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Luc Nijs April

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PE & VC in the Balkans and emerging markets incl. Turkey.

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Luc Nijs April

  1. 1. Private equity as an asset class in the region: a multi-focal approach Prof. Luc Nijs Founder & Chairman Horizon Ltd Istanbul April 27-28, 2009 Buy-outs & growth capital in the Balkans and emerging markets 2009
  2. 2. 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
  3. 3. Fundraising per region
  4. 4. Market outlook for fundraising
  5. 5. 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
  6. 6. Market outlook for EM fundraising
  7. 7. Market Outlook  Argumentation for EM proposition:  Resilient growth  Less use of leverage  Wider CEE massively impacted  20% of investors refer to increase EM risk
  8. 8. Investors stay committed…but…
  9. 9. Some of the underlying fundamentals
  10. 10. What about the converts…
  11. 11. 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?
  12. 12. Some of the underlying fundamentals
  13. 13. 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 EmergingMarkets DevelopedMarkets High Risk High Growth High Risk High Growth High Risk Low Growth Low Risk Low Growth Emerging Markets Risks Developed Markets Risks
  14. 14. Av. risk premiums in EMs (%, 2008-2009)
  15. 15. Another inconvenience  Capital inflows to developing world (Source: IFF, 27 January 2009)
  16. 16. Historic & projected EV/EBITDA Source: Prop. Research, averages for the clusters
  17. 17. 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
  18. 18. 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
  19. 19. 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
  20. 20. 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
  21. 21. Something else that is inconvenient Past performance & GP selection
  22. 22. Institutional investor views: EM versus developed (December 2008)
  23. 23. Institutional investor views: EM versus developed (April 2009)
  24. 24. Portfolio allocation
  25. 25. PE penetration as an asset class Source: Goldman Sachs, EMPEA
  26. 26. Portfolio exposure
  27. 27. Reasons for expansion or continuation Source: EMPEA 2008
  28. 28. EM Private Equity performance Source: Cambridge Associates LLC & prop. research,: pooled end-to-end returns, net of fees, expenses and carried interest
  29. 29. 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
  30. 30. 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
  31. 31. Smoke & mirrors…  BVCA and E&Y 2008 performance study
  32. 32. A disaster waiting to happen
  33. 33. 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
  34. 34. 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’?
  35. 35. 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
  36. 36. 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
  37. 37. 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
  38. 38. Let gravity have its way
  39. 39. Darwinian tsunami & paradigm shifting Where are you?
  40. 40. Contact Riga Graduate School of Law Law & Finance Chair Strelnieku iela 4k-2 Riga LV-1010 LATVIA luc.nijs@rgsl.edu.lv Tel. +37167039230

PE & VC in the Balkans and emerging markets incl. Turkey.

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