Overseas Investment: The Overseas Private Investment Corporation's
Investment Funds Program (Briefing Report, 05/09/2000,
GAO/NSIAD-00-159BR).

Pursuant to a legislative requirement, GAO reviewed the Overseas Private
Investment Corporation's (OPIC) progress in improving the management of
its investment funds program, focusing on: (1) how OPIC identifies and
approves investment fund concepts and selects fund managers; (2) the
funds' performance to date; and (3) the risk levels assigned to the
funds.

GAO noted that: (1) OPIC has identified and approved investment fund
concepts through three different mechanisms: (a) OPIC has identified the
need for funds in specific regions or sectors; (b) funds have been
created in response to administration or congressional foreign policy
initiatives; and (c) prior to its investment fund improvement plan
implemented in 1998, OPIC created several funds based on unsolicited
proposals received from the private sector; (2) under revised procedures
adopted as part of its 1998 improvement plan, OPIC publicly solicits
proposals from prospective private sector fund managers; (3) OPIC
officials stated that all of the fund managers, past and present, were
selected on the basis of experience and proven success with investment
funds or in a related industry; (4) the four fund managers that GAO
interviewed all indicated that OPIC completed a rigorous background
examination of their experience and qualifications; (5) however, GAO
reviewed OPIC's internal reports, correspondence, and other relevant
documents for the 26 operating investment funds and determined that 14
fund managers were not selected through a competitive process; (6) the
remaining 12 fund managers were selected after OPIC had solicited or
considered other proposals; (7) OPIC officials acknowledged that, prior
to 1998, it was not OPIC's policy to solicit competing fund manager
proposals for each fund; (8) it is difficult to draw meaningful
conclusions about fund performance to date because the investment funds
have been in operation for about 5 years on average--about half of the
projected life span; (9) OPIC provided GAO with the fund managers'
estimates of fund performance, which show that 13 funds presently have a
positive return on investment while 10 funds show either a zero or
negative annual average return (3 funds have not started investing);
(10) these estimates cannot be used to predict the future performance of
the funds, as they are only a snapshot of current performance; (11)
according to OPIC, the one fund that is now close to fully liquidating
its investments is expected to repay OPIC guarantied loan even though
the final return of the fund cannot yet be determined; (12) as of
September 30, 1999, 16 of 23 funds with investments had passing ratings,
indicating that the funds at least had a minimum ability to repay the
loan; (13) the 7 remaining funds had risk ratings that reflected
concerns about the repayment prospects of the loan; (14) however, no
funds are rated as a loss; and (15) to hedge against the possibility of
future losses, OPIC has established reserves that are based on risk
ratings for the investment funds.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  NSIAD-00-159BR
     TITLE:  Overseas Investment: The Overseas Private Investment
	     Corporation's Investment Funds Program
      DATE:  05/09/2000
   SUBJECT:  Investments abroad
	     Federal aid to foreign countries
	     Government guaranteed loans
	     Investment insurance
	     Risk management
	     International economic relations
	     Financial management
IDENTIFIER:  OPIC Investment Funds Program

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GAO/NSIAD-00-159BR

Briefing Section I: Overview 8

Briefing Section II: OPIC's Fund Concept Selection Process 20

Briefing Section III: OPIC's Fund Manager Selection Process 22

Briefing Section IV: OPIC's Investment Funds Financial Standing and
Performance 24

Appendix I: Results of GAO Review to Determine Origin of
Investment Fund Concepts

34

Appendix II: Results of GAO Review to Determine Fund Manager Selection
Process

35

Appendix III: Objectives, Scope, and Methodology

36

Appendix IV: Comments From the Overseas Private Investment Corporation

38

Appendix V: GAO Contact and Staff Acknowledgments

40

OPIC Overseas Private Investment Corporation

National Security and
International Affairs Division

B-285132

May 9, 2000

The Honorable Mitch McConnell
Chairman
The Honorable Patrick Leahy
Ranking Minority Member
Subcommittee on Foreign Operations
Committee on Appropriations
United States Senate

The Overseas Private Investment Corporation is an independent,
self-sustaining U.S. government agency1 created in 1969 to assist U.S.
investors overseas by providing political risk insurance,2 financing, and
other investment services. The Overseas Private Investment Corporation's
investment funds program was created in 1987 and has committed
$2.3 billion in financing (loan guaranties) since then to support 26 private
equity funds currently operating in developing countries and emerging market
economies.

