Masterclass PE Fundraising Prof. Luc NijsFounder & Chairman Horizon LtdGeneva July 2, 2009ICBI Super Return Emerging markets Conference
How today will look like (more or less) • 9.30-11.00 Data review Structural considerations and applications • 11.15-12.30 Terms & conditions (I) • 13.30-14.15 Terms & conditions (II) • 14.30-16.00 EM PE as an asset class • 16.00-16.30 Wrap-up, Q&A and discussion
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
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 • 25-50% of GPs are struggling for survival
Which Region would you invest in? Africa Asia Pacific Latin America Middle East Russia
Which emerging country would you invest in? Australia Brazil China India MENA Russia South Africa
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?
A (new) inconvenient truth about risk Emerging Markets Risks Developed Markets Risks Political instability Legal / Regulatory Curreny (F/X) Market fundamentals Counterparty Market fundamentals Structural issues Environmental Legal / Regulatory Pre-crisis Thinking High Risk High Growth Low Risk Low Growth Emerging Markets Developed Markets High Risk High Growth High Risk Low Growth Post-crisis Thinking
Another inconvenience • Capital inflows to developing world (Source: IFF, 27 January 2009)
Historic & projected EV/EBITDA Source: Prop. Research, averages for the clusters
Something else that is inconvenient Past performance & GP selection
PE penetration as an asset class Source: Goldman Sachs, EMPEA
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
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
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’?
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
Natural questions • Is this a crises like every other or a profound shift? • How will the industry evolve in the next decade? • What are the implications for the asset class? • What is the position of EM propositions within this space? • What is the impact on portfolio management and allocation • Can we learn something that might affect the fundraising effort?
This talk • Will seek to answer these questions by looking backwards • Traditionally, very hard to understand key drivers of private equity success • In recent years, much more information • Drawing on large-sample and case evidence • Thoughts about future of private equity more generally… • And particularly in new private equity markets
Everyone does about the same • Frequent claim among investors: • Emphasis on balancing portfolio by: • Type of fund • Location of fund • Vintage year • Similar to what’s seen in public market investing
Recent work • Has sought to understand how much difference is… • Between fund classes • Between funds • Seeking to distinguish importance of individual performance
Evidence from the Yale endowment Source: Lerner 
More general patterns Source: Kaplan and Schoar 
The reality • The key difference is between different funds: • Unlike public markets • Investing in the right categories is not nearly as critical as getting into the right companies!
“Regression to the mean” • Frequently heard stories… • “Our last two funds were a disappointment, but we’re getting back on track…” • “I considered investing in the fund, but I decided that their success must be a fluke...”
Recent work • Has sought to understand nature of performance: • Is there little continuity from quarter-to-quarter? • Many studies of public markets suggest little persistence: • Mutual funds • Hedge funds • Or is the reality different?
Persistence of performance • High likelihood that the next funds of a given partnership stays in the same performance bracket • Persistence • 1% boost in past performance → 0.77% boost in next fund’s performance Source: Kaplan and Schoar 
The reality • Performance seems to be very “sticky”: • Good continue to do well • Underperformers continue to do so • While exceptions, seems to be the basic rule: • Seen in buyouts as well as venture
Growth doesn’t hurt • Numerous venture groups have grown dramatically. • Mid 1980s and late 1990s. • Recent dramatic growth by buyout funds • Have typically argued that can sustain performance despite growth • But powerful incentives to grow may induce skepticism • Market is now clearly turning away from the at this stage