Spotlight Series: Guy Hands, Chairman & CIO, Terra Firma, spoke on ‘The New “Normal.” What is the new “Normal” in private equity and where do we go from here?’

In his only interview at SuperInvestor 2010, Guy explains why private equity needs to go back to basics and the advantages and disadvantages that this will create.

Anil Gupta, Chaired Professor of Strategy, INSEAD & Chair, Global Strategy & Entrepreneurship, The Smith School of Business, The University of Maryland presented new research entitled “As Innovation Moves East: Emergence Of China And India As The New Innovation Hubs”.

In an interview with Beverly Chandler, he outlines this research which focuses on five main topics, namely market size and growth, cost efficiency, the rise of China and India as innovation hubs, the rise of China and India becoming springboards for new global champions and finally capital.

An article by Antonia Henbest

‘Latin America is overshadowed by Emerging Asia – but now I think it’s becoming more prominent as Asia becomes expensive. It’s the next big thing.’

- European LP

The story of emerging market growth is both well documented and often remarked upon. In an attempt to maximise returns, many LPs and GPs have flocked to less developed markets and profited from the wealth of opportunities that stultified western markets can no longer provide. Most impressive has been the rise of Asia, which has seemingly witnessed a blossoming of local talent as well as the inevitable surge of larger firms setting up in the region. By comparison, LPs often remark that whilst there is no doubt of the opportunities available in Latin America, the number of GPs who are of sufficient quality to accept institutional capital remains surprisingly low. There are other barriers to investment; many US endowments are still scarred by awful experiences of getting their fingers burnt in the nineties and having less capital returned than was originally invested, and occasionally, none at all. But despite these often quoted examples, Latin American private equity is an increasingly attractive destination for international capital. The recent close of the heavily oversubscribed Southern Cross Fund III proves that for those able to demonstrate the ability to deliver real risk adjusted returns on investment; the market is now more lucrative than ever. The question that many LPs want answered now is not should we access this market, but how should we to access this region?

In an interview for Daily News Egypt, Mr Karim Helal, Group CEO of CI Capital Holding, said that Egypt needs solid investors with a long-term view which is why CI Capital is looking to the East.   

“The whole world is talking about emerging markets and how they are the linchpin for the world’s recovery,” Karim Helal, group CEO of CI Capital Holding, the investment banking arm of Commercial International Bank, said. As to whether these burgeoning economies will fulfill that promise, Helal said, “Emerging markets will play a major role, but we need to manage expectations.”    

 ”I don’t think it is right for the OECD [Organization for Economic Cooperation and Development] to hang their hopes of survival on emerging markets; they need to fix their own house. They caused this disaster, and we are back to the old habits of poor banking practices,” he added.   

Asked whether the obsession with emerging markets will wane once advanced countries get their economic houses in order, Helal indicated that herein lies the problem: “We have seen that Western investors blow hot and cold.” Egypt needs solid investors with a long-term view, he affirmed. “This is part of the reason that CI Capital took the initiative of looking Eastward and reaching out to promote Egyptian opportunities to Asian investors,” he noted.   

Owing to their culture, their mindset is different: “They aren’t hit-and-run investors nor are they looking for ridiculous returns, but instead reasonable, sustainable ones,” he said. Working in Asia for many years allowed him to have a firm grasp of the culture.   

As investors, he described Asians as “information addicts, they want to understand everything about the market in which they are planning to invest, and once they do, the floodgates open.” (Continues here)   

… For his part, one of the key reasons to hold the SuperReturn Africa conference is to “deepen the level of knowledge and awareness” about the continent, which is all too often lumped under one label, much in the same way one cannot not equate France or England with Europe as a whole, for example.   

 Africa is a geographic entity with “different or opposing dynamics…and the challenges of doing business will vary from country to country.” Thus, the conference will help identify these issues for investors eyeing the continent.   

To read the article please click here.   

Karim Helal will address the SuperReturn Africa  Opportunities in Egypt Summit on Monday 29th November at 14:20 on ‘The New Silk Route. The rising importance of trade and capital links between Egypt and Asia.’ He will also moderate an expert panel debate on Tuesday 30th November at 12:30,  discussing, ‘Egypt and Beyond. Benefitting from the COMESA free trade agreement to expand Egypt-based platforms into the Nile Basin and East Africa.’

