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February 24, 2009

How Harvard tripped on its investments

Forbes has an interesting article on the performance of Harvard Management Co., the subsidiary that invests the institution's money.
Desperate for cash, Harvard Management went to outside money managers begging for a return of money it had expected to keep parked away for a long time. It tried to sell off illiquid stakes in private equity partnerships but couldn't get a decent price. It unloaded two-thirds of a $2.9 billion stock portfolio into a falling market.

Now, in the last phase of the cash-raising panic, the university is borrowing money, much like a homeowner who takes out a second mortgage in order to pay off credit card bills. Since December, Harvard has raised $2.5 billion by selling IOUs in the bond market. Roughly a third of these Harvard bonds are tax exempt and carry interest rates of 3.2 per cent to 5.8 per cent. The rest are taxable, with rates of 5 per cent to 6.5 per cent.

...The fact that a fifth of HMC's portfolio is in private-equity-like investments makes it vulnerable to the kind of problems HMC faced this fall. HMC has made $11 billion of capital commitments to investment partnerships through 2018, says Moody's. HMC used to make good on those commitments with income generated by the existing private equity portfolio. "Endowments are afraid capital calls will come quickly and far ahead of any liquidity from private equity funds," says Colin McGrady, managing director at Cogent Partners.

Watching all of this, the group of 10 Harvard alumni from the class of 1969 feel vindicated. "The events of the last year show that the whole procedure of rewarding people so handsomely based on increases on paper value of the endowment was deeply flawed," says a spokesman for the group, which recently sent a letter to the Harvard president suggesting HMC staffers return $21 million of their latest bonuses. "Even now, we don't really know how well it has done in the last 10 years."
Arun Natarajan is the Founder & CEO of Venture Intelligence, the leading provider of information and networking services to the private equity and venture capital ecosystem in India. View free samples of Venture Intelligence newsletters and reports. Email the author at arun@ventureintelligence.in

February 23, 2009

Videos from The Deal's Distressed Investing Conference

The Deal has an interesting set of videos from its recently organized Distressed Investing Conference in Las Vegas here. Here is a sample featuring Michael Heisley of The Heico Companies LLC.


Arun Natarajan is the Founder & CEO of Venture Intelligence, the leading provider of information and networking services to the private equity and venture capital ecosystem in India. View free samples of Venture Intelligence newsletters and reports. Email the author at arun@ventureintelligence.in

Abu Dhabi replacing Dubai?

The NYT DealBook has an interesting post on how Abu Dhabi is making bold moves formerly associated with fellow Emirate Dubai.
Twin deals initiated out of Abu Dhabi on Monday could signal a major change in power in the United Arab Emirates — the seven-state federation in which both Abu Dhabi and Dubai belong.

First, Abu Dhabi has subscribed to half of a $20 billion bond offering floated by the government of Dubai to help the emirate pay off the more than $80 billion in debt it racked up during the boom years.

...By assisting Dubai in paying off part of its huge debt, Abu Dhabi is sending a signal that it has the money and the power to lead the U.A.E. through the current economic downturn.

Related: Couple of YouTube videos on the Dubai Real Estate crash, here and here.

Arun Natarajan is the Founder & CEO of Venture Intelligence, the leading provider of information and networking services to the private equity and venture capital ecosystem in India. View free samples of Venture Intelligence newsletters and reports. Email the author at arun@ventureintelligence.in

Interview with N. Ram of The Hindu

ContentSutra has an interview with N. Ram, the editor-in-chief of the The Hindu newspaper. The interview is especially interesting in the context of how newspapers - including The New York Times - are struggling to cope with competition from the Internet. Excerpts:

On the impact of the Internet:
Internet penetration in India is not even close to a stage when you feel cannibalization (of print) will occur. That gives you some comfort. I’m very pleased with the present situation, when print is still growing, and you can do as much or as little as you want on the Internet. When Internet penetration reaches, say, 200 million users, then the game might change. But even then, where’s the revenue model?

On the reported deal with Australia’s Fairfax Media:

That was true earlier, but then Fairfax went into a tailspin. The CEO resigned due to differences with the board etc. So I guess that is that. Nothing is on currently.

On whether The Hindu is likely to enter into a business relationship with the UK's The Guardian
We hope so. There have been some ideas, but these are early days.