These funds aim to promote broad U.S. foreign policy and strategic goals by
investing in countries or regions that are making the transition to market
economies or are otherwise of foreign policy interest to the United States,
such as the Balkans, the newly independent states of the former Soviet
Union, and sub-Saharan Africa. According to agency officials, investment
funds also serve as a catalyst for private sector development by providing
incentives for investment in countries where U.S. investors might be
unwilling or unable to invest without U.S. government support.

The investment funds are managed by private sector individuals or groups
selected by the Overseas Private Investment Corporation. The fund managers
establish the fund as a limited partnership or limited liability company and
are responsible for raising the capital for the fund from private sector
equity investors. The Overseas Private Investment Corporation's financial
participation in the investment funds takes the form of loan guaranties that
cover the risk of default for any reason.3 The guarantied loans have terms
of 10 to 12 years, and the guaranties are backed by the full faith and
credit of the U.S. government.

As of December 31, 1999, there were 26 Overseas Private Investment
Corporation-supported investment funds in operation, and the agency had
committed about $2.3 billion in loan guaranties to the 26 funds. However,
because these loan guaranties cover principal and interest, the maximum
potential loss due to possible nonperformance by borrowers is about
$3.4 billion ($2.3 billion in guarantied loan principal and about $1.1
billion of estimated interest4 that could accrue over the life of the
guaranty). In addition to Overseas Private Investment Corporation-supported
financing, the funds are comprised of about $1 billion in equity from
private investors, which is not guarantied by the agency.

To ensure that investment fund procedures would be more transparent (open),
clearly defined, and consistently applied, the President and Chief Executive
Officer of the Overseas Private Investment Corporation launched an
improvement plan in 1998. However, virtually all of the investment funds
were created before the improvement plan was put in place.

The Senate Committee on Appropriations directed us to review the Overseas
Private Investment Corporation's progress in improving the management of the
investment funds program.5 In conducting this work, we examined how the
agency (1) identifies and approves investment fund concepts and (2) selects
fund managers. In addition, we are providing information on the funds'
performance to date and risk levels assigned to the funds.

The Overseas Private Investment Corporation has identified and approved
investment fund concepts through three different mechanisms. First, the
agency has identified the need for funds in specific regions or sectors.
Second, funds have been created in response to administration or
congressional foreign policy initiatives. Third, prior to its investment
fund improvement plan implemented in 1998, the agency created several (10)
funds based on unsolicited proposals received from the private sector.

Under revised procedures adopted as part of its 1998 improvement plan, the
agency publicly solicits proposals from prospective private sector fund
managers. The prospective managers submit business plans in response to a
"call for proposals" posted on the agency's website and advertised in
business and trade publications. Agency officials stated that all of the
fund managers, past and present, were selected on the basis of experience
and proven success with investment funds or in a related industry. The four
fund managers that we interviewed all indicated that the Overseas Private
Investment Corporation completed a rigorous background examination of their
experience and qualifications. However, we reviewed the Overseas Private
Investment Corporation's internal reports, correspondence, and other
relevant documents for the 26 operating investment funds and determined that
14 fund managers were not selected through a competitive process; the
remaining 12 fund managers were selected after the agency had solicited or
considered other proposals. Overseas Private Investment Corporation
officials acknowledged that, prior to 1998, it was not the agency's policy
to solicit competing fund manager proposals for each fund.

Measuring the financial performance of the funds is difficult, as the funds
typically have 10- to 12-year life spans and, thus, long maturity periods
for their investments to reach their goals. The agency indicated that fund
managers generally expect to achieve a final return of at least 20 percent.
However, it is especially difficult to draw meaningful conclusions about
fund performance to date because the investment funds have been in operation
for about 5 years on average--about one-half of the projected life span. The
Overseas Private Investment Corporation provided us with the fund managers'
estimates of fund performance, which show that 13 funds presently have a
positive return on investment while 10 funds currently show either a zero or
negative annual average return (3 funds have not started investing). These
estimates cannot be used to predict the future performance of the funds, as
they are only a snapshot of current performance. According to the agency,
the one fund that is now close to fully liquidating its investments is
expected to repay the Overseas Private Investment Corporation guarantied
loan even though the final return of the fund cannot yet be determined.

