Alternative investments September 2007, CFA Managing Director Head of Global Equities and Alternatives Research
What are Alternative Investments? Traditional Investments Alternative Investments Real Estate Equities Hedge Funds Fixed Income Private Equity Foreign Exchange September 07 Slide 2
Alternative Investments are nothing new...... they have just been professionalized over the last decades September 07 Slide 3
What are Hedge Funds? lightly regulated investment vehicles with no restriction regarding their investment strategy invest across all financial markets (equities, bonds, currencies, commodities, traded real estate) and in some cases also in illiquid assets use all possible kind of financial instruments, especially derivatives (futures, swaps, options, etc) to implement their strategy often apply leverage to their portfolios, i.e. borrow funds to invest more than their initial equity capital September 07 Slide 4
1949 starting point of modern Hedge Funds Alfred Winslow Jones opens an equity fund using - leverage - short selling to hedge against market risk In the same year: Konrad Adenauer becomes first Chancellor NATO formed Mao proclaims establishment of the People s Republic of China September 07 Slide 5
...followed by a few global players Michael Steinhardt - Steinhardt Partners (1967-1995) Julian Robertson Tiger Management (1980-2000) George Soros The Quantum Fund (1973-2000) Catalysts for further rapid development: - Globalization widening scope for investment - Professionalisation of trading/improvement of market structure arbitration - development in IT quantitative strategies September 07 Slide 6
...before experiencing a tremendous boom USD billion 2000 1600 Estimated assets managed by hedge funds 1200 800 400 0 1990 1992 1994 1996 1998 2000 2002 2004 2006 Q2 2007 Source: Hedge Fund Research Rapid growth of AuM in hegde fund investments reflects structural shift in institutional asset allocation Strong fund inflows have increased correlation of hedge fund returns with equity markets Hedge fund investments should generate yearly returns of 7-9% in USD over the long-term September 07 Slide 7
When did private equity first appear? Before any stock market Columbus expeditions Hanseatic League - venture capital to merchants September 07 Slide 8
Private Equity: rebirth of the old model... Private Equity in the past decades were boosted again to off-set stock exchange limitations Listed Companies Private Equity Focus on quarterly profits Long term focus Diversification of Assets Focus on core business Management shareholder missmatch Alignment of interest US stock market s short term view saps US capitalism, Robert Solow, 1991 in Made in America September 07 Slide 9
...that accelerated in the past years 400 USD bn Deals 500 320 240 EU & US buyout deal volumes Number of EU & US buyout deal (r.h.s.) 400 300 160 200 80 100 0 1999 2000 2001 2002 2003 2004 2005 2006 H1 2007 Source: S&P LCD European & US Leveraged Buyout Reviews 0 September 07 Slide 10
Two Kind of Private Equity deals Leverage buyouts restructuring of established companies Shinsei Bank TXU Hertz Jack Wolfskin Venture Capital invest in new companies / sectors Sequoia Capital Cisco Systems Amgen Apple Google September 07 Slide 11
Situation now: Alternative Investments reach about 8% of world equity market capitalization (USD 3,500bn) Real Estate 27% Private Equity 40% Hedge Funds 33% Source: Credit Suisse September 07 Slide 12
...with large institutions taking a significant stake % of Total Asset 35% Commodities 30% Real Estate 25% Hedge Funds 20% Private Equity 15% 10% 5% 0% Calpers Calsters ABP Ontario Teachers Source: Credit Suisse, company reports New York State Common September 07 Slide 13
...and the growth is not over yet 12% % of total assets allocated to alternative investments (Europe) 10% 8% 2003 2005 2007 forecast 6% 4% 2% 0% Private Equity Hedge Funds Real Estate Source: Russell Survey on Alternative Investing, 2005-2006 September 07 Slide 14
Po co fundusze hedgingowe? Zdywersyfikowane inwestycje w te fundusze przynoszą bardziej stabilne stopy zwrotu 500 450 400 Indexed performance in USD (31.12.93 = 100) CS Tremont index SMI with dividends S&P 500 total return index 350 300 250 200 150 100 Source: Datastream 50 1994 1996 1998 2000 2002 2004 2006 September 07 Slide 15
...and offer diversification potential Historical returns in % (1994-2007) 8.5% 8.0% 7.5% 7.0% 6.5% 6.0% 5.5% 5.0% 4.5% 4% 6% 8% 10% 12% 14% 16% Volatility in % Equities - Bonds Equities - Bonds - Hedge Funds September 07 Slide 16
Private Equity: LBO boom is over, but we still see good opportunities in selected markets Ratio 6.5 6.0 5.5 5.0 Leverage ratio for European LBOs The Golden Age of large LBOs is over, but market weakness reopens opportunities in small/mid caps 4.5 4.0 3.5 3.0 Jan 98 Mrz 02 Mai 06 1st Lien/EBITDA 2nd Lien/EBITDA Other Debt/EBITDA Source: S&P LCD Review Europe We see regional opportunities in Asia and to some extent in Europe The recent credit market turmoil should refocus attention on neglected venture capital September 07 Slide 17
Private Equity usually outperforms listed equities Private equity earns an illiquidity premium Corporate control active investment strategy & specialization (sector know-how) Superior growth potential (VC) Leverage 16 14 12 10 8 6 4 2 Annualized returns in % 10 Yr 20 Yr 0 All PE US All PE Europe MSCI World Source: Bloomberg, Thomson Financial Venture Economics September 07 Slide 18
but not all Private Equity funds are equal Market is very illiquid Selection of an investment is rather labour-intensive The selection of a private equity fund manager is a very important task 40 35 30 25 35.70 1st Quartile 3rd Quartile 25.00 24.80 2nd Quartile 4th Quartile 20 15 10 5 0-5 -10 10.70 10.30 9.80 1.60 1.90 2.00-7.80-7.50-7.30 10 years 15 years 20 years Source: Thomson Financial Venture Economics September 07 Slide 19
Przykład dywersyfikacji portfela przy wykorzystaniu private equity 12% 11% 10% 9% 8% 7% 6% 5% Historical returns in % (1994-2006) More returns, less risk Equities - Bonds Equities - Bonds - Private Equity Volatility in % 4% 6% 8% 10% 12% 14% 16% Source: Credit Suisse September 07 Slide 20
Keypoints Major Alternative Investment classes are: Real Estate, Hedge Funds, Private Equity Alternative Investments experienced tremendous growth in assets over the last years Alternative Investments offer diversification to portfolios thanks to low correlation to traditional asset classes An optimal asset allocation would include 20% alternative investments: Cash Bonds Balanced long term (9-12 months) 20% 12% Equities 30% Total Return/ Alternative Investments 38% September 07 Slide 21
Performance of alternative asset classes 240 Indexed performance (31.01.04 = 100) 220 200 180 160 140 120 100 80 Dez 03 Jun 04 Dez 04 Jun 05 Dez 05 Jun 06 Dez 06 Jun 07 Commodities Hedge funds Private equity REITs Alternative Investment Benchmark Source: Bloomberg September 07 Slide 22
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