EMERGING MARKET VENTURE CAPITAL FUNDS
Challenges of Emerging International Markets
The initial wave of international venture capital investing in the emerging markets typically involved fund managers with (1) extensive knowledge and contact with the target region but little private equity experience or (11) extensive private equity experience (usually in the United States) but only marginal experience in the target region itself. In addition, there was no generally accepted framework for private equity investing in emerging markets. Rather, the approach was one of trial and error.
For example, based on the successful model developed in the United States where venture capital investors frequently have been able to exit investments through the public securities markets, many of the initial private equity funds structured their investments with the aim of exiting through the local secunties market or through an international placement of the target company's secunties. Unfortunately, the public secunties markets (locally or internationally) have not proven to be an effective means to exit most pnvate equity investments in the emerging markets. As a result, many emerging market funds have encountered difficulty in exiting their investments.
Fortunately, the expenences of the last fifteen to twenty years have helped to shape a model for emerging market pnvate equity investing. This emerging model retains the basic structure developed in the United States but has adjusted such model to meet the requirements of the local market. For example, this evolving model utilizes techniques designed to mitigate nsks associated with a less than fully transparent and effective judicial system and with thinly capitalized public secunties markets.
Addressing These Challenges
Expenenced attorneys are essential to the implementation of this new model. For example, the new model emphasizes the need to focus on developing an exit strategy for an investment pnor to making the investment. Moreover, such strategy will require looking at a variety of options, including making a quasi-equity investment rather than the traditional equity investment, negotiating put nghts with respect to an investment, and obtaining a drag-along nght or a forced sale nght (e.g., the nght to require that the target company be put up for sale itself if an exit is not completed by a certain date).