The Overseas Private Investment Corporation uses financial performance data
and several other criteria in assigning an overall risk rating to each fund.
As of September 30, 1999, 16 of 23 funds with investments had passing
ratings, indicating that the funds at least had a minimum ability to repay
the loan. The seven remaining funds had risk ratings that reflected concerns
about the repayment prospects of the loan. Agency officials indicated that
most of these concerns were related to the potential impact of host-country
macroeconomic factors on the funds' investments. However, no funds are
currently rated as a loss. To hedge against the possibility of future
losses, the agency has established reserves that are based on risk ratings
for the investment funds. These reserves totaled
$269 million in fiscal year 1999.

We received written comments on a draft of this report from the Overseas
Private Investment Corporation (OPIC), which are reprinted in
appendix IV. In addition to their overall comments, the agency provided us
with technical comments, which we incorporated as appropriate.

The agency characterized the report as a careful and complete review of a
complex program. OPIC also used the letter as an opportunity to assert that
the investment funds portfolio is sound and that the agency has made several
important improvements to the program since 1998. The points that OPIC
highlighted regarding the financial standing of the portfolio are their own
interpretation of our analysis. We noted that the financial performance of
the funds has been mixed, and drew no conclusions about the overall health
of the investment funds portfolio. Further, while we agree that OPIC has
taken steps to improve the operation of the program, we did not assess the
effectiveness of these changes since only one fund has been approved under
the new procedures.

Briefing Section I provides an overview of the Overseas Private Investment
Corporation's investment funds program. Briefing Section II discusses the
investment funds selection process. Briefing Section III discusses the
investment fund manager selection process. Briefing Section IV discusses the
financial standing and performance of the investment funds.
Appendix III contains a detailed description of our scope and methodology.

We recently briefed your staff on the results of this analysis; this report
summarizes the content of those briefings.

We are sending copies of this report to Mr. George Munoz, President and
Chief Executive Officer, OPIC; and interested congressional committees.
Copies will be made to other interested parties upon request.

If you or your staff have any questions about this report, please contact me
at (202) 512-4128. An additional GAO contact and staff acknowledgments are
listed in appendix V.

Susan S. Westin, Associate Director
International Relations and Trade Issues

Overview

Source: GAO from Overseas Private Investment Corporation data.

The Overseas Private Investment Corporation (OPIC) approved the first
investment fund in 1987. Sixteen of the 26 funds currently in operation were
approved during 1994-96.6 Agency officials said that the proliferation of
funds during this period was directly related to global events. For example,
the dissolution of the Soviet Union created a demand for private capital in
economies transitioning from a state-led economy to a free market economy.
Other agencies and organizations that support investment funds, such as the
U.S. Agency for International Development, the European Bank for
Reconstruction and Development, and the International Finance Corporation,
experienced a similar increase in the number of funds approved during
approximately the same time period.

In early 1998, OPIC began to implement a plan for improving the investment
funds program to ensure that investment fund procedures were more clearly
defined and consistently applied. One fund has been approved under these new
procedures, and two funds have been proposed and are in the process of being
approved.

Legend
NIS = Newly independent states of the former Soviet Union
SE = Southeastern

Source: GAO from Overseas Private Investment Corporation data.

The agency reported that OPIC-supported funds have invested in over
40 countries. Most funds invest in several countries within a designated
region in order to limit exposure in any single country. However, OPIC has
approved five country-specific funds that invest in single countries where
the agency has determined there is sufficient need for capital and an
acceptable level of risk. These include Draper International, India Private
Equity, Israel Growth, Poland Partners, and Russia Partners. Additionally,
OPIC has approved four global funds (that is, funds that can invest in any
country eligible for OPIC programs) that invest in specific sectors such as
water treatment and environment-related projects.

The average size of the 26 operating funds is about $127 million. The
smallest fund is the $20 million Allied Capital International Small Business
fund, and the largest is the $350 million New Africa Infrastructure fund.
OPIC's greatest exposure, based on total capital committed to any one
region, is in Russia and the newly independent states of the former Soviet
Union where the total size of all funds operating in the region is
$881 million.

The number of funds operating in any one region ranges from two to five.
Agency officials stated that because of the high demand for capital in
developing countries, there is no competition for investment opportunities
between investment funds operating in the same region. The fund managers and
industry experts we interviewed agreed that competition between emerging
market investment funds is generally not a problem.

