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Understanding Private Equity: The Asset Class You Can No Longer Ignore

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This article is sponsored by The Wharton School.

With market uncertainties growing, many investors and their advisors are taking a closer look at private equity. In fact, this asset class is now attracting a sizeable segment of the economy, and it has an ecosystem that includes not only private equity firms, but banks that cover their debt, individual investors, and companies looking to sell or being approached for a sale.

“No one needed to understand private equity 30 years ago,” says Wharton private equity professor and director of the school’s Alternative Investments Initiative Bilge Yilmaz. “But today, you can no longer ignore it. Private equity has evolved from deal-making by the ultra-wealthy to an investment option for individuals.” Yilmaz says that with so many people now involved, the bidding can be intense — and the chance of making a costly mistake is great. “You need to be able to see value where others can’t, and understand how a deal is put together. If you’re an investor, you will inevitably have to compete with others, so your ability to do good sourcing and due diligence is key.”

Yilmaz has been teaching private equity to Wharton MBA students for many years, providing them an edge that they can put to use in their first deal. Now, he is bringing the same innovative curriculum to an open-enrollment course for business executives in the four-day program Private Equity: Investing and Creating Value.

“We will help participants gain exposure to the strategies that private equity firms use to structure and finance a deal and create value for their investors. They will understand the key drivers in private equity and gain confidence in evaluating investment opportunities,” he says. In addition to best practices in and tools for structuring a deal, sessions on due diligence, debt negotiations, and exit strategies will show participants how to get maximum value from their investments.

“You need to experience the life of a deal to appreciate the knowledge and strategies that go into it.” Bilge Yilmaz, PhD, Wharton Private Equity Professor, Professor of Finance, The Wharton School

Yilmaz will be joined by other finance faculty and Wharton alumni who are leaders in many areas of the private equity industry. They will share their experiences and discuss their views on the private equity landscape. Outside the classroom, participants will work on deal proposals in small groups, applying what they have learned, using as reference a recent private equity deal. They will apply the tools that private equity firms use to structure and finance a deal, and show how it will create value. “This is the best way to learn,” says Yilmaz. “You need to experience the life of a deal to appreciate the knowledge and strategies that go into it. I want participants to be able to articulate why they want to own this business.”

A deal proposal will be presented to a panel of faculty and alumni who will provide real-time feedback at the end of the program. “This is not just an exercise,” say Yilmaz. “It’s a reality check on what you have learned in the program, how well you can apply it, and what you can do to improve.”

 
 
 
 

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Landscape of Pension Funds in GCC region

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This content is by Marmore Mena Intelligence.

The primary objective of a pension system is to ensure that the elderly have a decent standard of living post retirement. However, the different interpretations of this primary objective muddle the pool. The first interpretation is that the pension system should ensure only a basic standard of living. The main focus is on the “adequacy” of the pension benefit. Given the relatively wealthy status of the individuals in the GCC region, incorporating such an objective cannot be achieved without reasonably compromising on the living standards, which would prove to be a huge fiscal burden and a politically motivated decision.

The second interpretation is that the pension system should ensure a reasonable standard of living post retirement relative to the position before retirement. This means the pension system plays the role of insurance. Replacement rate would be in focus in this scenario. While GCC region is currently following this second interpretation, they are too high compared to global standards bringing into question the sustainability of these funds.

Globally, pension funds are one of the most popular instruments that sovereign governments and large institutional investors have used to fund the retirement benefits of their workforce. In the last two decades owing to burgeoning fiscal deficits and increasing inflation, Governments have been reviewing their schemes and benefits, prompting a shift from defined benefit model to defined contribution model. However, with respect to the development of pension funds, GCC region is still in nascent stages and continues to be an outlier.

Generous Government benefits, tight-knit family structures and religious obligations meant that the nationals in the region have little to worry about pensions. GCC countries still follow the defined benefit model while globally the trend has shifted to defined contribution model. Their income replacement rate after retirement is quite high and pension eligibility starts relatively earlier which further aggravates the current situation.

