Private equity as an asset class in the region: a multi-focal approach Prof. Luc Nijs Founder &...
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![Page 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.](https://reader034.fdocuments.in/reader034/viewer/2022051417/56649e355503460f94b2342c/html5/thumbnails/1.jpg)
Private equity as an asset class in the region: 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
![Page 2: 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.](https://reader034.fdocuments.in/reader034/viewer/2022051417/56649e355503460f94b2342c/html5/thumbnails/2.jpg)
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
![Page 3: 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.](https://reader034.fdocuments.in/reader034/viewer/2022051417/56649e355503460f94b2342c/html5/thumbnails/3.jpg)
Fundraising per region
![Page 4: 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.](https://reader034.fdocuments.in/reader034/viewer/2022051417/56649e355503460f94b2342c/html5/thumbnails/4.jpg)
Market outlook for fundraising
![Page 5: 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.](https://reader034.fdocuments.in/reader034/viewer/2022051417/56649e355503460f94b2342c/html5/thumbnails/5.jpg)
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
![Page 6: 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.](https://reader034.fdocuments.in/reader034/viewer/2022051417/56649e355503460f94b2342c/html5/thumbnails/6.jpg)
Market outlook for EM fundraising
![Page 7: 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.](https://reader034.fdocuments.in/reader034/viewer/2022051417/56649e355503460f94b2342c/html5/thumbnails/7.jpg)
Market Outlook
Argumentation for EM proposition: Resilient growth Less use of leverage
Wider CEE massively impacted 20% of investors refer to increase EM risk
![Page 8: 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.](https://reader034.fdocuments.in/reader034/viewer/2022051417/56649e355503460f94b2342c/html5/thumbnails/8.jpg)
Investors stay committed…but…
![Page 9: 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.](https://reader034.fdocuments.in/reader034/viewer/2022051417/56649e355503460f94b2342c/html5/thumbnails/9.jpg)
Some of the underlying fundamentals
![Page 10: 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.](https://reader034.fdocuments.in/reader034/viewer/2022051417/56649e355503460f94b2342c/html5/thumbnails/10.jpg)
What about the converts…
![Page 11: 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.](https://reader034.fdocuments.in/reader034/viewer/2022051417/56649e355503460f94b2342c/html5/thumbnails/11.jpg)
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?
![Page 12: 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.](https://reader034.fdocuments.in/reader034/viewer/2022051417/56649e355503460f94b2342c/html5/thumbnails/12.jpg)
Some of the underlying fundamentals
![Page 13: 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.](https://reader034.fdocuments.in/reader034/viewer/2022051417/56649e355503460f94b2342c/html5/thumbnails/13.jpg)
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
Em
ergi
ng M
arke
tsD
eveloped Markets
High RiskHigh Growth
High RiskHigh Growth
High RiskLow Growth
Low RiskLow Growth
Emerging Markets Risks Developed Markets Risks
![Page 14: 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.](https://reader034.fdocuments.in/reader034/viewer/2022051417/56649e355503460f94b2342c/html5/thumbnails/14.jpg)
Av. risk premiums in EMs (%, 2008-2009)
![Page 15: 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.](https://reader034.fdocuments.in/reader034/viewer/2022051417/56649e355503460f94b2342c/html5/thumbnails/15.jpg)
Another inconvenience
Capital inflows to developing world
(Source: IFF, 27 January 2009)
![Page 16: 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.](https://reader034.fdocuments.in/reader034/viewer/2022051417/56649e355503460f94b2342c/html5/thumbnails/16.jpg)
Historic & projected EV/EBITDA
Source: Prop. Research, averages for the clusters
![Page 17: 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.](https://reader034.fdocuments.in/reader034/viewer/2022051417/56649e355503460f94b2342c/html5/thumbnails/17.jpg)
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
![Page 18: 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.](https://reader034.fdocuments.in/reader034/viewer/2022051417/56649e355503460f94b2342c/html5/thumbnails/18.jpg)
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
![Page 19: 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.](https://reader034.fdocuments.in/reader034/viewer/2022051417/56649e355503460f94b2342c/html5/thumbnails/19.jpg)
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
![Page 20: 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.](https://reader034.fdocuments.in/reader034/viewer/2022051417/56649e355503460f94b2342c/html5/thumbnails/20.jpg)