Source: GAO from Overseas Private Investment Corporation data.

OPIC-supported funds had invested about $1.6 billion in 317 overseas
companies as of December 31, 1999. The funds invest in a variety of
companies and sectors. For example, fund investments in the infrastructure
sector include power, construction, and transportation businesses. The
largest percentage of investments is in the manufacturing sector, which
includes 26 percent, or about $428 million, of all investments. Examples of
investments in the manufacturing sector include businesses involved in the
production of high-technology electronic components, pharmaceuticals, and
paper manufacturing.

OPIC requires fund managers to submit each proposed fund investment for
review by the agency to ensure that the investments will not have an adverse
impact on the U.S. economy, environment, workers' rights, or human rights.
Further, OPIC requires fund investments to be diversified to limit risk. For
example, the agency's general guidelines state that a fund may not commit
more than 15 percent of available capital to any single company, nor commit
more than 33 percent of available capital to any single business sector
(unless the fund is created to invest in a specific sector).

Source: GAO from Overseas Private Investment Corporation data.

OPIC-supported investment funds combine OPIC-guarantied loans and private
investor equity. OPIC stated that the loan guaranties are necessary to
encourage private sector investment in developing countries. The fund
managers we interviewed said that the OPIC guaranty was an important factor
in their decision to establish an investment fund.

Although the amount of the loan guaranty varies among funds, the agency's
general policy is that OPIC's commitment shall not exceed two-thirds of the
fund's total capital. In other words, a fund should have no more than $2 of
OPIC debt for every $1 of private equity. According to OPIC, funds operating
in countries or sectors with a relatively higher level of risk may require a
higher level of OPIC commitment to provide sufficient incentive for private
sector investment. Conversely, OPIC officials noted that some funds require
a lower amount of OPIC loan guaranty in cases where country or sector risk
is lower, or where there is a higher amount of private investor capital for
the fund. The average ratio of OPIC debt to investor equity for the 26
operating investment funds is $2.40 of OPIC debt to $1 of private investor
equity.

In this simplified example, a $3 investment fund consists of $2 of
OPIC-guarantied debt and $1 of private investor equity. Once the fund has
been capitalized, it makes investments in foreign companies, subject to OPIC
review and approval.

Source: GAO from Overseas Private Investment Corporation data.

The terms for repayment of OPIC-guarantied debt and disbursement of profits
are defined by a formal contractual agreement between OPIC and the fund
manager. Although the specific terms of the contract vary among funds, the
contract generally requires the fund to repay all principal, interest, and
fees associated with the OPIC loan guaranty before returning equity to
private investors or disbursing profits. OPIC asserts that this payment
priority limits OPIC's risk because private investor equity is at risk
before the OPIC guaranty. For example, if a fund were comprised of
two-thirds OPIC debt and one-third private equity, it would have to lose
more than one-third of its total capital before OPIC would be required to
make payments on the guaranty. OPIC noted that, to date, the agency has not
incurred a loss on an investment fund.

After the fund has repaid all principal, interest, and fees and has returned
equity to its private investors, the fund may distribute any remaining
profits. The contract between OPIC and the fund manager also defines how any
profits will be distributed among OPIC, investors, and the fund manager.
Although the percentages vary for each fund, OPIC generally receives between
4 and 6 percent of the profits, the fund manager receives about 20 percent,
and the remaining portion is distributed to the private investors.

Source: GAO from Overseas Private Investment Corporation data.

OPIC's policy is to identify and approve fund concepts that support the
agency's U.S. foreign policy and free market development objectives.
According to OPIC, specific fund concepts originate from various sources,
including OPIC staff, foreign policy initiatives, and the private sector.

After a fund concept is approved, OPIC evaluates and selects a private
sector fund manager. In general, OPIC evaluates potential fund managers on
the basis of experience and proven success within the investment fund or
related industry.

Pending approval of the fund concept and fund manager from the agency's
15-member, Senate-approved Board of Directors, OPIC negotiates a contract
with the fund manager. The contract includes terms and conditions such as
the amount of OPIC financing available to the fund, financial reporting
requirements, and repayment and profit distribution guidelines. The fund
manager then obtains equity commitments from private investors and proposes
investments to OPIC, which the agency reviews to ensure compliance with the
terms of the contract.

