Luc Nijs April[1]

7/30/2019 Luc Nijs April[1]

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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

[email protected]

Tel. +37167039230
mailto:[email protected]:[email protected]

Documents

Luc Nijs April[1]