Globalization in the business of making money ( Alternative

Size: px

Start display at page:

Download "Globalization in the business of making money ( Alternative"

Vernon Bryan Parrish
7 years ago
Views:

1 Avinash Vashistha, Chairman Tholons Globalization in the business of making money ( Alternative Investments ) An Introduction to Alternative Investments The term alternative investment has been receiving a lot of attention recently as many investors are looking for higher returns, broader portfolio diversification and generating absolute returns independent of market direction. Derivative products, hedge funds, real estate investments, private equity funds, etc come under the alternate investments umbrella. Kohlberg Kravis & Roberts (KKR) put private equity investing on the map in the late 1980s with its famed hostile takeover of RJR Nabisco and some of the well known companies in the U.S. including Federal Express, Oracle, Apple Computer, Genentech and Intel, were initially financed with private

2 equity. Private Equity companies provide finance at an early stage (venture capital) or as an alternative for companies that have a public quote (the leveraged buy-out). Hedge funds are a large part of the alternative investments strategy and can take both long and short positions, use arbitrage, buy and sell undervalued securities, trade options or bonds, and invest in almost any opportunity in any market where it foresees impressive gains at reduced risk. The economics of alternative investments and the need to globalize Facing a mature and highly competitive market in the USA and UK, plus mounting pressure from investors for better performance, a global perspective was required to find new investment opportunities and cut administration and other expenses. Europe has received most attention in the recent past because of size of economy and restructuring opportunities. The industry size, the number of players involved and the economics reveal the need to consistently innovate and look for new opportunities outside the developed markets. Asia with its enormous growth and size has lately been seen as a place where these opportunities are occurring. In 2006, the private equity industry is estimated to have raised $460 billion worldwide (There are thousands of private equity firms worldwide). Private Equity funds traditionally include an annual management fee of around 1.5% to 2.5% of committed capital, and Incentive / Performance Fees, typically 20%, of total gains that is payable if they pass pre-defined thresholds (also known as "carried interest"). It is currently estimated that there are over 9000 hedge funds managing about $1.5 trillion world-wide. A vast majority of funds continue to manage less than $25 million and 75% of the single-manager funds have less than $100 million under management. Most Hedge Funds charge a 2% management fee and Incentive / Performance Fees, typically 20%, of any profits if they pass pre-defined thresholds. Private Equity: Globalization- How Did This Happen As these success stories of private equity investments multiplied and became widely known, large institutional investors like pension funds and insurance companies were drawn to the asset class, fuelling the industry s explosive growth. With the unprecedented returns generated from the surge in U.S. equity markets, institutional investors were on the lookout for new opportunities and began looking at emerging markets. Private equity investments in Asia Pacific (excluding Japan, including Australia) reached record volumes totaling US$7.6 billion in 2006, according to data gathered by Thomson Financial Tholons 2 of 5

3 Full Year 2006 Asia-Pacific (ex-japan) Private Equity Investments Company Nation No. of Deals No. of Comp No. of Firm Invested (US$ Mil) India China , Singapore , Australia Taiwan South Korea New Zealand Vietnam Thailand Hong Kong Indonesia Pakistan Sri Lanka Total , Source: Thompson Financial The global footprint of Hedge Funds In the ultra competitive environment of over 9000 hedge funds worldwide, fund managers are looking for investment strategies outside the developed markets of the US, UK, etc. A very common example cited as an investment strategy in the quest of alpha is the so-called yen carry trade. Hedge funds have borrowed billions of dollars at ultra-low interest rate in Japan, and invested the proceeds in countries like Brazil or Turkey where interest rates are high. In addition, the contemporary global financial market offers a wide array of instruments for investing and hedging purposes. For example, industry estimates place the share of hedge funds in total foreign portfolio flows into India at approximately 30-40% (In 2006, portfolio inflows into India aggregated $8 billion). Hedge funds exposure to India accounts for one per cent of total global hedge fund assets, according to Eureka Hedge data Tholons 3 of 5

4 Unlocking Global Value Private equity investments require long term (three to seven years) commitment, deep expertise to spot assets with substantial scope for improvement and growth, necessary industry expertise to improve performance following a deal. To execute investment strategies globally, funds need to research interest rate movements, currency rate changes, the regulatory environment, and the economies of countries in the emerging markets. Investors must have access to full and reliable information on these markets as well. Risk Management is another critical aspect when it comes to investing in overseas markets. This has resulted in: The need for educated knowledge workers in the different emerging markets generates highly skilled and high wage job opportunities Strengthening corporate governance in various countries leading to better accounting and regulatory environment Investments in technology and applications required to support trading, reporting, risk management, compliance, etc Companies in emerging markets nowadays have many more options when it comes to raising money Globalization cuts fund operational expenses Hedge fund and private equity companies operate in an ultra competitive environment. Equally important, the focus of the top management is on the core function of seeking new investment opportunities and investors. Hedge funds and PE firms outsource critical functions like fund administration, investor servicing, etc. A March 2007 survey by FSOutsourcing Knowledge Exchange (FSOkx) revealed: 60% of Hedge Fund managers outsource at least one hedge fund function. Two-thirds of Hedge Fund Managers expect to outsource another operation within a year and want their outsourcing supplier to bring specific expertise to the operation. Some bigger funds have setup captive centers, many outsource to independent vendors. A number of vendors use satellite offices in low cost destinations like India, Ireland, etc for fund administration, research, etc Tholons 4 of 5

5 A final thought Globalization will be a defining theme for the industry in the coming years, and a critical source of growth and the benefits will go both ways investors benefit with new investment opportunities and the emerging countries benefit with access to capital to build infrastructure, etc. If you have any questions or comments about this article please contact at avi@tholons.com 2007 Tholons 5 of 5

Wealth Management Education Series. Explore the Field of Mutual Funds

Wealth Management Education Series Explore the Field of Mutual Funds Wealth Management Education Series Explore the Field of Mutual Funds Managing your wealth well is like tending a beautiful formal garden