Lastly, the fund is capitalized with private investor equity and
OPIC-supported debt and begins to invest. The agency monitors ongoing fund
operations to determine financial performance and to ensure that the fund's
investments do not adversely impact the U.S. economy, environment, workers'
rights, or human rights. OPIC's monitoring activities include periodic
financial analyses of a fund's investments, site visits to the foreign
companies in which the fund has invested, and serving as a nonvoting member
of the fund's governing bodies.

OPIC's Fund Concept Selection Process

Source: GAO from Overseas Private Investment Corporation data.

OPIC has identified and approved investment fund concepts through three
different mechanisms. First, the agency has identified the need for funds in
specific regions or sectors. Second, funds have been created in response to
administration or congressional foreign policy initiatives. For example, the
Caucasus Fund was created in response to 1996 legislation (P.L. 104-107)
mandating the establishment of a Trans-Caucasus Enterprise Fund. Third,
prior to its investment fund improvement plan implemented in 1998, the
agency created several funds based on unsolicited proposals received from
prospective fund managers seeking to establish an OPIC-supported investment
fund. We reviewed OPIC internal reports, correspondence, and other relevant
documents for the 26 operating investment funds. We determined that 5 fund
concepts were identified by OPIC, 10 fund concepts were created in response
to foreign policy initiatives, and 10 fund concepts were originated based on
unsolicited proposals. We were unable to identify the origin of one fund
concept. See appendix I for the detailed results of our review.

Once a fund concept is identified, OPIC executive staff review the concept
to determine if the proposed fund is consistent with OPIC program
objectives. Additionally, OPIC conducts inquiries with the private sector to
ascertain investor support for a given fund concept and may conduct
feasibility studies and site visits to validate the need for a fund.

As part of the improvement plan implemented in 1998, OPIC resolved to no
longer approve fund concepts originating from unsolicited proposals without
soliciting competing proposals from prospective fund managers. The policy
change was intended to ensure that the opportunity to manage an
OPIC-supported investment fund was made available to a wide range of
candidates.

OPIC's Fund Manager Selection Process

Source: GAO from Overseas Private Investment Corporation data.

Since the inception of the investment funds program, OPIC's policy has been
to evaluate potential fund managers based on (1) previous private equity
investment experience, (2) ability to raise capital from investors,
(3) geographic and industry knowledge of the areas targeted in the fund
concept, and (4) ability to assemble management teams in the host countries
where the proposed fund will invest. OPIC's evaluation of fund managers'
qualifications includes a review of credit references, personal history, and
performance record managing other private equity funds or related investment
projects.

Prior to 1998, the agency selected some fund managers through a competitive
process, while other fund managers were selected after OPIC evaluated and
approved an unsolicited proposal. However, OPIC officials stated that the
criteria for evaluating the fund managers' qualifications were the same
under both processes.

OPIC revised the procedures for selecting fund managers in 1998 to establish
a transparent and competitive selection process. Under the revised
procedures, OPIC posts a call for proposals on the agency's website and
advertises it in business and trade publications. Prospective fund managers
submit a detailed business plan that is then reviewed by an
interdepartmental Evaluation Committee, an Investment Committee, and OPIC's
Board of Directors.

We reviewed OPIC's internal reports, correspondence, and other relevant
documents for the 26 operating investment funds and determined that
14 fund managers were not selected through a competitive process; the
remaining 12 fund managers were selected after the agency had solicited or
considered other proposals. OPIC officials acknowledged that, prior to 1998,
it was not the agency's policy to solicit competing fund manager proposals
for each fund. See appendix II for the results of our review.

OPIC's Investment Funds Financial Standing and Performance

Note: Data as of December 31, 1999.

Source: GAO from Overseas Private Investment Corporation data.

OPIC has committed $2.33 billion in loan guaranties to support investment
funds. However, only about one-half of these guarantied loans had been
disbursed to fund managers as of December 31, 1999. Because repayment of the
principal and interest on OPIC-guarantied debt is typically deferred until a
fund is liquidated, only $127 million of the principal had been repaid as of
that date.7 The outstanding principal on OPIC-guarantied loans was about
$1.13 billion at the end of calendar year 1999.

