MANILA, PHILIPPINES (27 February 2019) — The Asian Development Bank's (ADB) experience with equity investments reveals that development outcomes and financial success are positively correlated, and one does not have to come at the expense of the other, according to a recent study by ADB's Independent Evaluation Department (IED).
Equity investments are an increasingly important source of capital for companies in Asia, especially high-growth small and medium-sized ones developing new products and expanding operations. While investors look for financial returns, development institutions recognize that private equity investments can also deliver development results.
“Getting more equity capital into Asia’s private sector will be important for its growth and development because of the positive influence that institutional investors and investment funds can have not only on corporate governance and risk management but also for raising environmental and social standards,” said the Director General of Independent Evaluation at ADB Mr. Marvin Taylor-Dormond, adding that multilateral development banks such as ADB are devoting considerable resources to support equity investments that contribute to the creation of economic wealth, enhance development, and reduce poverty.
ADB made 67 private equity investments totaling $1.8 billion in the evaluation’s 2006–2017 review period, split almost evenly between direct equity investments and investments in private equity funds. Just over half of ADB’s direct equity investments were made in the People’s Republic of China and India, reflecting a concentration in two of ADB’s largest client countries.
“Investments made by multilateral development banks in the equity of companies whose businesses help advance development can go a long way in reducing the risk concerns of other potential investors,” said Mr. Enrico Pinali, the evaluation’s team leader. “In doing so, they can help attract co-investment from the public and private sector.”
As well as being more financially sustainable, ADB’s direct equity investments made a greater contribution to development results—such as improving access to finance and supporting the operational expansion of investee companies—than private equity funds. Around 85% of ADB’s direct equity investments were rated successful on the basis of evaluation criteria that included investment profitability and development results. The success rate was 37% for the private equity fund investments.
The evaluation highlighted several external factors that affected ADB’s equity investments over 2006–2017 including policy and political risks, and weak regulatory frameworks. It noted that although countries in East Asia and Southeast Asia include middle-income countries, they still have macroeconomic imbalances that inhibit the flow of risk capital.
Director of IED’s Sector and Project Division Mr. Nathan Subramaniam said that ADB needs to scale up its value addition proposition as private equity investments will have a more prominent role to play in the bank’s operations. He added that this will be facilitated by two recent developments at ADB: a significant increase in the capital resources that ADB can use for these investments and a plan to increase all the bank’s private sector operations so that they account for one-third of supported projects by 2024.
About Independent Evaluation at ADB
ADB's Independent Evaluation, reporting to the Board of Directors through the Development Effectiveness Committee, contributes to development effectiveness by providing feedback on ADB's policies, strategies, operations, and special concerns in Asia and the Pacific.