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How today will look like (more or less)

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How today will look like (more or less)

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  1. Masterclass PE Fundraising Prof. Luc NijsFounder & Chairman Horizon LtdGeneva July 2, 2009ICBI Super Return Emerging markets Conference

  2. 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

  3. 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

  4. Fundraising per region

  5. Market outlook for fundraising

  6. 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

  7. Market outlook for EM fundraising

  8. The LP ViewSurvey April 2009

  9. Would you consider committing to Emerging Market funds?  Yes  No

  10. Would you invest with a Global Emerging Market Fund?  Yes  No

  11. Would you consider Local Emerging Market Funds?  Yes  No

  12. Which Region would you invest in?  Africa  Asia Pacific  Latin America  Middle East  Russia

  13. Which emerging country would you invest in?  Australia  Brazil  China  India  MENA  Russia  South Africa

  14. Investors stay committed…but…

  15. Some of the underlying fundamentals

  16. What about the converts…

  17. 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?

  18. Some of the underlying fundamentals

  19. 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

  20. Av. risk premiums in EMs (%, 2008-2009)

  21. Another inconvenience • Capital inflows to developing world (Source: IFF, 27 January 2009)

  22. Historic & projected EV/EBITDA Source: Prop. Research, averages for the clusters

  23. Something else that is inconvenient Past performance & GP selection

  24. Institutional investor views: EM versus developed (December 2008)

  25. Institutional investor views: EM versus developed (April 2009)

  26. Portfolio allocation

  27. PE penetration as an asset class Source: Goldman Sachs, EMPEA

  28. Portfolio exposure

  29. Reasons for expansion or continuation Source: EMPEA 2008

  30. EM Private Equity performance Source: Cambridge Associates LLC & prop. research,: pooled end-to-end returns, net of fees, expenses and carried interest

  31. 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

  32. 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

  33. Smoke & mirrors… • BVCA and E&Y 2008 performance study

  34. A disaster waiting to happen

  35. 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

  36. 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’?

  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. Is there something we can learn from the past?

  39. 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?

  40. 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

  41. 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

  42. Recent work • Has sought to understand how much difference is… • Between fund classes • Between funds • Seeking to distinguish importance of individual performance

  43. Evidence from the Yale endowment Source: Lerner [2003]

  44. More general patterns Source: Kaplan and Schoar [2005]

  45. 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!

  46. “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...”

  47. 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?

  48. 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 [2005]

  49. 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

  50. 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