Arun Natarajan is the Founder & CEO of Venture Intelligence, the leading provider of information and networking services to the private equity and venture capital ecosystem in India. View free samples of Venture Intelligence newsletters and reports. Email the author at arun@ventureintelligence.in

February 20, 2009

Throwing Good Money After Bad - Illustration

The TARP, in Pictures

Arun Natarajan is the Founder & CEO of Venture Intelligence, the leading provider of information and networking services to the private equity and venture capital ecosystem in India. View free samples of Venture Intelligence newsletters and reports. Email the author at arun@ventureintelligence.in

February 19, 2009

Is the PE fee structure set for decline?

In the PE industry, a 2% management fee and a 20% "carry" (the so called and "2 and 20" or 2/20) seemed set in stone. . Until 2008. According to a new survey by Mercer, fees are expected to decline in 2009 - especially for the fund-of-funds segment.
The survey shows alternative investment strategies to have the highest fees for each dollar of investor capital allocated. According to Divyesh Hindocha, worldwide partner in Mercer’s investment consulting business: “One needs to take care before passing judgement on this evidence, as return and risk considerations should take priority over fees. It is fair to conclude, however, that fund of fund approaches extract a heavy premium from the alpha generation process and we would expect this to be under challenge in the new financial environment.”

Mr Hindocha commented, “Historically, fees are higher in those strategies where asset managers have the most potential to outperform. However, anecdotal evidence suggests that increasingly asset managers will have to negotiate their fee structures with ever more cost-conscious clients. “Alpha is now competing with cheap and plentiful beta and capacity is no longer an issue for most strategies,” he continued. “There is the recognition that institutional investors are no longer willing to pay upfront, such large proportions of the potential alpha, especially for the more complex strategies.”

KKR's move earlier this month to charge LPs in its new infrastructure fund a 1% management fee and 10% carry, seems to reinforce the survey results. Extracts from the PEI report on the KKR announcement:
The size and appropriate timing of fees has been a hot topic of debate in recent years among private equity firms entering the infrastructure asset class. Many GPs have sought to apply the traditional 2-and-20 model into the asset class, but given the steadier, lower returns many LPs expect from the asset class, that pricing model has come into question.

...In light of current market turmoil, many private equity firms have also been cutting their fees. Last month, mega-buyout firm TPG sent a letter to its LPs saying that it would allow them to reduce their commitments by as much as 10 percent and cut its annual management fees by one-tenth, regardless of whether the LPs cut commitments.

Arun Natarajan is the Founder & CEO of Venture Intelligence, the leading provider of information and networking services to the private equity and venture capital ecosystem in India. View free samples of Venture Intelligence newsletters and reports. Email the author at arun@ventureintelligence.in

February 17, 2009

Institutional investors to cut down on equity?

In an article for Business Standard, Akash Prakash of Amansa Capital points out the surprising "lack of debate on the poor returns delivered by global equities over the last decade".

Confidence in equities as the best place to park your long-term savings has got to have been shaken. Having just experienced two severe bear markets this decade alone, investors must be questioning their asset allocation towards equities. We run the risk that investors get disillusioned and use any strength in markets to lighten up on their equity exposures. Such behaviour, were it to come to pass, would set a ceiling on the equity markets for the short term at least, as any strength in the markets will be met by selling by investors looking to allocate out of equities.

A lot of the asset allocation policies adopted by many of the real money long-term investors must also be now under question. These policies are based on the framework that over the long term, equities always deliver the highest absolute returns. Most such strong hands, be they foundations, family offices or sovereign wealth funds, must now be questioning their long-term equity allocation. Most have upwards of 50 per cent in equities, and given the poor performance of equities vis-a-vis bonds, this number must be under debate. Also given the beating many of these institutions have taken over the last year, they must be anyway in a mode to curtail their risk appetite. I am not sure these institutions were set up to be able to handle the type of volatility and synchronised drawdowns that we saw in 2008. Could we see a wave of rebalancing coming up from these strong hands? If we do, that is a real problem, for there are no other strong hands in prospect which could absorb these flows.

...All of the above obviously point to the risks we see if investors start questioning the long-held assumption of equity being the highest returning asset class. However, the horrendous performance of equities over the last two decades also may point to us coming to a really attractive long-term entry point for global equities vis-a-vis government bonds and cash.

Arun Natarajan is the Founder & CEO of Venture Intelligence, the leading provider of information and networking services to the private equity and venture capital ecosystem in India. View free samples of Venture Intelligence newsletters and reports. Email the author at arun@ventureintelligence.in

February 16, 2009

Recession triggers rethink on renewable energy

At $145 to an oil barrel, Renewable Energy was a favorite theme among investors. But what when oil languishes at $45? Knowledge@Wharton provides the take of various energy industry players who spoke at the recent Wharton Energy Conference
Energy experts are now taking a more rigorous look at purported energy and environmental savings from renewables, trying to include all the costs and pollution that go into production, transportation and use. It is no longer given, for example, that America's oil-dependence and pollution problems can be solved by making ethanol from corn, Carson pointed out. "We're all doing a collective, 'What were we thinking?' on that." In another example, he pointed to a project in The Netherlands to make electricity from renewable wood pellets. While it sounded environmentally responsible, the wood came from pine trees in the U.S. state of Georgia, and the pellets traveled by train, ship and truck, each burning fossil fuels. "That was five or six steps too complicated for me."