URS Wietlisbach, partner and executive vice chairman at Partners Group spoke at SuperInvestor 2010

The European Commission came under fire at the SuperInvestor 2010 conference in Paris this week over the Alternative Investment Fund Managers directive (AIFM), which was blasted as an unnecessary and complex piece of legislation.     

Speaking at a panel session on regulation, Urs Wietlisbach, partner and executive vice chairman at Partners Group, said the regulation increased the number of barriers for new entries. “For new starters, it is going to be cumbersome. I don’t think it adds any value,” he said.     

 Richard Wilson, senior partner at Apax Partners and the former chairman of the European Venture Capital Association, added that although it was good to have some clarity, the devil will be in the detail. “The details will be thrashed out over the next few years, and it is what is in the details that will be key. The directive is not perfect and it is going to increase the burden on portfolio companies.”     

 He added: “At the end of the day, alternative investment managers are getting special treatment in this directive and it is not a level playing field and smaller players in particular are going to get hit hard, as it is not a light touch directive.”     

Didier Millerot, member of the cabinet of Michel Barnier, commissioner for internal market and services, defended the directive saying it would add transparency and that the European Commission believes it has managed to get a balance. “There are costs involved and it will add operational complexity for us, but the good thing is that if we have more transparency, new classes of LPs may be  attracted to the market.”     

Apax’s Mr Wilson agreed that although transparency was a good thing and would help boost interest and understanding of the industry, he argued that it would increase costs in the private equity industry and for investors, as well as put a burden on the portfolio companies. Mr Wilson added that it was unclear if the AIFM directive increased protection for investors and said that it was not obvious how professional funds would benefit.     

One major clause within the directive that caused a stir was article 30, which will place serious restrictions on private equity firms by limiting what they can sell. Mr Wietlisbach said GPs often sell part of a business to add value in other areas, and it was unclear whether the regulation covered this. Mr Millerot said: “The idea was not to prevent private equity firms to be able reorganise a group.”    

He argued that “the good managers were the ones that complied with regulation” and that there was little room for manoeuvre once the directive was set. “Regulation will happen, but all the principles in the directive need to be discussed with the new advisory body, which is in the process of being hired. They will advise the commission as well as have a supervisory role.” He said the authority will have an obligation to consult and the private equity industry and investors should take the opportunity to get involved in consultations.

An Article by Kalpana Fitzpatrick.

Private equity can add a lot value to the economy, but a number of issues must be overcome first, according to Charles Baillie, global co-head alternative investment and manager selection at Goldman Sachs.  Speaking at the SuperInvestor 2010 conference in Paris, Mr Baillie said one of the main issues was that there was too much capital chasing too few deals.

He said there were trillions of dollars waiting to be invested in news deals and that there was a chance that large deals may come back.

“If deals stay at the same level, then there is up to six years capital available. If things pick up, then there is up to four years capital available,” he explained.  Mr Baillie said there were also concerns on whether high returns were a thing of the past.

“Although it would be difficult to argue that private equity is an absolute return asset class, it is possible to outperform public markets.  “From mid 2008 to today, private equity has decreased less in value than public markets and every strategy within private equity has outperformed public markets,” he claimed.

The search for alpha was also key, and according to Mr Baillie, there was evidence that private equity created value relative to public companies.

“Private equity creates cash flow, but it also creates revenue,” he stated.  He went on to argue that debt pay-down was faster in private equity companies than public companies and that private equity can add value during an economic downturn.

Baillie said the attitude towards private equity was becoming more positive in comparison to last year.  He said there was also a re-emergence of emerging markets and that there were new opportunities to be realised in this area.

Mr Baillie said he was positive about the future of the private equity industry, which has also received positive comments in academic literature, as long as opportunities are acted upon and key challenges are met.

Stephen Murphy, Managing Director, Citadel Capital participated in and won the Quickfire Showcase.  In an interview for the Spotlight Series, Stephen explained the attractions of the MENA region, amongst them its limited local competition.