Legend
C = Central
E = Eastern
NIS = Newly independent states of the former Soviet Union
SE = Southeastern

Note: OPIC data reflect the weighted average annual rate of return for 44
liquidated and 267 unrealized investments through March 31, 2000. The
weighted averages are based on the cost of a fund's individual investments
relative to the total cost of OPIC-supported investments. Estimated annual
returns may not predict the funds' future performance.

Source: GAO from Overseas Private Investment Corporation data.

Assessing the financial performance of OPIC investment funds in midstream is
difficult, as the funds typically have 10- to 12-year life spans, and
returns are realized mostly late in a fund's life or at final liquidation.
Although OPIC indicated that fund managers generally expect to achieve a
final return of at least 20 percent, it is recognized within the industry
that it takes several years for investment funds with long intended life
spans to realize positive returns. Given that OPIC funds are still in the
early stages of investing--the average age of the investment funds is about
5 years--it is especially difficult to draw strong conclusions about future
investment performance. Additionally, interim returns do not predict the
future financial performance of funds, since the investment valuations apply
only to a specific point in time.

OPIC provided performance data to us on the estimated value of unrealized
investments and the value of liquidated investments as reported by fund
managers.8 Based on this combined data, the financial performance of
OPIC-supported funds appears mixed. Overall, 13 of the funds showed a
positive annual average return, while 10 showed either a zero (4 funds) or
negative (6 funds) annual average return. There were disparities in the
annual average returns of funds in different regions as well as funds within
a region. For example, the estimated annual average return of the three
operating Africa funds ranged from about negative 1 percent to a positive
533 percent. Significant disparities were also evident in the average annual
returns among OPIC funds within other regions and sectors.

Note: OPIC data reflect the results for 44 liquidated investments through
February 29, 2000. Results may not accurately predict the funds' future
performance.

Source: GAO from Overseas Private Investment Corporation data.

We also separately examined the results for 44 liquidated investments, which
represent about 9 percent of the funds' total investments. Returns on these
44 fully liquidated investments were mixed, as almost one-third of the
investments were sold either at a loss or at cost and two-thirds were sold
at a gain. Within the industry, it is generally recognized that investment
failures tend to be liquidated earlier in the life cycle of a fund than
potentially profitable investments would be.

Legend
Problemless = Fund demonstrates high degree of financial stability.
Program standard = Fund meets at least the minimum standards of
creditworthiness (ability to repay the loan).
Program standard: watchlist = Fund has potential weaknesses that if left
uncorrected could result in a deterioration of the repayment prospects of
the loan.
Substandard = Fund exhibits weaknesses that jeopardize timely repayment of
the loan.
Workout: recoverable = Fund demonstrates weaknesses that make repayment of
the loan doubtful but not improbable.
Workout: doubtful = Fund has characteristics that make repayment of the loan
unlikely.
Loss = Loan is considered uncollectible.

Note: OPIC had assigned risk ratings to 23 of 26 funds as of September 30,
1999. The three funds that were not rated had not drawn down any
OPIC-guarantied debt.

Source: GAO from Overseas Private Investment Corporation data.

OPIC uses seven risk ratings to categorize outstanding fund loans--two
representing passing ratings and five representing criticized ratings (that
is, ratings that reflect concerns about the repayment prospects of the
loan). To determine a risk rating for each fund, OPIC reviews its cash flow,
asset coverage, investment strategy, management and financial controls,
market conditions, and country risk. OPIC officials indicated that country
risk-- which reflects a country's macroeconomic environment, political, and
social constraints; foreign debt service burden; and access to foreign
exchange--is the most important factor in determining a risk rating for
funds that are in the early stages of the investment cycle.

OPIC reviews fund risk ratings quarterly or more frequently as events
dictate. As of September 30, 1999, 16 of 23 funds that had drawn down
OPIC-guarantied loans had passing ratings, indicating that they at least had
a minimum ability to repay the loan. The seven remaining funds had risk
ratings that reflected concerns about the repayment prospects of the loan.
Agency officials indicated that most of these concerns were related to the
potential impact of host-country macroeconomic factors on the funds'
investments. However, no funds were rated as "loss."

