies, and to implement a coherent strategy for the eventual liquidation of investments. The fund manager typically becomes a voting member of the board of directors or other governing body of any company in which a fund invests.
OPIC-supported funds typically are organized and structured like other private equity investment vehicles, i.e., as limited partnerships or limited liability companies. OPIC supplements private equity capital by lending long-term debt (typically with a 10 to 12 year maturity) to a fund. OPIC's new program standard generally limits the amount of debt to one-third of the private equity capital invested in the fund. OPIC receives commercially-based fees and a small profit participation component as compensation for the financing provided to the fund, and the program is structured to ensure that fees and profit participation will fully cover costs and a modest return. In addition, OPIC’s terms allow the fund manager to make distributions pro rata along with the equity investors subject to certain covenants being met.
Typically, OPIC financing will be provided to the fund in the form of a loan in which certificates of participation guaranteed by OPIC (and backed by the full faith and credit of the U. S. Government) are sold to “eligible investors” as defined in OPIC’s governing statute. In general, eligible investors include: U.S. citizens; U.S. corporations, partnerships, or the like which are more than 50% beneficially owned by U.S. citizens; and foreign entities wholly owned by U.S. citizens. OPIC requires either (1) that the fund manager or general partner be eligible investors, or (2) a significant percentage of the limited partner capital of the fund (typically, an amount equal to 25% of the OPIC financing) be provided by eligible investors. OPIC does not offer any guaranty of the fund’s equity, and all equity investments in OPIC-supported funds are fully at risk, and subordinate to any OPIC lending.
OPIC-supported funds operate in a variety of markets, including sub-Saharan Africa, Russia, Central & Eastern Europe, Latin America, the Middle East and Asia. Sector-specific funds operate worldwide and include investments in environmentally-friendly companies, water-related enterprises, maritime projects and independent power projects.
With regards to its existing portfolio of funds, OPIC conducts ongoing reviews of each fund. OPIC also monitors individual portfolio companies to ensure that they meet OPIC Investment Policy requirements regarding U.S. economic and environmental impacts, host country development impact, as well as worker and human rights.