New Dimensions of the
Public-Private Partnership:
Private Equity Options in
Developing Countries
Alan G. Straus
Skadden, Arps, Slate, Meagher & Flom LLP
Istanbul
November 8, 2006
Investigating New Dimensions
• Meaning of “infrastructure”
• Meaning of “private equity”
• Reasonable targets of private investment
in a developing economy
• How the public sector can assist
• Investing in a “bottoms-up” manner
instead of from the top down
Traditional Private Equity
• High-profile financial investor/ major
corporation
• Taking target operations “private”, no
public reporting
• Stock market exit at high multiple
Infrastructure Investment in
Developing Countries Urgently
Needed
• Infrastructure investment can directly
assist the poor by
– Enhancing economic activity
– Removing bottlenecks in a local economy
– Generating distributional effects by increasing
the access of the poor to product markets
Infrastructure
• OECD defines as power, telecoms, roads,
and water supply
• More really constitutes “infrastructure” that
is suitable for PPP investment
– Political and social constraints
Expanded Infrastructure
• Small and medium sized businesses
where a relatively small, targeted private
equity investment can have a general
multiplier effect
• More targets for investment
• Maintains local ownership of resources in
the host country
SME-targeted Private Equity
Investment
• Stresses the importance of small and medium
sized enterprises (SMEs) to produce economic
growth and human security
• Portfolio investment
• Jumpstart a business that needs development
capital but for various reasons can’t access
more traditional capital
• Stimulate growth in the SME sector that in itself
will be able to have a greater opportunity to
expand and build infrastructure, as widely
defined
SME-Targeted Model
•
•
•
•
•
Not a controlling investment
High risk
Ties to Management Training
Usable with Islamic Financing Techniques
Lower Leverage
Afghanistan Renewal Fund
• Mix of European and Afghan management
• $20 million committed
– High-net worth individuals
– Development finance institutions and donors
• Pipeline: over 200 potential deals
– Entrepreneurs seeking total investment of
$380 million
– Deal-pipeline growing at 10-20 deals/month
Effective Public Sector Participation
• May come in various forms
• Public sector participates as investor
– Publicly funded development finance
institutions can partner with private sector in
investing
• Public Sector as asset owner
– Private sector participates with low capital and
investment risk through service or
management contracts
Effective Public Sector Participation
• Public sector participation in the form of financial
project support, such as guarantees and
insurance, can mitigate investment risk
• Public sector participation, through tax or
concession incentives, might encourage
packaging of investment in infrastructure that
has sectoral or regional significance with
business licenses for tradable opportunities
• Public and private interests to create a
fundamental utility (for example, water, power
and sewage treatment and development rights)
might support