Private Equity Fund Operations | Asian Development Bank

Private Equity Fund Operations

Evaluation Document | 1 July 2008

This evaluation aims to identify how private equity funds operations could contribute better to private sector development.

ADB first invested in private equity funds (PEFs) in 1983 primarily to promote small and medium enterprises in developing countries. Between then and 31 December 2007, approved investments in PEFs totaled 75, with a combined value of $900 million. Such investments are now a core activity of ADB's Private Sector Operations Department: as at 31 December 2007, it had 40 active funds with a total value of $676.4 million.

Building on work done in 2002, OED conducted this special evaluation study to identify how PEF operations could contribute better to private sector development, focusing on investments administered by the Private Sector Operations Department in ADB's developing member countries. The evaluation covers from the commencement of ADB's PEF operations in 1983 to 31 December 2007. The investment portfolio was evaluated in terms of

  • development impacts and outcomes
  • ADB investment profitability
  • ADB work quality
  • ADB additionality

Summary of assessments

  • Development impacts and outcomes are evaluated in terms of (i) private sector development; (ii) business success; and (iii) environment, social, health, and safety performance. Overall rating for development impacts and outcomes is satisfactory.
  • Private sector development was rated satisfactory due to generally positive beyond-company impacts of mobilizing funds and demonstrating the feasibility of the concept of PEFs in Asia; and evidence of positive direct company outcomes in areas such as strengthening corporate governance, technology transfers, and employment generation.
  • Business success is less evident and rated partly satisfactory. Financial returns generated by ADB PEFs are significantly below comparators. ADB's average annual nominal return (net of management fees) in PEFs for 1986-2005 was 6.9% compared to the industry benchmark averages of 12.6% for Asia, 24.4% for Western Europe, and 20.4% globally (excluding the United States).
  • Provisions for fund managers to establish safeguard management systems have worked effectively, although provisions to monitor safeguards post approval should be strengthened, assigning a rating of satisfactory for environmental, social, health, and safety issues.
  • Although improving in recent years, overall ADB investment profitability has been poor, with nominal financial rate of return for the PEF portfolio of 7.5%, only slightly more than half of ADB's required rate of return of 14.3% for PEFs. Overall, ADB investment profitability is rated unsatisfactory.
  • ADB work quality was evaluated in consideration of (i) screening, appraisal, and structuring; (ii) monitoring and supervision; and (iii) role and contribution to the project. The screening process has demonstrated a lack of strategic focus, and the identification of PEF investments has been primarily reactive in response to sponsors approaching ADB.
  • Appraisal and structuring had been satisfactory. The due diligence process is comprehensive by industry standards and had been reasonably successful in identifying low-risk PEFs; however, development impacts were not clear, and financial performance had been poor. Post investment approval, funds had often departed significantly from approved investment concepts and few mechanisms were available to the Private Sector Operations Department to mitigate this risk.
  • Monitoring and supervision had been weak, primarily due to disparity in the quality of reporting and weak information management systems. Lack of data and management reports make it difficult to assess ADB's role and contribution to developing PEFs. Once funding is committed, the department is largely dependent upon fund managers to achieve positive development and financial results by relying upon a combination of commercial incentives and a set of high-level investment restrictions that have little relationship with development objectives. Overall, ADB's work quality is rated partly satisfactory.
  • ADB additionality was evaluated based on whether (i) ADB finance was a necessary condition for the timely realization of PEF investments, and (ii) ADB's contribution and function improved development impact. The study indicated that ADB's past participation in PEFs has provided additionality by catalyzing private investment in PEFs. However, this impact has been declining over time due to the continued focus on markets such as India and the People's Republic of China, where ADB's demonstration and risk mitigation impacts for PEFs have been declining in recent years, as demonstrated by the rapid growth in private equity in these markets. Due to resource constraints, the Private Sector Operations Department had had limited ability to directly add value to PEF operations and strengthen their development impacts. ADB additionality is rated partly satisfactory.
  • As justified by the underlying ratings of development impact, investment profitability, work quality, and additionality, the overall rating for ADB's PEF operation is partly successful.


The evaluation recommends that ADB Management consider

  • strengthening country programming arrangements for better coordination within ADB at the country and sector level when seeking to develop the nonbank financial sector for private sector development
  • preparing an operational strategy for PEFs, setting out principles for managing the overall portfolio, identifying targeted countries and subnational regions, sectors, stages of firm development, styles and sizes of funds, and desired development impacts that is circulated to all regional departments
  • upgrading PEF portfolio planning, management, and reporting systems to facilitate management of PEFs as a stand-alone portfolio and facilitate development impact monitoring
  • strengthening the risk management systems for PEFs by putting in place capacity to independently monitor projects post-approval from a financial, social, and environmental perspective
  • clarifying organizational roles and responsibilities, with particular regard to making greater use of resident missions for PEF operations, and the need to complement regional department operations
  • allocating sufficient resources in the areas of budgeting and staff to efficiently and effectively manage PEF operations


  • Executive Summary
  • I. Introduction
  • II. Rationale for Promoting Private Equity Funds
  • III. ADB's Strategies and Assistance Programs
  • IV. Private Equity Fund Evaluation
  • V. Issues, Lessons, and Recommendations
  • Appendixes