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Volume II |
Issue II Oct 1 ,2010
Information Technology Solutions
News letter of finance cell , Master of International Business
Your Finance Vocab
VOCAB: PRIVATE EQUITY
Ankit singh Nripanshi Sunita Anuratn
Intermediaries The growth in the private equity market over the past three decades is largely attributable to the emergence of private equity funds that raise and invest funds from investors. About four-fifths of private equity investments flow through specialized intermediaries, almost all of which are in the form of limited partnerships. The remainder is invested directly in firms through co-investments (direct investing alongside private equity partnerships) and other forms of direct investments. Issuers Issuers in the private equity market vary widely in size and in their reasons for raising capital. As private equity is one of the most expensive forms of finance, issuers generally are firms that do not have an alternative source of financing such as a bank loan, private placement or the public equity market. Club Deal A private equity buyout or the assumption of a controlling interest in a company that involves several different private equity firms. This group of firms pools its assets together and makes the acquisition collectively. The practice has historically allowed private equity to purchase much more expensive companies together than they could alone. Also, with each company taking a smaller position, risk can be reduced. Repackaging When a private equity firm takes a public firm private by purchasing all of its common stock with leverage loans. The private equity firm then makes changes to the company, in effect "dressing up" the company, with an eye toward bringing it public again via an initial public offering (IPO). -Ankit Singh MIB 2010-12
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Questions of MockStock (Continued)
1. 2. 3. 4. 5. 6. 7.
MOCK STOCK QUIZ: CONTINUED SECTION B (2 marks) Which mercantile institution has had the motto “My word is my bond since 1801? What term became popular after the newspaper report of Watergate Scandal in the year 1973? On which date and year did the stock market crash famously known as Black Tuesday happened. In which country's coins you can found the following lines imprinted, 'This is the root of all evils'? What is the Full form of German Stock Index DAX? Which is the only country having paper currency and have no coins and it introduced cheque only in 1997? Which word was derived from the French word Bougette meaning 'Little Bag'?
Section C (3 marks)
a) What is a 'pip' in Currency trading? b) He is the pioneer in mutual fund industry and often referred as the Father of Index Fund
investing. He created the first S&P 500 Index fund. Identify this famous person?
c) CAMEL is an effective system of rating by the banks. The model insists five main
criteria and based on these the financial health is evaluated on a scale of highest to lowest, 1 to 5. In that A means 'asset quality', M means 'management' and L for 'liability', then what are C and E refer?
Answers on last page .
When it comes to control and secrecy in the world of business; the dictum is, the fewer the better. Private equity is one such form that exhibits the need for centralized decision making and minimum outside intervention in corporate affairs amongst the owners. Technically speaking private equity refers to investment by way of securities in companies that are not listed on stock exchange i.e. private companies or in public companies with an intension to make them private .Private equity can take the form of leveraged buyouts (discussed in the previous issue), venture capital, growth capital, distressed investment etc. The underlying principle behind private equity is that a group of private individuals or firm acquires a company and uses its return to pay them back though that may not be the primary money making area. Recently the clauses also known as covenants that assured guaranteed returns have become rare in private equity deals and hence the primary source of income for these private equity firms is not dividend but sale proceeds of the company itself, which they sell at supposedly higher price than what they originally paid. In past the need for the company to sell its stake to private investors rose from introducing technical changes, R&D, avoiding governmental regulations, maintaining steady cash flow or strengthening its balance sheet but now a days proliferation of private equity deals is explained by the exorbitant price and huge premiums that they are able to get from the buyers. One example is Free-scale Semiconductor, who turned down a deal that paid a nearly 30% premium over its market value, demanding a better package which it managed to receive. The scale of these overpriced deals making headlines around the world had raised question marks on the long term sustainability of the prices being paid. Over $90bn of private equity was invested globally in 2009, a significant fall from the $181bn invested in the previous year. The 2009 total was more than 70% down on record levels seen in 2007. As shown by the facts and figures fortunately or unfortunately the spirit of this overpriced buyouts drive was dampened to an extent due to recent global economic recession as it diminished investor's appetite for risk though it is again gaining momentum with gradual recovery of financial systems across the globe.
