Embed Size (px)
Citation preview
Presented by -
Mridul Arora
MACRO TRENDS AND NEW APPROACHES IN PRICING OF PRIVATE EQUITY TRANSACTIONS IN EMERGING
MARKETS
Global Conference on Service Management (GCSM - 2014), Auro University, Surat, India,
4th to 5th January, 2014
MBA (Finance)Consultant (Deloitte)
Presentation Structure• Abstract
• Introduction
• Key Glossary Terms
• Introduction
a) Macro-economic Factors and Newer Trends in PE Markets
b) Objectives of the Study
c) Hypothesis of the Research Model
d) Conclusion
e) Limitations and Scope for Improvements
• Data Appendices, Charts and Tables
Abstract
Purpose –
• Investment banking is a very vast area in the field of banking and finance and
is a very old industry now.
• The present paper examines factors like Growth of Emerging Markets, Capital
Market Conditions, Hedging and Diversification Effect, Impact of Real Estate
sector and REIT/ETF markets, IPO, LBO and M&A activities, Participation of
Hedge Funds and Mutual Funds in PE Transaction and role of Corporate
Governance.
Findings –
Pricing of Private Equity transactions requires a close understanding of the
industry being considered for investment, valuation parameters in the capital
market and estimating these variables. The methods used to value normal
growth companies focus on tangible assets, present value of the future cash
flows, PAT, Operating Profit (EBITDA) and Price/Earnings Ratio (for listed
companies).
Risk in PE Funds can only be diversified by investing in a pool of funds.
Seed (< € 1 mil) Early Stages (€ 1 - 10 mil) Expansion/ (€ 10+ mil)development
Angels Incubators Accelerators Venture Capital Private Equity &Merchant Banks
Key Glossary Terms
Private Equity (PE) : Investment vehicles that pool capital for
investment in privately owned businesses at different stages of
development
PE Fund of Funds (FoF) : A PE FOF is a fund set up to invest in other
PE/VC/Hedge funds
REITs: A REIT is an entity, otherwise taxable as a U.S. corporation,
that meets certain technical requirements and that elects REIT
status for ownership of real estate by small investors
Sources:
http://www.equirus.com/Pages/services_private.aspx http://prezi.com/booipc_alx74/the-influence-of-social-media-on-governance/?utm_source=em0nl0explore&utm_medium=email&utm_campaign=gro&utm_term=a3703058896 http://readme.lk/searcc-international-conference-2013-colombo/
Introduction
Macro-economic Factors and Newer Trends in Private Equity Markets:
o Global Economic Outlook
o Capital Market Conditions
o Risk and Diversification
o Real Estate Industry Trends
o Nature of Transactions ( TP, IPO,LBO, Structured Debt and M&As)
o Corporate Governance by PE Fund Managers
The objective of the study:
To analyze the impact of Key Macroeconomic
Variables on PE (Global Private Equity Index)
In case of emerging market countries like Asia and China for Private Equity Pricing
Sou
rce:
“T
he E
cono
mic
Impa
ct o
f Ven
ture
C
apita
l in
Eur
ope”
(E
VC
A a
nd C
oope
rs &
Lyb
rand
)
Hypothesis of the Research Model:
Ho: A positive outlook influences investors to pay a higher price for a given investment opportunity and get higher prices at the time of disposal of the investment, encouraging investors to pay a higher price for the PE transactions.
• Conclusion:
The present study focuses on the emerging market countries with Asia and China clearly are at the top for Private Equity
investing activity.
A number of other considerations — low private equity penetrations, lack of financing generally in the market, lack of a strong venture capital market — ultimately the combination of all those is a need for capital.
Only LPs have access to the fund’s performance. Therefore, it can be safely concluded that Private equity is still an inefficient market.
GPs have dealt with problems in their portfolios and focused their new investment activity on more defensive sectors (like IT and ITeS)
• Limitations and Scope for Improvement:
Through this paper, we have stressed upon the need to look beyond and evaluate
several other measures, and have also briefly discussed the way to analyze and
compute a Global Index for Private Equity Funds.
The unexpected turn of events over the recent past, have forced the PE managers
to share more information as required by the investors in order to attract
investments. So it is up to investors to be more persistent in requesting the
required levels of transparency from the managers.
We might need to intend a further study on the paper by building up models from
Pool of Funds to the Fund of Funds, which is another sub class of investment
banking assets.
PE Investors may further develop their research to consider this index as a ready reference:
o for efficient fund selectiono for investments in specific sectors like Growth Sectorso for shift investment preferences to seek investment alternatives
Data Structures and Figuresused in the paper
PE Fund Organisation Chart
LP Insurance company
Pension fund
Large corporate
HNWI
GP The PE fund Manager
Portfolio Company A Company B Company C Company D Company E Company D
PE Fund Investment Structure
Source: Capital Line Database
PE Fund Key Statistics
Source: Bloomberg Business Week
Data Set – 1999 to 2012
Variables
Year Deals(%) PE Fundraising (%) GDP Growth Rates(%) PE Fund Standard Deviations
(%)
1999 6.40 8.45 4.30 7.20
2000 7.70 9.35 4.50 6.002001 7.50 8.43 5.50 6.502002 7.43 7.45 6.65 5.002003 7.65 7.89 8.54 7.00
2004 5.65 10.45 7.54 8.00
2005 6.54 13.60 6.75 6.00
2006 5.69 16.02 5.60 6.232007 5.09 17.61 6.00 4.002008 4.85 15.40 2.10 10.002009 6.29 6.91 3.00 9.452010 3.63 7.10 4.50 5.002011 4.78 5.02 6.20 6.00
2012 4.48 6.34 5.40 5.32
F-stat 11.09 19.41 17.07 12.89
p-value 0 0 0 0
Joint effect of all the variables
5.01 10.07 6.97 4.97
Source: Venture Intelligence Database
Private Equity Funding Facts
Private Equity Fundraising 2(Pool of Funds)
Source: Thomson Reuters
Cash Positions – Last 5 Years
Source: NSE
Standard Deviation in PE Funds
Source: Globalfunddata website
Global Indices used to value Private Equity Funds
Actual GDP Growth Rates from 2007 to 2012 for BRIC Countries
GDP Growth Rates over the last decade
China and Brazil leading the share of PE Investments
Global Comparison of PE Indices
Q & A
