Transcript Dia 1

Re-evaluating the PE model coming
out of 2008
Prof. Luc Nijs
Founder & Chairman Horizon Ltd
Founder & Group CEO The Talitha Group
Warsaw September 7-8, 2009
Buy-outs in the CEE – MarcusEvans 2009
Where to start?
The trends
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Despite the market conditions EM PE raised $ 66,5 bio in 2008, a 12% rise
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Proportional share in total global PE fundraising raising for 5 years in a row now
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Relative decoupling & economic power shifting to (some) emerging markets is
reinforced by current recession
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Cyclical recession became a structural one and the risk of L-shape recession is
looming (cf. Ponzi economy)
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Inflationary pressures despite current deflation trend having the potential to
cause another downward leg over the next 12-18 months
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Dynamics of the CEE region
 Debt-driven model to growth gone
 Erosion of financial infrastructure
Fundraising per region
Market Outlook
 Argumentation for EM proposition:
 Resilient growth
 Less use of leverage
 Remaining catch-up effect in the region sufficient
to offset the loss of the debt-engine
 If not, GDP growth will be limited to productivity
growth
 Labor-arbitrage as a strategy has lost most of its
dynamics
Investors stay committed…but…
Some of the underlying fundamentals
What about the converts…
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?
 Limited visibility of LT impact on
economic fundamentals
 If you broaden you monetary base….
Some of the underlying fundamentals
Av. risk premiums in EMs (%, 2008-2009)
Institutional investor views: EM versus
developed (December 2008)
Institutional investor views: EM versus
developed (April 2009)
Portfolio allocation
The dynamics of LT capital
 The need for LT capital is beyond doubt in every economy based
sustainable fundamentals
 Patient capital is there to unleash human & business potential
 Has PE ignored some of its fundamental DNA
 Conflict of interest when engaged in multiple parts of the capital
structure
 Going back to the core of being an ‘activist shareholder’
 Semi-globalization = procession of Echternach
PE penetration as an asset class
Source: Goldman Sachs, EMPEA
Portfolio exposure
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
Impact on portfolio construction
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In 2008 about 1/3 of the total pool of LPs had some kind of exposure to EMs
Portfolio weighting somewhere between 10-30% and total portfolio’s 3-5 %
Do or die for LPs the next couple of years: capture trend lines of GDP growth
etc.
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’?
What is considered important
 Survey institutional investors by BNY Mellon
(May 2009)
1. Alignment of interests
2. Transparency
3. Performance
4. ….
5. ….
Sunshine is the best disinfectant
 US seems to understand that..registration and info
 Europe does not …at least judging based on their
April 30, 2009 proposal to manage the AIM
industry
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Ill-thought through
Politically compromised
Creates barriers-to-entry
Unnecessary conditions
Blocking 3rd country managers/funds
Erodes competitiveness of EU investors
Team
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What is the DNA of your team?
What is the set-up of the team? Locations?
How is decision-making shared?
How is the carry shared?
Stability- How are you going to execute your
strategy
 Is your team ready for the ‘new normal’ ..i.e.
generating returns by improving operations and
creating synergies rather than leverage
 Can your HC live up to that test?
Team
 The HC rainmaker paradox
 Human Capital center of excellence
 Retention
 Change management
 Compliance
 Organizational Development
 Recruiting
 Sourcing
 Resource Development
Terms & conditions
 Compensation
 2 & 20
 Alternatives? After the investment period?
 Imputing transaction fees by GP?
Source: SJ Berwin AS 2009
Terms & conditions
 Compensation
 Carry vs. hurdle rate
Subject to delay until clawback unlikely
Source: SJ Berwin AS 2009
Fund structure
 Back to the open ended-structure?
 Relevance of ‘permanent capital’
 Are we going to leave liquidity up to the ‘secondary
market’ or contribute to that as an agent of
change
 Herding behavior and GP mushrooming
Regional versus country specific
 Regional specific strategies more-difficult to
execute unless industry focus
 Macro-economics are going to drift among CEE
countries more than in the past
 Relation between performance, investment
strategy and in-house specialists
Who do you want to be ?
 Align you personal interest with the dynamics of LT
capital
 Mushrooming of GPs not necessary a blessing for
the industry
 Contribute to value creation in a world where too
much money is chasing too little opportunities
 Consider yourself an entrepreneur
Let gravity have its way
Conclusion
 Re-thinking of PE model is very much needed
 Live the talk…
 No right or wrong, no good or bad
 The LPs are at the centre of everything you do
 EMs have become a relative game
 CEE needs to show its bearings
 Remaining catch-up in CEE needs to be supported by
economic and financial maturity and permanent efforts re
innovation & technical enhancements
 PE needs to evolve towards being part of the mainstream
finance environment
Contact
Riga Graduate School of Law
Law & Finance Chair
Strelnieku iela 4k-2
Riga LV-1010
LATVIA
[email protected]
Tel. +37167039230