Presentation is loading. Please wait.

Presentation is loading. Please wait.

London Business School November 5, 2009 Prof. Roger Leeds.

Similar presentations


Presentation on theme: "London Business School November 5, 2009 Prof. Roger Leeds."— Presentation transcript:

1 London Business School November 5, 2009 Prof. Roger Leeds

2 Clarifying Terminology-“Private Equity,” “Venture Capital,” “Mezzanine Finance,” “Buy-Out,” “Hedge Fund” “Private equity”– Generic term refers to all the above; increasingly imprecise term – Huge range of target firms- from early stage/start- ups to SMEs to multi-billion $ publicly listed companies “going private” – Huge range of PE fund size -from $15-20 billion – Virtually every sector, from high-tech to manufacturing, services, real estate, banks – Not just equity—various types of debt (LBOs), mezzanine Prof. Roger Leeds, Nov. 2009

3 PE Common Characteristics Medium to long-term illiquid financial commitment Investors usually in legally structured private partnerships (the PE fund) Fund manager (GP)-sophisticated investors with financial & operating expertise Illiquidity & concentrated ownership create incentive to enhance firm value (active Investors) Valuation, terms & conditions result from process of negotiation (except publicly traded companies) Alignment of interests between investor & management All of above geared to creating opportunity for exit with substantial returns—dependent on achieving performance enhancements Prof. Roger Leeds, Nov. 2009

4 Most “Western” Buyouts Don’t Fit Developing Country Profile TRANSACTION SIZE: TEND TO BE HUGE (Billions) CONTROL: MAJORITY OR 100% PUBLICLY LISTED COMPANIES HIGHLY LEVERAGED—60-80% DEBT; ASSUMES AVAILABILITY OF RELATIVELY CHEAP DEBT AUCTIONS & “CLUB DEALS” INCREASINGLY COMMON FINANCIAL ENGINEERING/RESTRUCTURING RATHER THAN HANDS-ON VALUE CREATION DEVELOPED FINANCIAL MARKETS TAKEN FOR GRANTED (E.G. EXITS, CREDIT MARKETS) EM PE…A DIFFERENT RISK PROFILE, REQUIRING DIFFERENT SKILL SET… Prof. Roger Leeds, Nov. 2009

5 EM PE-Different Market, Requiring Different Skill Set Higher country risks – Macroeconomic volatility – Weak legal protection for investors – Thin domestic debt & equity markets – Limited exit alternatives – Thin professional management class More challenging due diligence & valuation – Less disclosure requirements/enforcement – Information asymmetries more severe – Accounting and reporting standards less reliable – Sub-standard corporate governance (e.g. transparency & management accountability) Prof. Roger Leeds, Nov. 2009

6 EM PE Market-Covers Broad Range Start-ups-early stage (VC) Established family-run firms seeking to expand & become more competitive Medium-sized, established companies at pre-IPO stage Consolidation of independent firms within same sector (“roll-ups”) Restructuring/ turn-around situations (post-Asia financial crisis) Privatizations What do all EM PE candidates have in common? Prof. Roger Leeds, Nov. 2009

7 EM PE Market-Covers Broad Range Start-ups-early stage (VC) Established family-run firms seeking to expand & become more competitive Medium-sized, established companies at pre-IPO stage Consolidation of independent firms within same sector (“roll-ups”) Restructuring/ turn-around situations (post-Asia financial crisis) Privatizations What do all EM PE candidates have in common? Prof. Roger Leeds, Nov. 2009

8 Victims of Financing Gap Majority of EM companies have limited or no access to medium/long-term capital But not due to capital shortage – Many developing countries have savings rates in 30-50% range, compared to 17% in U.S., 15% in England and 23% in Germany – Assets of largest EM institutional investors (pension & mutual funds) substantial & growing, but govt. regs impede PE investing – Government borrowing absorbs large portion of private savings Prof. Roger Leeds, Nov. 2009

9 Financial Sector Weakness= PE Opportunity Funding Source Access Domestic bank credit (>1 year) Limited Domestic stock market Very Limited Domestic bond market No Govt. programs Yes Int’l equity markets No Int’l credit No Int’l develop. finance (IFC, IIC) Limited Private equity Limited Prof. Roger Leeds, Nov. 2009

10 Limited Financing Alternatives Enhance PE Opportunity “Patient Capital”- medium/long-term, illiquid; Alignment of interests between investor and management; share incentive to enhance firm value; prerequisite for exit Non-financial value added-incentive & expertise to strengthen corp. governance, financial reporting, access to new markets, etc. Catalyst-PE strengthens other ingredients for private sector development (e.g.corp. governance, IPO deal flow) Prof. Roger Leeds, Nov. 2009

11 Inefficiencies Generate PE Opportunity Successful PE investors (everywhere) identify & capitalize on inefficiencies Rampant EM inefficiencies a prime explanation for rapid EM PE growth – Companies-weak corp. governance, financial controls, marketing….. – Sectors-over-populated with under-financed companies unable to achieve scale – Countries-anti-competitive regulations, labor law rigidities, taxes Course focuses on both heightened EM risks and opportunities created by inefficiencies Prof. Roger Leeds, Nov. 2009

12 Post-Investment Value Enhancement VC Mantra: “The real work begins after money is disbursed.” More true in EMs-building firm value more difficult Skill set required to make an investment very different than to enhance firm value – Investment bankers – do deal, collect fee, move to next deal; no operating experience Post-investment success requires local presence, deep knowledge of indigenous business culture, and cooperative management – “We no longer invest where we do not have eyes and ears permanently on the ground.” Prof. Roger Leeds, Nov. 2009

