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Private equity as an asset class in theregion: 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
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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 currentrecession
Cyclical recession became a structural one and the risk of L-shape depression islooming (cf. Ponzi economy)
Source: EMPEA April 2009
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Fundraising per region
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Market outlook for fundraising
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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 directinvesting (FOM,)
Force of consolidation coming in
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Market outlook for EM fundraising
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Market Outlook
Argumentation for EM proposition: Resilient growth
Less use of leverage
Wider CEE massively impacted
20% of investors refer to increase EM risk
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Investors stay committedbut
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Some of the underlying fundamentals
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What about the converts
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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?
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Some of the underlying fundamentals
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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
E
mergingMarket
sD
evelopedMark
ets
High Risk
High Growth
High RiskHigh Growth
High Risk
Low Growth
Low RiskLow Growth
Emerging Markets Risks Developed Markets Risks
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Av. risk premiums in EMs (%, 2008-2009)
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Another inconvenience
Capital inflows to developing world
(Source: IFF, 27 January 2009)
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Historic & projected EV/EBITDA
Source: Prop. Research, averages for the clusters
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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
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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
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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 fromcommodity play
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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 thetime to come
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Something else that is inconvenient
Past performance & GP selection
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Institutional investor views: EM versusdeveloped (December 2008)
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Institutional investor views: EM versusdeveloped (April 2009)
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Portfolio allocation
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PE penetration as an asset class
Source: Goldman Sachs, EMPEA
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Portfolio exposure
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Reasons for expansion or continuation
Source: EMPEA 2008
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EM Private Equity performance
Source: Cambridge Associates LLC & prop. research,: pooled end-to-end returns, net of fees, expenses and carried interest
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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
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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
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Smoke & mirrors BVCA and E&Y 2008 performance study
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A disaster waiting to happen
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So now what
If PE is an activist shareholders position than whyhave these funds been managed as investmentvehicles
Demonstrate inept to manage companies
Focus on financial engineering
Models have to change
Fund structure
Terms & conditions
Exit modeling
Valuation and transparency
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So now whatlife 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?
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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 morerisk
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The 7 deadly sins of banking (Mike Mayo)
Zombie banks versus complete recapitalization ofsystem
Relaxation of mark-to-market rules will impactbalance sheets but the upswing will be largely outpowered by the later downswing
A potential artificial accounting-induced capitalinjection that does not change the economics
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Is this time going to be different for EMs?
During previous booms and busts the developedand 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
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Let gravity have its way
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Darwinian tsunami & paradigm shifting
Where are you?
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Contact
Riga Graduate School of LawLaw & Finance Chair
Strelnieku iela 4k-2
Riga LV-1010
LATVIA
Tel. +37167039230
mailto:[email protected]:[email protected]