and Rumelt (1991) highlight the dominance of firm-specific determinants over industry and country effects in explaining profitability. Rumelt (1991) finds that business-unit effects explain a much larger share of profitability variance compared to industry effects. Hawawini et al. (2003) extend this view by demonstrating that outlier firms—those with uniquely strong or poor performance—can disproportionately skew overall performance metrics, a factor particularly relevant in emerging market contexts where firm performance may vary dramatically within the same sector. This observation is supported by our data, where sectors such as finance exhibit a high number of ’home run’ investments or those that significantly outperform sectoral averages. Throughout this paper, we define home run investments as those that generate a return of at least 50% annually, on average, over the duration of the investment.

Even so, macroeconomic variables play a role. In particular, GDP growth and real exchange rate depreciation significantly influence returns. Our study extends the analysis of Cole et al. (2024) and highlights that the variance in returns is notably influenced by real exchange rate (RER) movements, which significantly impact dollar-denominated returns, consistent with earlier work by Solnik (1974) and Phylaktis and Ravazzolo (2005) who demonstrate that exchange rate volatility plays a significant role in dollar-denominated returns. This is especially pertinent in EMDEs, where currency stability varies considerably. Thus, although firm-specific factors are dominant, sectoral and country/macroeconomic factors remain relevant.

# **2 Data**

This paper analyzes the cash flows associated with every equity investment made by the International Finance Corporation (IFC), a member of the World Bank Group. The IFC aims to improve social and environmental outcomes that are aligned with the United Nations’ Sustainable Development Goals. Historically, before these goals were formally established, the IFC focused on providing capital to markets where it was scarce. In 1961, the institution’s operations changed when a charter amendment allowed it to hold equity. This triggered a sharp rise in equity investment to approximately 50 percent of total investment by 1963-64 (Kapur et al., 1997). Since then, the equity share has fluctuated between 15 and 35 percent.

Our primary dataset comprises the complete series of cash flows associated with all 2,727 equity investments made by the IFC, from the inception of the first equity investment in 1961 to June 30, 2023 (end of fiscal year 2023).<sup>3</sup> Negative cash flows refer to contributions that increase the value of the investment in an equity position. Conversely, distributions are cash flows returned to the investor (IFC) through dividend payments or the sale of a company’s shares. For investments still in the portfolio, our analysis treats the net asset value as of June 30, 2023, as though it was a positive distribution (the residual). We measure returns using the annualized cash multiple, which considers the number of years an investment has been held in the portfolio. Additionally, we employ the PME as this metric accounts for the absolute level of returns and their correlation with a global risk factor, consistent with the principles of the capital asset pricing model.

> 3We exclude any loans converted into equity from the analysis.

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