IFC’s private equity investments cause controversy

7 February 2012

The increasing use of private equity (PE) firms as conduits for World Bank lending continues to stoke controversy (see Update 76, 73).

In October last year, the International Finance Corporation (IFC, the Bank’s private sector arm), signed up Emerging Capital Partners (ECP) as the first participant in the IFC’s Private Equity Africa Climate Change Investment Support Program. The programme provides advisory services and is funded by the Norwegian government. This follows a $25 million investment by the IFC in ECP in July 2010.

In January, a BBC report revealed that ECP hired a private investigation company to covertly monitor Dotun Oloko, a Nigerian whistleblower who had alerted ECP’s institutional investors to corruption allegations against the firm. Oloko’s name had been leaked to ECP by the UK’s Department for International Development (DFID). The investigation agency hired by ECP trawled through Oloko’s life, including interviewing friends and family members, and following his children to school. Oloko, who lives in fear of retribution and is unable to return to Nigeria, said “it is absolutely outrageous that the IFC can back ECP as a partner for development finance in Africa at a time when the ECP is facing strong and credible accusations of corruption, fraud and money-laundering. By selecting ECP at a time when increasing evidence is being put into the public domain by people who have placed themselves at risk to do so, the IFC and its selection process stand indicted.” The UK International Development Secretary, Andrew Mitchell, has now apologised “unreservedly” to Mr Oloko.

In June 2011, US-based NGO Pacific Environment wrote to IFC head Lars Thunell, regarding corruption allegations surrounding investments in Oceanic Bank in Nigeria made by the IFC-supported Ethos Private Equity Fund. The letter points out that “in 2007, Ethos Fund V announced it had led a consortium that invested $130 million in Oceanic Bank International Plc. Oceanic Bank has been named in Nigerian corruption and malfeasance investigations, and its former CEO and Managing Director, Cecilia Ibru, was removed from office by the Governor of the Central Bank of Nigeria [CBN] and was subsequently convicted and jailed for fraud.” It goes on to note that “in 2010, Oceanic Bank’s participation in the US Export-Import Bank’s Nigerian Banking Facility was revoked following an investigation by the agency’s Inspector General. It is not clear what, if any action IFC has taken following these developments.” Despite this, the IFC followed up previous investments with a commitment in December 2011 to put up to a further $30 million into Ethos.

The IFC’s response notes that Ethos had in fact informed the IFC of this “immediately” but that “Ethos indicated that it was not aware of any alleged fraudulent or criminal” activity prior to the CBN investigation. “the IFC reviewed Ethos’s due diligence in connection with the Oceanic Bank investment” and concluded that it “was in line with generally accepted business practices.” The IFC says it “has since had in depth discussions with Ethos about due diligence in frontier markets” and that this episode “has served as a costly learning experience” for Ethos, though it does not spell out what those costs are. In December 2011, the IFC invested a further $30 million in Ethos.

Hedge fund gets IFC backing

In September 2011, the IFC took a further major step in its rapid transformation into an organisation that increasingly uses financial intermediaries to deliver its projects (see Update 76, 73) by making its first investment in a hedge fund. The IFC has invested $100 million into a fund being set up by London and New York-based Christofferson Robb & Company, who aim to raise a further $300m million from private investors. The fund aims to help big international banks reduce the capital that new international rules will force them to set aside against loans to small companies in emerging markets by offering “risk protection for specific SME [small and medium enterprise] loan portfolios.” This can lower “banks’ capital costs of lending to SMEs, and therefore free up capacity for them to do new SME credit business”. The IFC will hold the less risky ‘senior tranche’ of investments, and earn 7 per cent returns, allowing other investors to buy a riskier tranche paying as much as 20 per cent.

Climate equity?

In September 2011, the World Bank issued a robust response to a critical report by Swiss NGO the Berne Declaration (see Update 78) on loans to Turkey from the Clean Technology Fund (CTF, one of the Bank-housed Climate Investment Funds). It denies the allegations that the Bank is over-estimating the amount of additional private finance ‘leveraged’ by the CTF, arguing that “CTF resources of $100 million have leveraged about $800 million of additional resources”. However, closer reading of their response shows that much of these “additional” resources are in fact further World Bank loans, not private investments.

The one area where the Bank backtracks slightly is on transparency, saying that “the World Bank agrees that it is important that information on individual subprojects is made publicly available during subproject implementation. In this regard, under the restructured project and proposed additional loan, the borrowers will require the sponsors of any new investment to provide, and agree to public disclosure of, subproject locations and nature, capacity of investments and the start and completion date of construction.” However, there is no commitment to apply this requirement to existing loans, or indeed to any other CTF or World Bank loans outside of this specific project.

Issues regarding the lack of transparency of lending through financial intermediaries is the subject of an ongoing review by the Bank’s private sector complaint mechanism, the Compliance Advisor-Ombudsman (see Update 76), which is now scheduled to be completed later this year.

Meanwhile, in November, the IFC’s Asset Management Company (AMC) launched its Climate Catalyst Fund, aimed at promoting private equity  investment in climate-friendly projects in emerging markets, while a recent report from US-based NGO the Oakland Institute details the Bank’s promotion of private equity firms in the agricultural sector (see Update 79).