The International Finance Corporation (IFC), the private sector arm of the World Bank Group, is the largest investor in Private Equity (PE) Funds in emerging markets, having committed more than $9 billion to 400 PE Funds between 2013 and 2023. These funds can be powerful engines of growth in developing countries when financial discipline is matched with rigorous execution and a steady focus on development outcomes. 

An Independent Evaluation Group (IEG) review of success factors driving IFC-supported PE funds found that the main factor driving their performance was the ability of the fund manager. However, manager ability is necessary but not sufficient. Other key success factors include: the manager’s value-add to investees, timely exits, adherence to strategy, viable fund size, and strong environmental and social (E&S) practice—together delivering results that attract investors and advance development.

Why PE Funds matter for development?

PE Funds are pooled sources of capital that are used to invest in equity ownership of companies. When successful, they can be a key element of development finance in emerging markets. As equity investments are usually limited in those markets due to relatively shallow capital markets, high interest rates, and constrained bank lending, PE funds can bring patient, long‑term capital. By mobilizing private capital and managerial expertise, PE funds can help local companies grow, create jobs, and raise productivity that debt alone would not be able to support. Accordingly, in markets where access to finance is limited, PE can fill a critical gap, especially for Small and Medium Enterprises (SMEs) and midmarket firms, supporting entrepreneurship, innovation, and more competitive value chains.

For development finance institutions like IFC, investing in PE funds is not only about financial returns; it is also about leveraging private sector resources to achieve sustainable development outcomes at scale. In addition, institutions like IFC can act as anchor investors, supporting fund managers that want to operate not only in emerging markets in general but also in frontier geographies.

Key findings: what makes a Fund successful?

Strong financial performance, typically measured by the net Internal Rate of Return (IRR), is essential as it signals fund viability, enables repeat capital mobilization, and pressures managers to successfully execute the Fund’s investment strategy. But development success is multidimensional. IEG’s development outcome rating synthesizes four subdimensions: Project Business Performance, Economic Sustainability, Environmental & Social Effects (E&S), and Private Sector Development. IRR feeds into the project business performance, which influences development outcomes, but high IRR alone does not guarantee development impact. True success is only achieved when financial and development objectives are aligned and mutually reinforced.

What IEG Found: Moving Beyond the Obvious.

Managers who brought a combination of PE expertise, sector experience, and country or regional knowledge were more likely to be successful. A successful track record and robust pipeline were also important keys to success. In addition, the IEG analysis shows that the differentiators are concrete, operational levers that fund manager teams pull (or fail to):

1. Value-add to investees: Successful funds provided hands-on support to companies—strategy, governance, and operational upgrades—far more often (93% vs. 41% in less successful funds). This translated into stronger revenue and earnings growth.
2. Timely exits and financial discipline: Funds that executed multiple profitable exits earlier tended to post stronger IRRs and higher development outcome ratings, turning capital to partners while reinforcing development impact.
3. Commitment to the original investment strategy: About 1/3 of funds deviated from their board-approved strategy and 65% of those posted negative development outcome ratings. Investment discipline matters, and governance is a critical lever.
4. Viable fund size and meaningful private capital: Funds that reached target size faster—and had a higher share of commercial investors —were more likely to succeed. Bigger, timely closures enable deployment, pipeline execution, and exits.
5. E&S practice and investee supervision: 81% of the Fund projects evaluated by IFC and validated by IEG are meeting IFC E&S requirements. This was above the overall IFC average. Fund Managers can improve E&S performance further by implementing the Environmental and Social Management System and ensuring that investees fully comply with IFC’s Performance Standards.

IEG found that those IFC-controllable levers often tipped “borderline” projects over the line toward success, despite shocks such as foreign currency devaluations, pandemics, and civil unrest that generally sit outside IFC’s control.

Looking forward: Takeaways for IFC & Partners

As IFC aims to double its annual commitments in PE Funds, IEG’s findings could become crucial for future operations. Suggested actions include:

1. Support managers with local presence and networks. Prioritize fund managers with ample sector/country depth, cohesive investment teams, and clear operating agendas for investees.
2. Build capacity where it counts. Pair first-time or lower-capacity managers with targeted technical assistance for pipeline development, governance, and E&S execution—especially in frontier markets and countries eligible for the International Development Association, the World Bank’s concessional financing arm.
3. Accelerate fundraising to minimum viable size and crowd in private capital. IFC’s convening power should help funds hit target size more quickly, with a meaningful share of limited commercial partners to sharpen incentive structures.
4. Track what matters beyond returns. Beyond returns, continue to systematically track jobs, investee productivity, E&S performance at investee level, and market development effects (e.g., governance upgrades, follow on finance).

To truly unlock the potential of PE funds in emerging markets, maintaining a dual standard – delivering strong financial returns with measurable, lasting development outcomes is key. The path to maximizing their impact lies in a holistic playbook: strong managers with a local edge, disciplined value creation, timely exits, adherence to strategy, viable fund size with real private capital, and credible E&S practice, tracked and reported alongside IRR.

This blog is based on an IEG assessment, “IFC Funds Sector Highlights”, concluded at the end of FY24. Per the relevant policy, details of such an assessment are not publicly disclosed to protect confidential commercial information.