The World Bank's private sector lending arm is boosting its equity investments in home-grown second-rank companies where it sees opportunity and growth but wary investors may still see risk.
The bank's International Finance Corp (IFC) has long loaned funds businesses in the developing world to reduce poverty and promote economic development. It has also teamed up with major companies in high-risk markets as a lender and guarantor.
But since 2005, IFC has started to step up its equity stakes in second-tier local firms in developing nations and in March created a new equity department to manage that expansion.
"We have the capacity, the balance sheet, and equity base, and the risk-taking appetite to grow on the equity side, at the very least in line with our overall growth in loan investments," Sak Kupasrimonkol, director of the new equity department, said in an interview late on Friday.
"The mix of the portfolio is going to be somewhat different from the past, it is going to be much more orientated towards local companies where we can be most useful," he added.
With economies booming in many developing countries and plenty of private capital pouring into rapidly growing nations like China and India, IFC is looking off the beaten track for the next "big one", where investors perceive greater risk but potential remains untapped.
While there are still opportunities in Asia and Latin America, Kupasrimonkol said reform-minded countries in the Middle East and Africa had caught IFC's attention.
For example, he said IFC was eyeing a number of transactions in Pakistan, a country perhaps less associated in some quarters with business than with Washington's declared war on terror.
"It has certain potential but there are also geopolitical risks, which is why perhaps people are less concentrating in that area, but there are niche markets where IFC can have a special role," Kupasrimonkol added.
He said he was optimistic about sub-Saharan Africa, where IFC plans to significantly boost its activities in 2007, latching on to strong economic growth and improved economic management in the region.
IFC is not the only one courting Africa's potential. Private equity funds are also looking in that direction, attracted by the high returns - higher than in former frontier markets in Eastern Europe and, in some cases, Asia. "We are seeing private equity funds are beginning to be interested in Africa and this is an area I am optimistic about because they have the resources and the population for demand," Kupasrimonkol said.
It is in these nascent markets that Kupasrimonkol sees IFC being most useful and making early equity investments in companies looking seeking to grow but lacking capital. With 51-years of experience, knowledge in global markets, in-house specialists, and an understanding of social and environmental standards, the IFC had a lot to offer, including the World Bank name. he said.
New equity commitments - the volume of deals signed a year - totalled $612 million in fiscal year 2005 and increased to just above $1 billion in 2006. For 2007, IFC hopes to increase that by around 40 percent and more than double the 2006 figure each year for the next two to three years.
"More and more we are seeing that our clientele is local medium-sized companies that want to grow enough so they can raise capital from stock markets, but a number of things needs to be done before they are in that position, and this is where IFC can help," Kupasrimonkol said.
He said IFC was limited to being a minority partner. "We are not in the business of becoming a majority or managing shareholder and that by itself means our partners don't feel threatened, we are there to work with them." While sector strategies may vary from region to region Kupasrimonkol said demand was "tremendous" in infrastructure development in Africa, telecommunications and financial services.
"This is where innovation and an ability to take risks can make a significant difference," he added. Kupasrimonkol said IFC was also prepared to offer equity investment for early stage exploration or mining and also consider debt financing if an operation has proven reserves. In growing middle-income countries such as China and India, he said consumer-driven sectors were of interest.