A period of rethinking also could help dispel some of the myths about renewables, clearing the way for smarter investment, Susman said. "There's somewhat of a perception that investing in technology is ... going to drive all the changes that we see toward renewables in coming years. In fact, consumers will be the driving force, as they demand renewables and legislation to support these energy sources." Unfortunately, he added, economic worries are now cutting into consumers' willingness to pay a premium to go green.

A second myth: Startup firms will lead the charge to renewable energy. Such firms will indeed play a key role, "but we also need people sitting at Morgan Stanley, at Chevron and at the Department of Energy," Susman suggested. Without these players, the industry will not get the regulatory and financial support it will need.
Arun Natarajan is the Founder & CEO of Venture Intelligence, the leading provider of information and networking services to the private equity and venture capital ecosystem in India. View free samples of Venture Intelligence newsletters and reports. Email the author at arun@ventureintelligence.in

February 12, 2009

Emerging Markets PE Funds raise record $67-B in '08

Extracts from an EMPEA press release

Bucking global trends, 210 private equity funds focused on emerging markets raised a record-breaking US$66.5 billion in 2008, a 12% increase over the US$59 billion raised in 2007, according to new research from the Emerging Markets Private Equity Association (EMPEA).

“The good news is that there is a pool of capital that can take advantage of unprecedented investment opportunities in emerging economies,” said Sarah Alexander, President of EMPEA. “The bad news is that fundraising in 2009 will be much more challenging. Western institutional investors are grappling with their own asset allocation issues, and the globalization of the financial crisis will impact expansion plans into new markets,” she said.

EMPEA estimates that 371 private equity funds focused on emerging economies are presently in the market looking to raise as much as US$144 billion in capital.

“2009 will be a difficult year for fund managers seeking to raise capital, but funds with dry powder to invest are in a very good position right now,” Alexander said. “We’re entering a period of potentially very ripe conditions for private equity in these markets: lower entry prices, less competition for deals and very attractive deal flow from entrepreneurs with few alternative options for raising capital,” said Alexander. “The real challenge is convincing Western investors to maintain exposure to what are considered riskier markets,” she added.

A recent EMPEA Survey showed that 52% of institutional investors believe that their emerging markets private equity fund portfolio will be less negatively affected by the financial crisis than their developed market counterparts. “The private equity model in emerging markets is about equity investments in growing companies—not leverage. Whereas the lending draught in the West resulted in stalled buyout markets, in emerging markets deals are still getting done. Those funds that were prudent in their investment pace when valuations were high are well positioned in this environment, and those investors who stick with them will be rewarded,” said Alexander.

Emerging Asia continues to dominate the private equity landscape in developing countries. Emerging Asia represented 60% of total funds raised in 2008 versus 48% in 2007. Emerging Asia funds raised US$40 billion, a 39% increase over 2007, driven by a significant increase in capital raised by China-dedicated funds. Funds focused on China raised US$14.5 billion in 2008 compared to US$3.9 billion in 2007. India-dedicated funds raised US$7.7 billion in 2008 versus US$4.6 billion in 2007. No other single region accounted for more than 10% of total capital raised.

In addition to the continued prominence of Asia, there was a significant rise in the number and size of funds targeting multiple regions or pan-emerging markets opportunities. “One explanation for this is the growing size of successor pan-emerging market funds—in 2008 we saw 2 follow-on pan-emerging market funds close at US$2 billion or more,” explained Jennifer Choi, EMPEA’s Director of Research. “Another reason is the expanding mandate among some Middle Eastern funds that now includes opportunities in Asia,” Choi added.

16 funds achieving final closes in 2008 raised US$1 billion or more, versus 19 funds achieving that milestone in 2007 and 4 in 2006. Notable closes in 2008 included two of the largest pan-emerging market funds raised to date, which closed at US$2.25 billion and US$2.9 billion; a US$2.5 billion China fund; a nearly US$2 billion fund focused on Central and Eastern Europe; and two pan-Asia funds that raised more than US$4 billion. Fund sizes (for funds achieving a final close in 2008) averaged US$400 million in 2008 versus US$426 million in 2007 and US$272 million in 2006.

