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Top Lessons by Subject

Funds

1. Fund Managers: Management is the single most important determinant of the success of investment funds. IFC should ensure that:

  • the selection process of the manager is transparent;
  • IFC participates actively with the fund's sponsors in identifying experienced, high quality fund managers; and
  • fund managers have relevant formal training or outside experience.
     
    2. VC structures to avoid: IFC should be extremely cautious, and should probably not invest in venture capital funds where:
  • IFC has not played a role in structuring and sponsors are not prepared to amend terms;
  • the VC has not undergone an in-depth appraisal, but there is "political" pressure to invest; and
  • the VC is excessively small.
     
    3. Fund manager's contract: IFC should pay particularly careful attention to the fee structure and termination provisions in the fund manager's contract.   The fund managers incentives should be tied to the achievement of project commitment and project performance objectives. The contract should enable IFC to terminate a fund manager for non-performance.
     
    4. Disbursements: Disbursements to venture capital funds should be in stages to avoid over-liquidity of the funds and attendant low returns on liquid assets and risks of devaluation. A further advantage of disbursement in stages is that technical collaboration agreements can be included as conditions of disbursement to the fund.
     
    5. Exposure limits: Clear restrictions and adherence to borrowing and exposure limits in venture capital funds is essential. However, IFC is helpless in enforcing these limits when they are waived by a majority of the board.
     
    6. Deal flow: The deal flow of venture capital funds is often too optimistically forecast.
     
    7. Screening requirements: During screening and appraisal of venture capital funds, IFC should carefully review the fund management company's system of budgeting and internal controls. IFC should also review the main drivers of the fund management company's revenues, profitability and financial condition.


    The above lessons are based on 37 lessons from past IFC investments.
    Last updated December 1998    .

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