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Where to start? Why not fundraising!

Private equity in emerging markets A place to look for returns in the current downturn? Prof. Luc Nijs Founder & Chairman Horizon Ltd London, March 2, 2009 ICBI’s Fund Forum emerging markets 2009. Where to start? Why not fundraising!.

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Where to start? Why not fundraising!

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  1. Private equity in emerging marketsA place to look for returns in the current downturn?Prof. Luc NijsFounder & Chairman Horizon LtdLondon, March 2, 2009ICBI’s Fund Forum emerging markets 2009

  2. 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 Feb. 2009

  3. Fundraising per region

  4. 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

  5. Av. risk premiums in EMs (%, 2006-2008)

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

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

  8. Market Outlook • Cheaper valuations (although some parties sometimes are still in denial) • Attractive deal flow to arrive • Capital constrained entrepreneurs & management • BRIC as a catalyst gone? • But major differentiators among emerging markets • Semi-globalization = procession of Echternach

  9. 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

  10. 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

  11. 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

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

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

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

  15. Expecting to grow Source: EMPEA

  16. Cause of….. Source: EMPEA 2008

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

  18. 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

  19. 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

  20. Portfolio exposure

  21. 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 • HC issues • Global versus local teams: the best of both • Business model rethinking & paradigm shift • EM debt usage less or more prudent

  22. Let gravity have its way

  23. Darwinian tsunami & paradigm shifting Where are you?

  24. Contact Riga Graduate School of Law Law & Finance Chair Strelnieku iela 4k-2 Riga LV-1010 LATVIA luc.nijs@rgsl.edu.lv Tel. +37167039230

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