To cushion against potential future losses, OPIC establishes reserves based
on a fund's risk rating. The reserves are based in part on OPIC's assessment
of country and sector risks and the potential impacts of these risks on the
funds' investments. For a fund with a passing rating, OPIC generally sets
aside reserves equaling 1.5 percent to 3 percent of the fund's outstanding
loans and accrued interest, and reserves from 6 percent through
100 percent of outstanding loans and interest for funds with criticized
ratings.9 According to OPIC officials, the average reserve level for the
funds is approximately 15 percent and totaled $269 million in fiscal year
1999.

Note: Data reflect OPIC's estimates of U.S. and host-country benefits for
operating OPIC-supported funds through September 30, 1999.

Source: Overseas Private Investment Corporation.

According to OPIC, the investment funds program (1) strengthens the U.S.
economy and enhances the competitiveness of U.S. businesses and
(2) promotes social and economic development in developing countries and
regions in a manner that complements U.S. policy objectives. In terms of
host-country benefits, OPIC estimates that the funds had created about
34,000 host-country jobs and generated over $600 million in host-country
revenue through September 30, 1999. U.S. and host-country effects are based
on estimates provided to OPIC by fund managers. Based on OPIC's in-country
monitoring of selected investment projects, agency officials reported that
fund managers' estimates of economic and social benefits are reasonably
accurate.10 OPIC also estimates that the operating funds had generated
almost $2.7 billion in U.S. exports and over 8,200 U.S. jobs. However, as
reported in our prior work, economists and policymakers recognize that U.S.
employment levels are substantially influenced by macroeconomic policies,
including actions of the Federal Reserve.11 At the national level, under
conditions of full employment, government export finance assistance programs
may largely shift production among sectors of the economy rather than raise
overall employment levels.

Additionally, OPIC notes that the investment funds program contributes to
the development of emerging markets by stimulating non-OPIC supported
investment. For example, OPIC fund managers are currently operating or
raising private equity for 12 non-OPIC supported funds in emerging
countries.

Results of GAO Review to Determine Origin of Investment Fund Concepts

Corporation

New Africa Opportunity
New Century Capital Partners
Newbridge Andean Partners
Pioneer BancOne Property
South America Private Equity Growth

Africa Growth
AIG-Brunswick Millenium
Asia Pacific Growth
Caucasus
InterArab Investment
Israel Growth
Modern Africa Growth
New Africa Infrastructure
Poland Partners
West Bank/Gaza & Jordan

Allied International Capital Small Business
Aqua International Partners
Asia Development Partners
Bancroft Eastern Europe
Draper International
Emerging Europe
Global Environment Emerging Markets I
Global Environment Emerging Markets II
India Private Equity
Russia Partners

Agribusiness Partners International

Results of GAO Review to Determine Fund Manager Selection Process

Proposals

Africa Growth
AIG-Brunswick Millenium
Asia Pacific Growth
Caucasus
InterArab Investment
Israel Growth
Modern Africa Growth
New Africa Infrastructure
New Africa Opportunity
New Century Capital Partners
Pioneer BancOne Property
West Bank/Gaza & Jordan

Proposals

Agribusiness Partners International
Allied International Capital Small Business
Aqua International Partners
Asia Development Partners
Bancroft Eastern Europe
Draper International
Emerging Europe
Global Environment Emerging Markets I
Global Environment Emerging Markets II
India Private Equity
Poland Partners
Russia Partners
South America Private Equity Growth

Newbridge Andean Partners

Objectives, Scope, and Methodology

The Senate Committee on Appropriations directed us to review the Overseas
Private Investment Corporation's progress in improving the management of the
investment funds program. In conducting this work, we examined how the
agency (1) identifies and approves investment fund concepts and (2) selects
fund managers. In addition, we provided information on the funds'
performance to date and risk levels assigned to the funds.

To identify how the Overseas Private Investment Corporation reviews and
selects investment fund concepts and fund managers, we reviewed the agency's
current and previous operational guidelines as well as internal reports,
which examined investment fund operations and made several recommendations
for improving investment fund selection procedures that OPIC subsequently
adopted. We also interviewed OPIC officials, including its President and
Chief Executive Officer, to discuss the series of improvements launched in
1998 to ensure that the fund concept and fund manager selection procedures
were more clearly defined and consistently applied.

To determine (1) how the agency identified and selected the 26 fund
concepts; (2) how many of the fund managers were selected through a
competitive process; and (3) whether OPIC systematically collected
information regarding these fund managers' experience and qualifications, we
reviewed relevant documents included in each fund's project folder,
including fund proposals, investment committee papers, board of director's
papers, annual reports, fund manager qualification statements, and
correspondence between OPIC and the fund manager.

