LAVCA recently spoke with Marieke Roestenberg, Senior Investment Officer- Private Equity at the Netherlands Development Finance Company (FMO), about its focus on emerging markets and strategy and interests in Latin America.
LAVCA: Please give some background on your fund and FMO’s mission. What are your assets under management?
Roestenberg: FMO is the development bank of the Netherlands, focusing exclusively on private sector investments in emerging markets. Majority owned by the Dutch government, we offer a broad spectrum of financial products, including loans, guarantees, capital market products, mezzanine and equity products, to companies and entrepreneurs in Africa, Asia, Central & Eastern Europe and Latin America. FMO’s total portfolio amounts to USD 4.6b of which approximately USD 1.1b consists of equity investments. Celebrating our 40th anniversary this year, we seek to be ‘the entrepreneurial development bank’.
LAVCA: What are your investment criteria? Do you have a diversification strategy, by asset class and geography?
Roestenberg: As a development institution, FMO always looks for financial market-based returns in combination with developmental returns (e.g. creating access to scarce products/services, generation of additional employment, improving sustainability). From an equity perspective FMO focuses both on direct investments as well as fund investments. In the case of funds we prefer to support first-time or second-time funds (leaving subsequent fund generations to the commercial investor segment) focusing on the SME or mid-market segments with a size up to approximately USD 350m. Especially with mid-market funds we often have a preference for funds that generate a good potential for co-investments.
LAVCA: What geographies or countries are of particular interest to you right now? What about in Latin America specifically? Has this changed since you first entered the region?
Roestenberg: FMO seeks to concentrate its investment efforts in low and lower-middle income countries. In addition, we are looking for high growth markets that do not experience a large influx of capital from pure commercial parties. Consequently, in Latin America we have been excluding Brazil and Mexico from our investment focus since 2009. We are currently mainly focusing on Colombia and Peru in the Andean region but we are also interested to explore opportunities in Central America and the Southern Cone region (with the exception of Chile).
LAVCA: Roughly what percentage of your portfolio do you generally allocate to Latin America? How has this changed in recent years?
Roestenberg: Our equity portfolio in Latin America amounts to roughly USD 200m, representing almost 20% of FMO’s overall equity portfolio, which is similar to the allocation in previous years. We expect the allocation to Latin America will remain fairly constant in the future.
LAVCA: What would be a typical size of a commitment that you make to a fund? Does Latin America differ from other emerging markets?
Roestenberg: Depending on the fund’s size, investment focus and strategy, FMO typically commits between USD 5-20m to a fund, but the average size of our fund commitments, both in Latin America as well as in other emerging regions, averages around USD 10-15m. Generally, we try to avoid taking more than a 20% stake in a fund.
LAVCA: Who are your co-investors?
Roestenberg: FMO works out of one office which is based in The Hague in the Netherlands and we have no local ‘on-the-ground’ presence in our focus regions. Therefore we always prefer to invest alongside a local active partner that can have hands-on involvement in our investments and that can add value on a day-to-day basis. In many cases this local active partner is one of the fund managers that we selected for a fund commitment and with whom we subsequently seek to realize co-investments. However, FMO also often invests alongside other DFIs such as DEG, Proparco and IFC. Finally, we also frequently invest alongside commercial local or international institutional investors. In fact, FMO actively seeks to trigger investments by commercial investors into our projects where we can, since catalyzing commercial capital is considered a key element of our mission.
LAVCA: Have you co-invested alongside local pension funds (for instance in Colombia and Peru)? If so, how was your experience working with them?
Roestenberg: We have invested in funds alongside local pension funds in Colombia and Peru mainly; in most cases however the direct interaction with them to date has been limited, since often the international investors (including FMO) invest through a separate (parallel) vehicle domiciled at an offshore location, while most of the pension funds prefer to invest through vehicles domiciled locally. Nevertheless, we look forward to work more closely with these important local investors in the future.
LAVCA: What are the key characteristics of the best emerging markets fund managers?
Roestenberg: Given the specific dynamics of many emerging markets, we consider deep knowledge of the local market and an extensive local business network as the key elements of a good emerging market fund manager; this often translates into a requirement for local presence and staffing by a team of professionals coming from the country or region. Good fund management teams typically also have built up some kind of track record, either in a previous fund or on an ad-hoc investment basis, which has allowed them to validate their strategy, focus and investment approach. First time managers typically lack an existing track record as a team, in such cases we look for relevant professional experience and individual track records. Other key elements that we take into account when evaluating fund managers are team cohesion and the complementary skills of the professionals within the team.
LAVCA: What data do you use to benchmark returns in Latin America? Would the availability of better data make you more willing to allocate capital to the region?
Roestenberg: We benchmark the returns of our portfolio to emerging market benchmarks as provided by MSCI for listed entities and Cambridge Associates for the PE industry. Benchmarks are primarily used to assess our own performance or to assess the performance of fund managers. Investment allocations among regions are more driven by our assessment of the market opportunities.
LAVCA: Do you plan on making new investments in 2010 in Latin America? If so, how many investments do you expect to make?
Roestenberg: We are always looking for interesting opportunities in Latin America and aim to commit an additional USD 50m in equity to the region during this year. This amount will likely be allocated across 3-4 fund investments and 2-3 direct investments.