Landscape of GCC Institutional Investors, 2016 (USD bn)


Source: Marmore Research

Pension fund assets have the second largest amount of Assets under Management (AuM) in the region, making them one of the key institutional investors in the region. Although higher oil prices for most part of the decade boosted government’s ability to fund probable shortages in future, oil price slump since 2014 due to shale, negative outlook towards fossil fuels and slowing growth across most of the prominent economies warranted pension funds to relook into their obligations, retirement age and in few instances recapitalisation. The oil prices slump in the past few years led to pension funds being underfunded relative to the benefits that are being promised.

GCC pension systems are only partially funded with most retirement benefits paid out with the help of excess contributions from the employees rather than income derived from pension assets. This position may not be sustainable unless structural reforms in the pension system are introduced. Responsibility for managing the assets should gradually shift away from the government towards the individuals, and thereby to private pension fund managers. It would also lead to a gradual shift in pension systems from defined benefit plans to defined contribution plans, wherein the liability of institutions ends with pension contribution and the management of the same would fall under the scope of respective employees. There is a need to draw long-term investment policies and asset allocation should be modified to meet the liabilities. Currently there is no One-Size-Fits-All rule to define the proper level of basic pension or replacement rate. GCC region needs to take into account a multitude of factors to find the right mix.

Marmore’s report, GCC Institutional Investors III – Pension Funds, is a detailed study focusing on the development and evolution of pension funds in the GCC region, which also covers asset composition, pension eligibility, key growth drivers, key challenges and provides policy recommendations. This report would provide an in-depth understanding about the landscape of pension funds in GCC.

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Market performance has materially changed from late 2018, but have the facts?

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This partner content is by MFS Investment Management.

by Robert M. Almeida, Jr. – Portfolio Manager and Global Investment Strategist

Hope is not an investment thesis
Investor pain in the final quarter of 2018 has seemingly faded from memory, based on the rerisking across global equity and credit markets in the first two months of 2019. This prompts the question: Were investors too pessimistic then or are they too optimistic now? To my mind, the answer is yes to both. The real answer is that the market suffers from recency bias — the tendency to remember recent events better than those that happened earlier — and it tends to get whipsawed by nonmaterial information. Have the facts materially changed since last quarter to cause such volatility? Let’s review.

Broadly speaking, there were three sources of hope that investors seemed to latch onto in the early months of 2019: a change in tone by central banks, particularly the US Federal Reserve, to a more dovish stance; hopes for a resolution of the US–China trade war; and an end to the longest government shutdown in US history.

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By clicking on the link to view the report, you acknowledge you are an institutional investor or other accredited investor.

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UBS Asset Management’s 24th Annual Reserve Management Survey

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This article is sponsored by UBS Asset Management.

In the survey and during on-site voting at UBS AM’s annual Reserve Management Seminar, held in August, sophisticated investors shared their views on concerns about macro and economic issues and their plans for asset and currency allocation.

Key survey findings from UBS Asset Management’s 24th Annual Reserve Management Survey:

  • More than half of the respondents say that their level of reserves increased over the last 12 months, signaling that the period of falling reserves which saw the drop in commodity prices in 2016, is now over.
  • The top three concerns this year all revolve around political developments, with the potential for trade wars ranking as the top concern. Not a single respondent cited worries about potential deflationary shocks. Fears of a hard landing in China have eased from previous surveys.

Changes in asset allocation:

  • FX reserve diversification is continuing with the majority of central banks pursuing increased allocations to non-government-bond assets.
  • Central banks continue to increase their holdings of corporate debt and mortgage- and asset-backed securities.
  • Infrastructure investments gained traction with 15% saying they increased their holdings last year and 10% saying they plan to increase infrastructure holdings in the coming year.
  • Central banks slightly reduced equity and emerging market debt holdings.
  • The biggest gainers when it comes to currency allocations by central banks last year were the Euro and the Renminbi, but the US dollar remains the default currency to invest new reserves.

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Disclaimer
By clicking on the link to view the report, you acknowledge you are an institutional investor or other accredited investor.

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