To gain additional perspectives on the investment funds program and the
recent operational improvements, we interviewed managers of five
OPIC-supported investment funds located in New York City and Durham, North
Carolina. We also interviewed several other industry experts not affiliated
with the Overseas Private Investment Corporation, including officials from
the U.S. Agency for International Development; the European Bank for
Reconstruction and Development; and the International Finance Corporation, a
member of the World Bank group.

To identify how OPIC measures fund performance, we met with OPIC officials
to determine what performance data the agency maintains for its investment
funds program. We also obtained the agency's most current estimated average
annual return data for each fund. These data were based on the value of
liquidated investments and the current estimated value of unrealized
investments as reported by the fund managers.

To gain additional insights into investment fund valuation issues, we
reviewed several industry guides and reports that addressed measuring the
performance of private-equity investment funds, including the European
Venture Capital Association guidelines--which industry experts we
interviewed consistently cited as the industry standard--and the
International Finance Corporation's Investment Funds in Emerging Markets:
Lessons of Experience Series (1996). We also discussed investment fund
performance issues, including the availability of comparative data, with
managers of OPIC-supported funds; officials from the other development
agencies; and other private industry groups, including the National Venture
Capital Association headquartered in Arlington, Virginia.

We also reviewed OPIC's process for assigning risk ratings and establishing
reserves for its investment funds. Specifically, we interviewed senior
agency officials and obtained documents detailing the fund risk rating
process and defining the various risk ratings and associated reserve levels.
We also obtained the risk rating and reserve level assigned to each fund as
of September 30, 1999. Because agency-supported funds have economic and
developmental objectives, we collected documentation regarding how the
agency measures such impacts. We also obtained data that estimate the funds'
impact on U.S. employment and exports as well as host-country tax and
customs revenues and employment.

The fund performance data included in this report are not an accurate
indicator of the future performance of the funds, because the underlying
investment valuations apply only to a specific point in time. We did not
independently assess the reliability of the performance data that OPIC
provided.

We conducted our work from February through April 2000 in accordance with
generally accepted government auditing standards.

Comments From the Overseas Private Investment Corporation

GAO Contact and Staff Acknowledgments

Stephen M. Lord, (202) 512-4379

In addition to the person named above, Carlos J. Evora, Matthew E. Helm,
Rona H. Mendelsohn, and Mary E. Moutsos made key contributions to this
report.

(711481)
  

1. As part of the Consolidated Appropriations Act of 2000 (P.L. 106-113),
the Congress authorized the agency to use its own funds for administrative
expenses ($35 million) and for credit programs ($24 million).

2. Political risk insurance covers investors for up to 20 years against
losses due to currency inconvertibility, political violence, and
expropriation.

3. The investment funds program includes one fund supported through a $20
million loan. All other funds were supported through Overseas Private
Investment Corporation loan guaranties.

4. In the agency's 1999 Annual Report, the Overseas Private Investment
Corporation estimated the potential interest to be $1.1 billion as of
September 30, 1999.

5. Senate Committee on Appropriations, Foreign Operations, Export Financing,
and Related Programs Appropriation Bill, 2000, Senate Report 106-81 (June
17, 1999).

6. One fund, the First Newly Independent States Regional Fund, repaid its
OPIC-guarantied loan in 1999 and is no longer operating as an OPIC-supported
fund.

7. The funds have varying maturity dates ranging from the year 2004 to the
year 2011. However, about two-thirds of the funds will not mature for at
least 5 years.

8. Fund managers' estimates of the value of unrealized investments are not
reported in accordance with U.S. Generally Accepted Accounting Principles.
According to OPIC, under these principles, about 80 percent to 90 percent of
the funds' investments would have been valued at cost.

9. OPIC sets aside an additional reserve of 0.5 percent of the undisbursed
loan amount for all funds.

10. OPIC staff have visited 52 investment project sites since the beginning
of fiscal year 1997 and plan to visit at least 3 additional project sites
during the remainder of fiscal
year 2000.

11. See Export-Import Bank: Key Factors in Considering Eximbank
Reauthorization
(GAO/T-NSIAD-97-215 , July 17, 1997).
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