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Re-evaluating the PE model coming out of 2008
Prof. Luc NijsFounder & Chairman Horizon Ltd
Founder & Group CEO The Talitha GroupWarsaw September 7-8, 2009
Buy-outs in the CEE – MarcusEvans 2009
Where to start? The trends
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 to (some) emerging markets is reinforced by current recession
Cyclical recession became a structural one and the risk of L-shape recession is looming (cf. Ponzi economy)
Inflationary pressures despite current deflation trend having the potential to cause another downward leg over the next 12-18 months
Dynamics of the CEE region Debt-driven model to growth gone Erosion of financial infrastructure
Fundraising per region
Market Outlook
Argumentation for EM proposition: Resilient growth Less use of leverage
Remaining catch-up effect in the region sufficient to offset the loss of the debt-engine
If not, GDP growth will be limited to productivity growth
Labor-arbitrage as a strategy has lost most of its dynamics
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? Limited visibility of LT impact on economic fundamentals
If you broaden you monetary base….
Some of the underlying fundamentals
Av. risk premiums in EMs (%, 2008-2009)
Institutional investor views: EM versus developed (December 2008)
Institutional investor views: EM versus developed (April 2009)
Portfolio allocation
The dynamics of LT capital
The need for LT capital is beyond doubt in every economy based sustainable fundamentals
Patient capital is there to unleash human & business potential
Has PE ignored some of its fundamental DNA
Conflict of interest when engaged in multiple parts of the capital structure
Going back to the core of being an ‘activist shareholder’
Semi-globalization = procession of Echternach
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
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% and total portfolio’s 3-5 %
Do or die for LPs the next couple of years: capture trend lines of GDP growth etc.
Systemic risk in Western markets are not reflected in risk premiums
Source: Proprietary data
Smoke & mirrors… BVCA and E&Y 2008 performance study
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’?
What is considered important
Survey institutional investors by BNY Mellon (May 2009)1. Alignment of interests2. Transparency3. Performance4. ….5. ….
Sunshine is the best disinfectant
US seems to understand that..registration and info
Europe does not …at least judging based on their April 30, 2009 proposal to manage the AIM industry Ill-thought through Politically compromised Creates barriers-to-entry Unnecessary conditions Blocking 3rd country managers/funds Erodes competitiveness of EU investors
Team
What is the DNA of your team? What is the set-up of the team? Locations? How is decision-making shared? How is the carry shared? Stability- How are you going to execute your
strategy Is your team ready for the ‘new normal’ ..i.e.
generating returns by improving operations and creating synergies rather than leverage
Can your HC live up to that test?
Team
The HC rainmaker paradox Human Capital center of excellence
Retention Change management Compliance Organizational Development Recruiting Sourcing Resource Development
Terms & conditions
Compensation 2 & 20 Alternatives? After the investment
period? Imputing transaction fees by GP?
Source: SJ Berwin AS 2009
Terms & conditions
Compensation Carry vs. hurdle rate
Source: SJ Berwin AS 2009Subject to delay until clawback unlikely
Fund structure
Back to the open ended-structure?
Relevance of ‘permanent capital’
Are we going to leave liquidity up to the ‘secondary market’ or contribute to that as an agent of change
Herding behavior and GP mushrooming
Regional versus country specific
Regional specific strategies more-difficult to execute unless industry focus
Macro-economics are going to drift among CEE countries more than in the past
Relation between performance, investment strategy and in-house specialists
Who do you want to be ?
Align you personal interest with the dynamics of LT capital
Mushrooming of GPs not necessary a blessing for the industry
Contribute to value creation in a world where too much money is chasing too little opportunities
Consider yourself an entrepreneur
Let gravity have its way
Conclusion Re-thinking of PE model is very much needed Live the talk…
No right or wrong, no good or bad The LPs are at the centre of everything you do
EMs have become a relative game CEE needs to show its bearings
Remaining catch-up in CEE needs to be supported by economic and financial maturity and permanent efforts re innovation & technical enhancements
PE needs to evolve towards being part of the mainstream finance environment
Contact
Riga Graduate School of LawLaw & Finance ChairStrelnieku iela 4k-2
Riga LV-1010LATVIA
[email protected]. +37167039230