As Superinvestor 2010 comes to a close in Paris for another year, we would like to thank all the delegates, speakers and sponsors for making the conference a very successful and hugely enjoyable event.

In addition to the coverage of the event,  we’ve gathered the leading articles and commentary from the business news websites to give you a comprehensive review of big industry issues tackled this year.

A Twitter round up:

@Super_Investor‎: Steve Schwarzman dropped into Paris SuperInvestor.. Has uncertainty affected him too?

@Super_Investor‎: Stuart Gent: Scenario-driven views, a strategy for translating a downturn into growth + good teams are needed for portfolio co growth #SI10

@Super_Investor‎: Systemic risk reduction, investor protection, inc transparency from EC Directive. Inc Transparency good for pe - Richard Wilson #SI10

@Super_Investor‎: Stop chasing ghosts and accept reality of today’s more traditional private equity industry - Guy Hands #SI10

@eFinancialNews‎: #GuyHands: ‘We would have looked like geniuses’ without #EMI http://bit.ly/99sd1r #SI10 #Paris

@Super_Investor‎: Great buzz at the speed LP/GP networking again. 3 more great sessions before reception at the fabulous Hotel Crillon #SI10

@Super_Investor‎: Ogeday Karahan of Eurasia Capital Partners won the 90-second pitch competition at SuperInvestor on Tuesday. Congrats! #SI10

@Super_Investor: The high yield maket is on fire - Tom Atwood #SI10

@PE_Fanatic‎: RT @Super_Investor: More pass the parcel deals needed in PE, GPs selling to other GPs - Guy Hands #SI10

@Super_Investor‎: Euro is a dog’s breakfast and a disaster waiting to happen. Greece Ireland and Portugal will leave - Roger Bootle #SI10

@Super_Investor‎: A manager resembling a “scar-faced warrior” is what’s needed to manage portfolio companies in a downturn ac to Jan Stahlberg of EQT #SI10

@SuperReturn‎: Roger Bootle is the only man more bearish than me - Tom Attwood #SI10

@Super_Investor: Euro is a dog’s breakfast and a disaster waiting to happen. Greece Ireland and Portugal will leave - Roger Bootle #SI10.

‎@PE_Fanatic‎: RT @SuperReturnKate: 2012-2016 will be new golden age of private equity according to Michael Queen, 3i speaking at SuperInvestor #SI10

@SuperReturn: Packed lunchroom, great buzz, hard to break up conversations to start the pm. #SI10

@Super_Investor‎: More pass the parcel deals needed in PE, GPs selling to other GPs - Guy Hands #SI10

@Super_Investor‎: A good manager is one who is “complying with the rules”, ac to Didier Millerot #SI10

@SuperReturnKate: Overhang will be burnt off in next 12 - 18 months. Michael Queen of 3i speaking at SuperInvestor #SI10

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@SuperReturnKate: SuperInvestor is kicking off in Paris. Record attendance! #SI10.

‎@SuperReturnKate‎: SuperInvestor is kicking off in Paris. Record attendance! #SI10.

‎@SuperReturn‎: Developed world has been on a 13 year course of disinflation says Roger Bootle #SI10.

@SuperReturnKate: Roger Bootle expects america to eventually put in protectionist measures. Speaking at SuperInvestor in Paris #SI10.

@Super_Investor: UK heading for a tough couple of years ac to Roger Bootle #SI10

@Super_Investor: Hunger and humilty in combination make the best managers ac to Stuart Gent #SI10.

@SuperReturn‎: No change in interest rates anywhere in the foreseeable future in the west says Roger Bootle #SI10

@Super_Investor‎: Too many people, too much capital and too high return expectations in private equity at the moment - Guy Hands at SuperInvestor #SI10

@SuperReturn‎: Governance to drive LP activism: SuperInvestor 2010 article by Kalpana Fitzpatrick

@SuperReturnKate‎: America is the only producer of something the chinese want to buy a lot of - dollars. Roger Bootle at SuperInvestor in Paris #SI10

@Super_Investor‎: The high yield maket is on fire - Tom Atwood #SI10

@Super_Investor‎: Availabilty of bank debt will go down not up - Tom Atwood, ICG #SI10

@Super_Investor‎: Recovery will be “bath-shaped” or L shaped according to Roger Bootle #SI10

@Super_Investor‎: Weak Western economies and recent bubble explained by Asian surplus and China currency policy, sucking Western jobs- Roger Bootle #SI10

@SuperReturn‎: Next big challenge is exit overhang. Michael Queen speaking at SuperInvestor, Paris #SI10.

