PE & VC in the Balkans and emerging markets incl. Turkey.

1. Private equity as an asset class in the
region: a multi-focal approach
Prof. Luc Nijs
Founder & Chairman Horizon Ltd
Istanbul April 27-28, 2009
Buy-outs & growth capital in the Balkans and 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 April 2009

3. Fundraising per region

4. Market outlook for fundraising

5. Market Outlook
 A few conflicting data:
 Preqin (April 2009):
 US leads the way with 23 bio $
 Europe 20,2 bio $
 EM 2,7 bio$
 Lot of funds postpone final closing
 Development finance will focus more on direct
investing (FOM,…)
 Force of consolidation coming in

6. Market outlook for EM fundraising

7. Market Outlook
 Argumentation for EM proposition:
 Resilient growth
 Less use of leverage
 Wider CEE massively impacted
 20% of investors refer to increase EM risk

8. Investors stay committed…but…

9. Some of the underlying fundamentals

10. What about the converts…

11. 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?

12. Some of the underlying fundamentals

13. A (new) inconvenient truth about risk
Political instability
Legal / Regulatory
Curreny (F/X)
Market fundamentals
Counterparty
Market fundamentals
Structural issues
Environmental
Legal / Regulatory
Pre-crisis Thinking
Post-crisis Thinking
EmergingMarkets
DevelopedMarkets
High Risk
High Growth
High Risk
High Growth
High Risk
Low Growth
Low Risk
Low Growth
Emerging Markets Risks Developed Markets Risks

14. Av. risk premiums in EMs (%, 2008-2009)

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

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

17. Market Outlook
 Cheaper valuations (although some parties are still in denial)
 Attractive deal flow to arrive (Q1 2010 onwards)
 Capital constrained entrepreneurs & management
 BRIC as a catalyst gone?
 But major differentiators among emerging markets
 Semi-globalization = procession of Echternach

18. 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

19. 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

20. 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

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

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

23. Institutional investor views: EM versus
developed (April 2009)

24. Portfolio allocation

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

26. Portfolio exposure

27. Reasons for expansion or continuation
Source: EMPEA 2008

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

29. 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

30. 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

31. Smoke & mirrors…
 BVCA and E&Y 2008 performance study

32. A disaster waiting to happen

33. 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

34. 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’?

35. The 7 deadly sins of banking (Mike Mayo)
 5 April 2009-more bad weather to come
 Greedy loan growth
 Gluttony of real estate
 Lust for high yields
 Sloth-like risk management
 Pride of low capital
 Envy of exotic fees
 Anger of regulators
 Each reflects a way that banks tried to compensate
for lower natural rates of growth by taking more
risk

36. The 7 deadly sins of banking (Mike Mayo)
 Zombie banks versus complete recapitalization of
system
 Relaxation of mark-to-market rules will impact
balance sheets but the upswing will be largely out
powered by the later downswing
 A potential artificial accounting-induced capital
injection that does not change the economics

37. 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
 Global versus local teams: the best of both
 Business model rethinking & paradigm shift
 EM debt usage less or more prudent

38. Let gravity have its way

39. Darwinian tsunami & paradigm shifting
Where are you?

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