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Private equity as an asset class in the region: a multi-
focal approach
Prof. Luc NijsFounder & Chairman Horizon Ltd
Istanbul April 27-28, 2009Buy-outs & growth capital in the Balkans and
emerging markets 2009
Where to start? Why not fundraising!
Despite the market conditions EM PE raised $ 66,5 bio in 2008, a 12% rise
Proportional share in total global PE fundraising raising for 5 years in a row now
Relative decoupling & economic power shifting is reinforced by current recession
Cyclical recession became a structural one and the risk of L-shape depression is looming (cf. Ponzi economy)
Source: EMPEA April 2009
Fundraising per region
Market outlook for fundraising
Market Outlook
A few conflicting data:
Preqin (April 2009): US leads the way with 23 bio $ Europe 20,2 bio $ EM 2,7 bio$
Lot of funds postpone final closing Development finance will focus more
on direct investing (FOM,…) Force of consolidation coming in
Market outlook for EM fundraising
Market Outlook
Argumentation for EM proposition: Resilient growth Less use of leverage
Wider CEE massively impacted 20% of investors refer to increase EM risk
Investors stay committed…but…
Some of the underlying fundamentals
What about the converts…
Market Outlook
Argumentation for refusal of EM proposition: (Short-term) EM risk Lack of experience in EMs Only few quality GPs available in EMs
Quantitative easing and systemic risk?
Some of the underlying fundamentals
A (new) inconvenient truth about risk
Political instability
Legal / Regulatory
Curreny (F/X)
Market fundamentals
Counterparty
Market fundamentals
Structural issues
Environmental
Legal / Regulatory
Pre-crisis Thinking
Post-crisis Thinking
Em
ergi
ng M
arke
tsD
eveloped Markets
High RiskHigh Growth
High RiskHigh Growth
High RiskLow Growth
Low RiskLow Growth
Emerging Markets Risks Developed Markets Risks
Av. risk premiums in EMs (%, 2008-2009)
Another inconvenience
Capital inflows to developing world
(Source: IFF, 27 January 2009)
Historic & projected EV/EBITDA
Source: Prop. Research, averages for the clusters
Market Outlook
Cheaper valuations (although some parties are still in denial)
Attractive deal flow to arrive (Q1 2010 onwards)
Capital constrained entrepreneurs & management
BRIC as a catalyst gone?
But major differentiators among emerging markets
Semi-globalization = procession of Echternach
Market Outlook
But major differentiators among emerging markets
CEE & CIS: Sovereign risk & currency management Debt-financed growth model is broke Euro and Nordic currency infrastructure has eroded fundamentals Mid/Long term catch-up dynamics still in place South-East Europe & Turkey still attractive Russia has a significant implied X-factor at present time
MENA: Undeniable impact on economy SWFs are diverting capital flows back home Mid/Long term outlook still positive Valuations in region still need recalibration to new reality
Market Outlook
But major differentiators among emerging markets
Mena: Still growth but impact of the credit situation trickling
down Commodity play Sector focus
Sub-Saharan Africa: Limited effect of credit situation Tremendous improvement in investment environment Good risk-adjusted returns GDP growth & overall economic development decoupled
from commodity play
Market Outlook
But major differentiators among emerging markets
Asia: China as a manufacturing hub Semi-globalization shows Global gross capital formation (cross-border at risk) Unrealistic valuations in India at present
Volume of investments dropped 38,5 % in 2008 to $ 10,7 bio and are expected to drop to $ 5 bio this year
3/4th of PE investments were done in listed entities
Can they become our customers of last resort? Social unrest might destabilize the vulnerable progress made South Korea, Singapore, Malaysia etc weak on their feet for
the time to come
Something else that is inconvenient
Past performance & GP selection
Institutional investor views: EM versus developed (December 2008)
Institutional investor views: EM versus developed (April 2009)
Portfolio allocation
PE penetration as an asset class
Source: Goldman Sachs, EMPEA
Portfolio exposure
Reasons for expansion or continuation
Source: EMPEA 2008
EM Private Equity performance
Source: Cambridge Associates LLC & prop. research,: pooled end-to-end returns, net of fees, expenses and carried interest
Comparative end-to-end results 6/30/2008
(*) Statistical noise likely due to low sample distribution
Source: Cambridge Associates LLC & prop. research,: pooled end-to-end returns, net of fees, expenses and carried interest
Impact on portfolio construction
In 2008 about 1/3 of the total pool of LPs had some kind of exposure to EMs
Portfolio weighting somewhere between 10-30% Do or die for LPs the next couple of years Systemic risk in Western markets are not reflected in risk premiums
Source: Proprietary data
Smoke & mirrors… BVCA and E&Y 2008 performance study
A disaster waiting to happen
So now what…
If PE is an activist shareholders’ position than why have these funds been managed as investment vehicles
Demonstrate inept to manage companies Focus on financial engineering Models have to change
Fund structure Terms & conditions Exit modeling Valuation and transparency
So now what…life after leverage
Value creation/operational side Impact of average /holding periods Massive room for improvement of private capital formation Put capital to work But do they have the right ‘human capital in place’?
The 7 deadly sins of banking (Mike Mayo)
5 April 2009-more bad weather to come Greedy loan growth Gluttony of real estate Lust for high yields Sloth-like risk management Pride of low capital Envy of exotic fees Anger of regulators
Each reflects a way that banks tried to compensate for lower natural rates of growth by taking more risk
The 7 deadly sins of banking (Mike Mayo)
Zombie banks versus complete recapitalization of system
Relaxation of mark-to-market rules will impact balance sheets but the upswing will be largely out powered by the later downswing
A potential artificial accounting-induced capital injection that does not change the economics
Is this time going to be different for EMs?
During previous booms and busts the developed and developing world evolved in a parallel fashion
This time there is a (partly) contra-cyclical pattern
Political & regulatory impact Global versus local teams: the best of both Business model rethinking & paradigm
shift EM debt usage less or more prudent
Let gravity have its way
Darwinian tsunami & paradigm shifting
Where are you?
Contact
Riga Graduate School of LawLaw & Finance ChairStrelnieku iela 4k-2
Riga LV-1010LATVIA
[email protected]. +37167039230