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
![Page 21: 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.](https://reader034.fdocuments.in/reader034/viewer/2022051417/56649e355503460f94b2342c/html5/thumbnails/21.jpg)
Something else that is inconvenient
Past performance & GP selection
![Page 22: 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.](https://reader034.fdocuments.in/reader034/viewer/2022051417/56649e355503460f94b2342c/html5/thumbnails/22.jpg)
Institutional investor views: EM versus developed (December 2008)
![Page 23: 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.](https://reader034.fdocuments.in/reader034/viewer/2022051417/56649e355503460f94b2342c/html5/thumbnails/23.jpg)
Institutional investor views: EM versus developed (April 2009)
![Page 24: 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.](https://reader034.fdocuments.in/reader034/viewer/2022051417/56649e355503460f94b2342c/html5/thumbnails/24.jpg)
Portfolio allocation
![Page 25: 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.](https://reader034.fdocuments.in/reader034/viewer/2022051417/56649e355503460f94b2342c/html5/thumbnails/25.jpg)
PE penetration as an asset class
Source: Goldman Sachs, EMPEA
![Page 26: 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.](https://reader034.fdocuments.in/reader034/viewer/2022051417/56649e355503460f94b2342c/html5/thumbnails/26.jpg)
Portfolio exposure
![Page 27: 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.](https://reader034.fdocuments.in/reader034/viewer/2022051417/56649e355503460f94b2342c/html5/thumbnails/27.jpg)
Reasons for expansion or continuation
Source: EMPEA 2008
![Page 28: 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.](https://reader034.fdocuments.in/reader034/viewer/2022051417/56649e355503460f94b2342c/html5/thumbnails/28.jpg)
EM Private Equity performance
Source: Cambridge Associates LLC & prop. research,: pooled end-to-end returns, net of fees, expenses and carried interest
![Page 29: 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.](https://reader034.fdocuments.in/reader034/viewer/2022051417/56649e355503460f94b2342c/html5/thumbnails/29.jpg)
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
![Page 30: 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.](https://reader034.fdocuments.in/reader034/viewer/2022051417/56649e355503460f94b2342c/html5/thumbnails/30.jpg)
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
![Page 31: 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.](https://reader034.fdocuments.in/reader034/viewer/2022051417/56649e355503460f94b2342c/html5/thumbnails/31.jpg)
Smoke & mirrors… BVCA and E&Y 2008 performance study
![Page 32: 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.](https://reader034.fdocuments.in/reader034/viewer/2022051417/56649e355503460f94b2342c/html5/thumbnails/32.jpg)
A disaster waiting to happen
![Page 33: 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.](https://reader034.fdocuments.in/reader034/viewer/2022051417/56649e355503460f94b2342c/html5/thumbnails/33.jpg)
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
![Page 34: 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.](https://reader034.fdocuments.in/reader034/viewer/2022051417/56649e355503460f94b2342c/html5/thumbnails/34.jpg)
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’?
![Page 35: 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.](https://reader034.fdocuments.in/reader034/viewer/2022051417/56649e355503460f94b2342c/html5/thumbnails/35.jpg)
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
![Page 36: 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.](https://reader034.fdocuments.in/reader034/viewer/2022051417/56649e355503460f94b2342c/html5/thumbnails/36.jpg)
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
![Page 37: 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.](https://reader034.fdocuments.in/reader034/viewer/2022051417/56649e355503460f94b2342c/html5/thumbnails/37.jpg)
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
![Page 38: 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.](https://reader034.fdocuments.in/reader034/viewer/2022051417/56649e355503460f94b2342c/html5/thumbnails/38.jpg)
Let gravity have its way
![Page 39: 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.](https://reader034.fdocuments.in/reader034/viewer/2022051417/56649e355503460f94b2342c/html5/thumbnails/39.jpg)
Darwinian tsunami & paradigm shifting
Where are you?
![Page 40: 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.](https://reader034.fdocuments.in/reader034/viewer/2022051417/56649e355503460f94b2342c/html5/thumbnails/40.jpg)
Contact
Riga Graduate School of LawLaw & Finance ChairStrelnieku iela 4k-2
Riga LV-1010LATVIA
[email protected]. +37167039230