February 09, 2009

K@W interview with CEO of Sutherland

Knowledge@Wharton has an audio interview with Dilip R. Vellodi, CEO of Sutherland Global Services, about the company's business model and its future.

Arun Natarajan is the Founder & CEO of Venture Intelligence, the leading provider of information and networking services to the private equity and venture capital ecosystem in India. View free samples of Venture Intelligence newsletters and reports. Email the author at arun@ventureintelligence.in

Indian PE veterans look back and ahead

The Mint traces the history of the Indian PE/VC space via interviews with three industry veterans - Nitin Deshmukh of Kotak PE, PR Srinivasan of CVC International (both of whom were formerly with ICICI Venture) and JM Trivedi of Actis (formerly with GVFL). Here are some extracts on what these managers think about the scenario ahead:

Deshmukh: While it is unfortunate to be caught in this unprecedented financial environment, this will bring in discipline among private equity players on investment processes and valuations. We had seen unprecedented euphoria and excesses in PE investing in India during the last three years. At least 70% of investments in private equity over the past three years is estimated to have gone into PIPEs (private investment in public equity) and pre-IPO placements. This is going to hurt many players. In fact, many first-time funds that have participated in the euphoria will see tough times and find it difficult to raise funds in the future. The number of players, who had increased from just around 40 in 2004 to over 200 in 2007, will therefore see a reduction.

Trivedi: These are challenging times. The short- to medium-term growth could be significantly lower than that projected at the time of investment and PE funds will have to work with the management teams to cut costs and bring about operational improvements to achieve the returns.

Srinivasan: India will have its place, fairly high in the pecking order, as a favourable investment destination. In every down cycle these questions arise: Which fund managers will survive? Who will be able to retain their LPs? Who will be able to raise new funds? As it happens, every time a few managers will exit, a few LPs will cut their India exposure but then new fund managers and new LPs will come.

Arun Natarajan is the Founder & CEO of Venture Intelligence, the leading provider of information and networking services to the private equity and venture capital ecosystem in India. View free samples of Venture Intelligence newsletters and reports. Email the author at arun@ventureintelligence.in

February 06, 2009

Will global markets hit fresh lows in 2009?

Ruchir Sharma says the likelihood of this scenario has increased in an article for the Economic Times.
Scenario3: The deleveraging process continues unabated resulting in fresh new lows for global markets: There is still something incomplete about the current downturn; overall leverage ratios are way above trend and after the overshoot on the upside valuations need to fall to bargain-basement levels to form a true bottom for equities. The current consensus among opinion makers is for governments to end the downturn through intervention and aggressive spending.

...The base case here still is that the US and the global economies avoid an Armageddon-type scenario in the wake of all the concerted policy action. But it would still not be possible to engineer a new growth cycle until excessive debt in the system is purged. As a result, equity markets will continue to trade in the range established since the lows were hit in November 2008.

However, the odds of the third scenario materialising have increased in recent weeks as treasury yields in the US have risen sharply and the price of gold has broken out on the upside. It’s key that these disturbing trends reverse quickly and the US market holds the November lows for Scenario 1 or 2 to have a chance to play out in 2009.

Arun Natarajan is the Founder & CEO of Venture Intelligence, the leading provider of information and networking services to the private equity and venture capital ecosystem in India. View free samples of Venture Intelligence newsletters and reports. Email the author at arun@ventureintelligence.in

February 01, 2009

Boutique I-Banks tightening their belts

The Mint has an article on how Boutique investment banks are bracing for the slowdown.
“Last year, a lot of investment bankers came up, few will be active in 2009, as the correction was too sharp and caught every one unaware,” says T.R. Srinivas, director, real estate and energy, Ozone Capital Advisors Pvt. Ltd.

...M&A activities will be more prominent this year as a number of companies that diversified into unrelated areas may look at opportunities to get out of them, they say. Mergers could also get triggered by necessity as a few companies may look at the option of liquidating assets to generate working capital.

“Last year, our revenues from PE/M&A were in the ratio of 50:50. This year we expect the ratio to change to 30/25:70/75, as PE deals will be less than M&A,” says Ozone Capital’s Srinivas. Experts say valuations are attractive among information technology service firms (as it will continue to grow at 20%) and quite a few mid-sized US companies are interested in acquiring Indian firms.

Arun Natarajan is the Founder & CEO of Venture Intelligence, the leading provider of information and networking services to the private equity and venture capital ecosystem in India. View free samples of Venture Intelligence newsletters and reports. Email the author at arun@ventureintelligence.in