@Super_Investor‎: Hunger and humilty in combination make the best managers ac to Stuart Gent #SI10

@Super_Investor‎: Chris Masterson: Leverage in a portfolio co creates a dangerous war situation that management need to realise

@Super_Investor‎: Jan Stahlberg: Mezzanine guys sometimes come with a gun or a bomb hidden beneath their coat #SI10

@Super_Investor‎: Wim Borgdorff of Alpinvest and Dominique Senequier of Axa both agree that style drift is a major source of trouble for the industry SI10#

@Super_Investor‎: The best thing for the private equity industry is for banks to continue to make money, acc to Sanjay Patel of Apollo #SI10

Press coverage

Bloomberg - Buyout Firms Vying for Targets Increase Prices, May Lower Profits, 3i Says

Leveraged buyout firms are driving prices for potential targets to “extraordinarily” high levels in Europe as they vie to spend unused funds, 3i Group Plc Chief Executive Officer Michael Queen said.

Firms are paying 10 to 13 times companies’ earnings before interest, tax depreciation and amortization, more than during the buyout boom of 2006 and 2007, Queen told the SuperInvestor conference in paris today. Firms may struggle to profit from those deals, said Sanjay Patel, head of international private equity at Apollo Management International LLP. (More here)

eFinancialNews - A happy marriage: the key to happy returns

Senior buyout executives have highlighted the importance of having a happy marriage to succeed as a company manager. Discussing portfolio company management at the SuperInvestor conference in Paris this morning, buyout veteran and better Capital chairman Jon Moulton said firms should watch out for an unlikely threat to their investments - marital problems, which he said could lead management to crack under pressure. (More here)

eFinancialNews - 3i chief says industry has ’spectacularly failed’ to fulfil aim

Michael Queen, 3i Group’s chief executive, has said the buyout industry has “spectacularly failed” to fulfil its aim of investing through the downturn. Speaking at the Super Investor conference in Paris today, the FTSE 1oo company head said the buyout industry’s investment strategy was to under-invest at the top of market and over-invest at the bottom, but that the industry had “spectacularly failed to put that into practice”. (More here)

Financial Times - Enough to make your teeth ache

The biggest laugh of an otherwise subdued private equity get-together in Paris this week came when Guy Hands told a packed room what he did after losing a multibillion dollar lawsuit against Citigroup over his ill-fated buy-out of EMI.

Appearing in front of an audience at the SuperInvestor conference, the Terra Firma boss told how he had flown back to his tax-exile home in Guernsey on a Sunday night, after a grueling three weeks in a New York courtroom. (More here)

Reuters - Buyout industry to grow after painful squeeze-conference

The private equity industry will grow in the long term and big firms will get bigger as long-standing investors keep increasing their allocations and new investors enter the asset class, industry insiders said. But the buy-outs business could be in for a painful contraction in the short term as newer and more opportunistic investors, such as insurers, banks and hedge funds, attracted by the bumper returns being produced by the industry, pull back their money.

“I think it’s inevitable the private equity market will grow,” David Roux, co-founder and co-chief executive of Silver Lake told the SuperInvestor private equity conference in Paris. (More here)

Reuters - New Moulton vehicle to list before Christmas

Better Capital, the new venture from Jon Moulton is planning to raise over 100 million pounds for turnaround investments and is due to list in London before Christmas, Moulton said. Following an acrimonious split with former colleagues at Alchemy Partners in September, the private-equity industry veteran has been sounding out investors and hiring staff for a new investment vehicle.

