World Bank's Jim Yong Kim embraces private equity
By Jame DiBiasio
Jim Yong Kim has journeyed on the road to Damascus. Just as the early Christian apostle Paul was suddenly converted to a new faith, the recently installed president of the World Bank Group has similarly changed belief – in this case, by realising the need for private capital to drive economic development in emerging markets.
Kim revealed his change of heart while speaking in Washington, DC at the annual global private equity conference organised by the Emerging Markets Private Equity Association (Empea) and the International Finance Corporation, the private-sector arm of the World Bank.
Now less than a year into his presidency, Kim, a former anthropologist and health expert, says, “I never would have guessed that private equity could play a critical role in meeting the aspirations of the two billion people still in poverty today.”
Prior to assuming this role, Kim believed the solution to eradicating absolute poverty (defined as living on less than $1.25 a day, a condition affecting 1.2 billion people) had to come from increasing official development aid, and making it more effective.
However, government foreign aid tallies $125 billion a year, which is just a drop in the bucket of what emerging markets require to lift themselves out of poverty.
The Brics countries alone require nearly $5 trillion of infrastructure spending over the next five years. At least half of that financing will have to come from the private sector.
India has 400 million people living in absolute poverty. “India needs private-sector investment to grow its economy and escape poverty,” Kim says, “and official development assistance won’t cover it.”
He also says he now realises that, if private capital is required, it must see a steady profit on that investment. “We can’t address the bottom 40% of society [in terms of wealth] unless private equity feels confident about investing.”
Kim says private equity is demonised in Western societies because it uses leverage. But it does not generally use leverage in emerging markets, and there it is pure growth equity that supports companies lacking access to bank financing.
“The private sector creates 90% of the jobs in developing countries,” Kim says. Acknowledging his knowledge of how public-private partnerships operate is still sketchy, Kim says, “I don’t know what PPP arrangements work, but I know [how to make them work] is the question” the World Bank has to address if it is to reduce the global population living in absolute poverty to just 3% by 2030.
Cai Jin-Yong, CEO of the IFC, has also been in his role for under one year. Also speaking at the event, he says bankers and private equity investors are guilty in the eyes of Western media. “But in Africa and other emerging markets, people are looking for solutions,” he says. “Look at my boss: the mainstream is starting to realise that private capital is the key to helping the world. It is more efficient than public capital, and there’s a lot more of it.”
He urges private-equity managers to “tell the media your story and what you have done to help grow the economy and create jobs”.
Cai, a former Morgan Stanley and Goldman Sachs investment banker, says the youthful demographics in many emerging markets creates a need for private investment, in order to create jobs. He cites infrastructure as a key area, while Kim says investments to address climate change and to promote women entrepreneurs are critical areas where PPPs need to come into play.
Cai, a Chinese national, adds that private investment will be required in China in order to rebalance its economy away from state-led fixed-asset spending to big, connected companies, and to help support smaller enterprises currently starved of bank credit.