Private equity affects the public market in the form of increased stock prices of publicly traded companies as it makes their supply less in comparison to private equity. Also, private equity can boost a company's stock price if people think a buyout is likely. Given recent trends in the private equity industry, investors often feel safe in assuming that private equity firms will pay a hefty premium over a company's market value. This drove up the stock prices for companies such as Martha Stewart Living Omnimedia (MSO) and Radioshack (RSH), which were commonly mentioned as buyout targets. Though private equity has lucrative incentives attached to it, its future will be largely determined by the successful implementation of measures being taken by the governments and regulators to come out of the slump of recession and changing investor's sentiments. -Sunita Arora (MIB 2010-12)
Private Equity :An Insight
In India, private equity is reasonably young, dating back to the mid-1990s. The environment heated up in the end of the '90s with the IT boom, with companies investing (and getting their fingers burnt) with their investments. In recent years, there has been a resurgence of these firms, with India's stock markets booming and sectors like the life sciences, infrastructure and most recently, real estate being growth stories for the future. Global firms such as Warburg Pincus, Blackstone and the Carlyle Group have a presence in India while Indian players like ICICI Venture and ChrysCapital also have a large presence. What does the work entail and how do these firms make money? Essentially, PE funds raise money from high net worth individuals, financial institutions, etc. for a period of seven-ten years and then invest in opportunities as and when they arise, either in early-stage, maturing or even public companies. The work involves of course, valuing the companies that approach you and deciding how much of the company your stake is actually worth, what the company's growth prospects are, etc. Structuring the transactions for taxefficiency and industry-specific reasons is also part of the job. Post-stake taking, day-to-day monitoring and growth plans are monitored by the fund, with a senior director taking a seat on the company's board. Since the target is also to exit the investment in a few years and return money to investors, the deal teams also constantly monitor the capital markets for suitable times to do an Initial Public Offering or find a strategic investor to sell to. So what's in it for you? Outside of entrepreneurship, private equity arguably offers the best shot you'll get at 'being the boss' yourself, and not just being just an employee. Since the money is, in some sense, your own, the attachment you would have with your investments is much greater than in most jobs. Additionally, the nature of work offers an unparalleled opportunity to understand a variety of industries and also get to know many of the movers and shakers in the corporate world, investment banking, etc. Monetarily, private equity is possibly the most highly-paid post-MBA job you can hope to get. The biggest incentive in this industry is the concept of carried interest, which means that the firm keeps a portion (typically 20 pc) of the profits made for its investor, which is then distributed to employees. Over a period of 7 years, that amount can be huge. As an example, consider a $ 1 billion fund (par for the course these days). Over 7 years, the target profits from this would be in the range of $ 1-1.5 billion; 20 pc of this is $200 million. Assuming 50 pc of this is distributed to employees, each member of a 7-person PE fund (again roughly the standard size for a $ 1 billion fund) would be rich beyond their wildest dreams.
What do they look for? Entry barriers to the industry are notoriously high. An MBA is a must, preferably from an Ivy League school; even a top 3 IIM degree is often not enough to get you a job. At higher levels, extensive senior level experience in an industry is a major plus. The skill set necessary for a PE job includes significant financial expertise, an intuitive understanding of capital markets, but most importantly, an eye to capture the right businesses and entrepreneurs at the right time. Courtesy: pagalguy.com (Abhijit Nath is an alumnus of IIM, Ahmedabad and an economics graduate. He currently works with a real estate focused private equity fund.)
(From this issue we will be introducing a new section where we take up an executive from a firm and share his/her life history and achievements.)
KKR & Co. L.P. (formerly known as Kohlberg Kravis Roberts & Co.) is a global private equity firm, famously specializing in leveraged buyouts, based in New York. The firm sponsors and manages private equity investment funds. Henry R Kravis and George R Roberts are the founding members of KKR and work as the company's executives on a board with three other members. In this issue we pick George R Roberts and bring to you his life and achievements. George R. Roberts (born 1944) is an American financier and was one of the three original partners of Kohlberg Kravis Roberts & Co. (KKR), which he co-founded alongside Jerome Kohlberg and first cousin Henry Kravis in 1976. Roberts has an estimated net worth of around $5.5 billion as of 2007 . Much of this wealth came through his position at private equity firm Kohlberg Kravis Roberts. In 1989 Roberts and Kravis led one of the most famous leveraged buyouts (LBOs) in the takeover of RJR Nabisco. Roberts' involvement in the RJR Nabisco deal was profiled prominently in the book and movie, Barbarians at the Gate. Roberts was featured on the cover of FORTUNE Magazine at the height of the buyout boom of the 1980s alongside his cousin and partner, Henry Kravis. GEORGE R. ROBERTS Working for Bear Stearns in the late 1960s and early 1970s, Roberts, alongside Kohlberg and Kravis began a series of what they described as "bootstrap" investments. Their acquisition of Orkin Exterminating Company in 1964 is among the first significant leveraged buyout transactions. In the following years the three Bear Stearns bankers would complete a series of buyouts including Stern Metals (1965), Incom (a division of Rockwood International, 1971), Cobblers Industries (1971), and Boren Clay (1973) as well as Thompson Wire, Eagle Motors and Barrows through their investment in Stern Metals. Although they had a number of highly successful investments, the $27 million investment in Cobblers ended in bankruptcy. By 1976, tensions had built up between Bear Stearns and the trio of Kohlberg, Kravis and Roberts leading to their departure and the formation of Kohlberg Kravis Roberts in that year. Most notably, Bear Stearns executive Cy Lewis had rejected repeated proposals to form a dedicated investment fund within Bear Stearns and Lewis took exception to the amount of time spent on outside activities. Early investors in KKR included the Hillman Family. By 1978, with the revision of the ERISA regulations, the nascent KKR was successful in raising its first institutional fund with approximately $30 million of investor commitments. Roberts, who is a native of Houston, Texas attended Claremont McKenna College, graduating in 1966. He then attended the University of California, Hastings College of the Law, graduating in 1969. He graduated from Culver Military Academy in '62 and received that institution's "Man of the Year" Award in 1998.He is listed by Forbes magazine as the 158th richest man in America, with an estimated net worth of $1.4 billion. -Nripanshi MIB 2010-12
South Africa targets Sasol, Arcelor in cartel breakup push
South Africa is stepping up efforts to fight an unexpected legacy of apartheid: cartels in industries from supermarkets to steel that push up prices, deter investment and damp competition.
