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Private equity in emerging markets A place to look for returns in the current downturn? Prof. Luc Nijs Founder & Chairman Horizon Ltd London, March 2, 2009 ICBI’s Fund Forum 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 Feb. 2009 Fundraising per region A (new) inconvenient truth about risk Emerging Markets Risks Political instability Market fundamentals Counterparty Emerging Markets Curreny (F/X) Pre-crisis Thinking High Risk High Growth High risk High Growth Low Risk Low Growth High Risk Low Growth Post-crisis Thinking Market fundamentals Developed Markets Legal / Regulatory Developed Markets Risks Structural issues Environmental Legal / Regulatory Av. risk premiums in EMs (%, 2006-2008) 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 sometimes are still in denial) Attractive deal flow to arrive 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) PE penetration as an asset class Source: Goldman Sachs, EMPEA Expecting to grow Source: EMPEA Cause of….. 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 Portfolio exposure 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 HC issues 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 Law Law & Finance Chair Strelnieku iela 4k-2 Riga LV-1010 LATVIA [email protected] Tel. +37167039230