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

luc.nijs@rgsl.edu.lvTel. +37167039230