Liberty mutual agency pulls biggest US IPO of 2010
Liberty Mutual Holding Co., the policyholder-owned insurer, postponed the largest U.S. initial public offering of 2010 as demand was less than the company had projected for a unit that sells policies through agents
Adani to spend $4 bn on Aussie mine
After completing its big-ticket acquisition of an Australian coal asset from Linc Energy, Adani Enterprises will now make an additional investment of $3.5-4 billion to develop the necessary mining infrastructure and logistics.
Core infrastructure industries grow 3.7%
Growth of core infrastructure industries slowed to 3.7 per cent in August, as compared to 6.4 per cent in the same month last year.
RCOM becomes first pvt operator to unveil 3G capabilities
Anil Ambani-owned Reliance Communications (RCOM) on Tuesday became the first private operator to unveil its 3G network capabilities to the public.
BofA sells $89.3 million of notes linked to Gold
Bank of America Corp., the biggest underwriter of gold-linked notes in the U.S. this year, sold $89.3 million of bonds linked to the precious metal that reached a record high today.
Yen reaches strongest versus dollar since intervention as US data slows
The yen reached the strongest level versus the dollar since the Bank of Japan intervened to weaken the currency as a report showed lower-than-forecast U.S. consumer confidence, boosting demand for refuge assets.
Morgan Stanley to Freeze IBD hiring for 2010
Morgan Stanley, the sixth largest U.S. bank by assets has frozen hiring at its IBD division. Meredith Whitney, top banking analyst, says banking job cuts may follow.
No hope for tax cut vote before election: Democrat
Congress will not vote on extending Bush-era tax cuts before the November elections, a Senate leader said on Thursday, reflecting fear among some Democrats that it could hurt their chances at the polls.
EU pulls plug on Glaxo's Avandia, FDA restricts
Health regulators took steps to end widespread use of GlaxoSmithKline's diabetes drug Avandia, as European officials moved to pull it from the market and U.S. authorities imposed tough restrictions.
Sun completes Taro acquisition
India's top valued drug maker, Sun Pharmaceutical Industries Ltd, said it had completed the acquisition of a controlling stake in Taro Pharmaceutical Industries Ltd.
India, U.S. finalising $5.8 bln Boeing aircraft deal
India is aiming to finalise a $5.8 billion defence agreement with the United States before the November visit of President Barack Obama in a deal that would mark the biggest India-U.S. defence deal ever.
New Basel capital rules pose dilemma - RBI chief
New global capital rules for banks will come at the expense of growth in India, which poses a dilemma for a country that needs to fund $1 trillion in infrastructure and bring more people into the financial system, the Reserve Bank of India governor said.
KKR, TPG vie for Honda's India venture stake
KKR & Co, TPG Capital, Carlyle Group and Bain Capital LLC are competing to acquire a part of Honda Motor Co's stake in the country's biggest motorcycle maker, according to five people with direct knowledge of the matter.
Fiscal deficit to be contained at targeted 5.5%: RBI
The Reserve Bank today said that the higher than expected revenue from the auctioning of 3G and BWA spectrum would keep the fiscal deficit within the target of 5.5 per cent of GDP in the current fiscal.
-Ankit Singh MIB 2010-12
1. London Stock Exchange 2. 'Money Laundering' 3. October 29, 1929 4. Vatican City 5. Deutscher Aktien IndeX 6. Vietnam 7. Budget SECTION: C a. A pip is the minimum fluctuation or smallest increment of price movement in the foreign currencies. A pip equals $1 per $10,000 of currency (mini sized lot) or $10 per $100,000 of currency (standard sized lot) b. John Bogle
c. Capital Adequacy & Earnings.
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