Speaking to reuters on the sidelines of the SuperInvestor conference in Paris, moulton said Better Capital had appraoched a few traditional private equity investors, as well as equities investors and wealth managers, and had received sufficient interest  to push ahead with the plans. (More here)

Reuters - Private equity firms mull future as asset managers

Private equity firms will need to become more like asset managers, offering buyouts as just part of their portfolio, or else focus tightly on specific sectors in order to prosper, industry participants said.

“Our view is that the future will be dominated by multi-asset class models or very focused models,” Baillie told the SuperInvestor conference in Paris on Wednesday. (More here)

Telegraph - Terra Firma founder Guy Hands speaks out on EMI deal

Guy Hands, the founder of Terra Firma, has said his private equity group would have “looked like geniuses” had it not bought EMI Group.

Mr Hands’ comments came at the SuperInvestor conference in Paris, in what was his first public speech since losing a high-profile court battle against Citigroup over the music company’s purchase. (More here)

An article by Kalpana Fitzpatrick

Private equity needs to get back to basics and start investing in classic deals to generate super returns, Guy Hands, chairman and CIO of Terra Firma said.

Speaking at the SuperInvestor 2010 conference in Paris, his first public speech since the conclusion of the EMI legal battle, Mr Hands said: “At the moment there is too much capital and too many people in private equity – the industry grew too quick.

“There is simply too much money to find classic deals and to generate returns at the 20% benchmark level,” he claimed.  Mr Hands said the industry had to reduce the amount there was to invest and said it was also time to stop passing the parcel and to start enjoying what made private equity strong and attractive in the first place.

He added that expectations in the private equity were also too high and that returns would not come in quick.  Returns for LPs currently sit at 8% - 9%, “that is a lot less than the 20% plus range that we come to expect. It is not bad, but it is not going to meet the expectation that people come into private equity with.”

Mr Hands said in order for the industry to move forward, it was time to accept that private equity must return to the norms of 10 years ago, and that its roots were about changing and building businesses.

“It is going to be painful and difficult to get back to where we were, but we must remember that private equity is about deep knowledge, building scale, creating value and recognising macro themes.  “The new normal is the old normal, but there are fundamental challenges in going back to the old normal,” he added.

“We are in a difficult time at the moment and I think we should proceed with great caution. Although the West has avoided a financial meltdown, it is at best, particularly after the Lehman’s collapse, seeing an anaemic economic growth.”

He explained that the downturn in the West was “fundamental” and not “cyclical” and that new needs should be taken into account.

Mr Hands said change was vital to ensure the industry continued to receive regulatory and political support going forward.  “By 2012, we need to emerge clearly on where we are going as an industry,” he said.

An article by Kalpana Fitzpatrick

“The world economy remains fragile and will see a slow growth and recovery”, Roger Bootle, founder and managing director of Capital Economics and the author of The Trouble with Markets, said.

Speaking at the Super Investor 2010 conference in Paris, Bootle cited the Eurozone as one of the major areas of concerns, which faces the continuing threat of default and break up.  Ireland and Greece have been major contributing factors, particularly with Ireland, which is on the verge of a bail-out.

“The Eurozone needs a strong economic growth, but this is not happening.  “The Euro is disaster waiting to happen; one country will leave the Euro; I think it should be Germany, but it is more likely to be Greece, Ireland or Portugal. We may even see the Euro split, with weak members going their own way,” he said.

Bootle said the problem with Germany was that it had a large surplus and was sucking the demand out of the world by slowing demand down. The same was said about China.

“The collapse of demand has caused the difficulties that we are in now,” he argued.  He said Germany was also not spending, “which is not good for the rest of us and this is a fundamental problem in the Eurozone”.

Commenting on the state on the banks, he said tight lending rules were causing problems but it was something that was unlikely to change anytime soon.  He said he also expected interest rates to remain low for an extended period.  Unemployment, the burden of debt and low spending also continue to be a problem.

“For most countries of the West, consumer spending will be particularly weak, as people want to save and not spend.” he added.  “Although government has tried to loosen fiscal policies and tough measures have been put in place in some EU countries, for economic growth to happen, countries need to become competitive – there is currently a lack of it”.

He said European equities were ok, but there was not an exciting story in these markets.  Bootle said growth was expected to be strong in emerging markets, but weak in the developed world.