13 PE Contribution to Value Enhancement (e.g. earnings growth, multiples expansion) Financial engineering-B/S restructuring Identify & negotiate additional funding sources Recruitment -new management & board members Leverage industry contacts to identify suppliers, customers, markets Operational restructuring- gross margin improvement, operating expense reduction IPO Preparations Exit preparation Prof. Roger Leeds, Nov. 2009

14 EM PE Performance: Fundraising & Investment: Prof. Roger Leeds, Nov. 2009

15 EM PE Fundraising By Region:

16 Year YTD 2008* Western Europe35,61128,86834,03737,23085,026108,000152,000NA US110,00068,20049,30092,000151,800252,000291,000NA Asia (incl. JANZ)7,0643,2214,8017,65118,26925,82834,734NA Asia (ex-JANZ)5,1921,0932,2002,78515,44619,38628,66837,088 Latin America ,2722,6564,4193,975 CEE/CIS ,7772,7113,27214,6295,364 Africa , ,3532,3402,592 Middle East781, ,9152,9465,0276,380 Multi-RegionN/A ,6302,5804,0778,092 Emerging Markets6,5613,2313,4896,54525,76533,19359,16063,491 Global154,044102,42790,498141,690265,414399,635508,226NA Global PE Fundraising: USD Millions Source: EMPEA, 3i PwC, APER, BVCA, Dealogic, Dow Jones, EVCA, GVCA, KPMG, NVCA, RVCA, SAVCA, Thomson, VELA, Zawya *YTD 2008 figures cover the period starting January 1, 2008 and ending December 9, Prof. Roger Leeds, Nov. 2009

17 Global PE Investment: USD Millions Source: EMPEA, 3i PwC, APER, BVCA, Dealogic, Dow Jones, EVCA, GVCA, KPMG, NVCA, RVCA, SAVCA, Thomson, VELA, Zawya *YTD 2008 figures cover the period starting January 1, 2008 and ending December 9, Year YTD 2008* Western Europe41,00032,47634,10043,40067,393113,775132,608NA US58,00041,39959,20043,50022,738215,000444,390NA Asia (incl. JANZ)11,2009,11917,60011,79916,55950,68341,506NA Asia (ex-JANZ)2, ,5284,3167,69222,46830,37020,570 Latin America ,0694,2638,0176,177 CEE/CIS ,6034,4264,189 AfricaNA 1,3001, ,2002,731 Middle EastNA ,1953, Emerging Markets3,3131,3616,0267,38511,98635,37950,51334,463 Global111,51384,105112,398101,768110,984392,369638,647NA Prof. Roger Leeds, Nov. 2009

18 EM PE Returns: Steadily Improving Relative to U.S. & European Funds…Until Late 2008 IndexOne Year Three Year Five YearTen Year Emerging Markets VC & PE ( 7.18) Asia (ex Japan) PE (8.65) CEE & Russia PE Latin America & Caribbean PE MSCI Emerging Markets (33.01) US VC (0.9) US PE (5.55) Western Europe PE (14.76) S&P 500 (21.98) Prof. Roger Leeds, Nov Cambridge Associates EM PE/VC Index (as of 30 September 2008) Source: Cambridge Associates LLC Proprietary Index: pooled end-to-end returns, net of fees, expenses and carried interest. 18

19 Emerging markets still under-penetrated Source: EMPEA estimates. Note: Emerging Asia excludes Japan, Australia, New Zealand. Prof. Roger Leeds, Nov. 2009

20 PE Fundraising as % of GDP (2007)

21 PE Fundraising as % of GDP by Region (2007)

22 The risk premium for EM PE rose from 6.7% in 2008 to 7.2% in the 2009 Survey Change in Risk Premium China 6.4%6.3%0.1% India 6.4%6.1%0.3% Brazil 6.4%6.9%-0.5% CEE (inc Turkey) 6.4%5.0%1.4% South Africa 7.0%6.4%0.6% Other Emerging Asia 7.3%N/A Middle East 7.3%6.5%0.8% Latin America (ex Brazil) 7.5%6.7%0.8% North Africa* 8.0%6.7%1.3% Russia/CIS 8.4%6.9%1.5% Sub-Saharan Africa (ex S. Africa)* 8.4%6.7%1.7% LPs’ perception of risk premiums required for EM PE funds relative to developed market buyout funds * Categorized as “Pan Africa” in the 2008 survey. EMPEA/Coller Capital Emerging Markets Private Equity Survey, Global Private Equity Conference May LP assessment of risk has gone up for all markets except Brazil; China and India relatively unchanged Prof. Roger Leeds, Nov. 2009

23 EM Attractiveness over Next 12 Months: Country Rankings (LP Survey, March 2009) 2009 Survey 2008 Survey Change China 110 Brazil India Central & Eastern Europe Latin America (ex Brazil) Africa (ex South Africa) South Africa Middle East 880 Russia/CIS 96-3 EMPEA/Coller Capital Emerging Markets Private Equity Survey, Global Private Equity Conference May Prof. Roger Leeds, Nov. 2009

24 GDP Source: International Monetary Fund, World Economic Outlook Database, April 2009 Developed vs. Emerging Emerging Market Regions GDP But performance varies significantly across regions. Emerging Market Economies Outperforming Developed Countries during Financial Crisis Prof. Roger Leeds, Nov. 2009

25 Financial Crisis Consequences-Some Good News EM PE industry better positioned to withstand down cycle –deeper, more established than 5 years ago Financial crises generally lead to lower valuations, less competition, more PE opportunity (e.g. growth capital, restructurings, distressed asset sales) Historically, PE deals consummated during times of crisis tend to outperform Long-term perspective-key drivers of EM PE growth during past 5 years have not evaporated! * See reading assignment Prof. Roger Leeds, Nov. 2009


Download ppt "London Business School November 5, 2009 Prof. Roger Leeds."

Similar presentations


Ads by Google