February 27, 2009
Briefing Note For Workshop VII
This Briefing Note has been prepared for Workshop VII of the 2009 European Business Summit. The workshop will run between 15.45 and 17.00 on Thursday 26th March 2009. This Briefing Note has been prepared by the Hedge Fund Group.
The workshop will be moderated by Euronews and will include the following speakers:
Tayfun Bayazit, CEO, Yapi Kredi Bank
Jacques de Larosiere, former Director General, IMF
Idar Kreutzer, CEO Storebrand
Richard Wilson, President Hedge Fund Group
David Wright, Deputy Director General, DG Internal Market and Services, European Commission
Private Equity And Hedge Funds: Is There A Future?
Part 1: Introduction to the Topic
The depressed economic environment which we are now experiencing has forced more hedge funds and private equity firms to close down than within any other single 12 month period. These two industries face a marred public image, overall negative investment returns and an investor base which in many cases now prefers to hold cash equivalents rather than place money at this time in the market cycle. The industry faces many challenges, while also serving as fertile ground for those funds which can prevent losses and recruit talent.
Part 2: Main Hedge Fund & Private Equity Issues in Europe
3 Positive Private Equity & Hedge Fund Trends
There are three specific areas which show promise and a chance for both the private equity and hedge fund industries to regain their assets and stature within the broader investment industry over the next 18-36 months.
While the economic conditions have shut down many funds, exposed fraudulent activity, and also created a unique set of opportunities for a small subset of traders and portfolio managers within the industry. The hedge fund and private equity industries are as entrepreneurial as ever. In Q1 2009 there are hundreds of New York and London based hedge funds being started to take advantage of high volatility, historically low asset prices, and relatively cheap talent hungry for a fresh start. Many of these young hedge funds and private equity groups are not yet on the radar of institutional databases or mainstream media outlets but by Q3 and Q4 of 2009 they will be, and we will be able to see how many funds have been started around the world. I believe these figures will be high and will spur even more startup activity as others move to seize the current market opportunities.
The private equity and hedge fund industries are evolving, private equity and hedge fund vehicles are being constructed to fill the cracks where banks cannot go, where funding is otherwise unavailable. While hedge funds have gotten more than their fair share of press lately, every month in which this depression continues they become more entrenched within every crack of opportunity. When the market turns, alternative investment funds will see a large infusion of capital from all sources.
$1T plus dollars of assets are sitting on the sidelines right now, and they will be there for a small group of funds, many of which will grow from managing $100M-$800M to $3-5B+. New leaders in the industry will be selected by top institutional consultants, pensions and family offices and their assets will triple and quadruple within just one or two years.
The Value of a Brand
The value placed upon the brand of service provider hedge funds and private equity firms are employed has doubled in the past 9 months. This is due to Lehman Brothers, Bear Stearns, Madoff and others. In each of these cases the common thread was the creation of or fault of un-reliable or unstable service providers. Some hedge funds in London had 100% of their assets frozen within Lehman’s custody services, partnered banks and hedge funds fled Bear Stearns as it sank and Madoff’s fund raised half a dozen red flags from in house administration and self clearing to working with a 2 person auditing firm. The result is an effort by many to mitigate counter-party risk and conduct research on those who have been traditionally responsible for providing fund due diligence services. Fund managers are feeling pressure from hedge fund and private equity board members and investors to rely on well known and vetted service providers rather than trying to save 20% in fees by working with a local or lower cost operation.
Protecting the brand of your own hedge fund or private equity fund is more important than ever. Rumors of gating clauses being enacted or redemption requests spiking within a single fund can spread around the world in less than 3 days. False rumors can cause investors to act irrationally and began to question the quality of a fund’s team or operations. As these two industries develop further many funds will continue to expand their use of public relations firms and many funds may need to have public relations plans in place to counter false rumors and be ready to act; this could be just as important to have in place as a disaster recovery system.
Part 3: Challenges in the Short/Medium Term
One of the challenges facing governments around the world is how to properly regulate hedge funds and private equity firms without stifling domestic growth and innovation within that sector. While many solutions are being proposed the topic is thick with political interest and the amount of private equity and hedge fund specific regulations will likely expand several fold over the next 12 months.
Another challenge that the private equity and hedge fund industries face is marketing portfolios and maintaining fee level levels and positive track records amidst recent market losses. This is always a difficult task but it has proven even more so within these economic conditions. A percentage of investors are hesitant to allocate their funds within anything but money market accounts right now. At the same time many funds are desperate for capital to keep their doors open and they are offering 0% management fees, sliding high watermarks and performance guarantees. It is yet to be seen how these concessions and recent market vs. private equity and hedge fund performance will affect the economics of the industry as a whole.
Part 4: Possible Questions to be Asked During the Discussion Session
Question 1: What strategies do you see emerging once the market does turn? Many I have spoken to believe that hedge funds may recover before private equity once the market corrects. Do you agree?
Question 2: Private equity and even more so hedge funds have taken a lot of heat for contributing to the shorting of financial institutions, profiting at the expense of taxpayers and in earlier years being compensated too highly for their work completed. What are your opinions on these issues, are they warranted or completely blown out of proportion?
Question 3: What is read in the mainstream media about private equity and hedge funds is often two or three shades of color away from the reality of what is happening within the industry. Are there a few issues which you believe will soon be brought to the public light which have not yet? What trend are you observing from your position in the industry which the average corporate executive may not?
Question 4: How much additional regulation of hedge fund and private equity firms will we see over the next 18 months.? While hedge fund and private equity funds are often seen and dealt with separately within the US they are sometimes regulated together in parts of Europe. Do you believe that this will lead to more private equity regulation in Europe by their association with hedge funds?
Question 5: Access to capital is a problem for almost every area of finance, real estate, and investing. Do you believe the limited access to capital and lower leverage ratios will hurt hedge funds or private equity more?
Question 6: What pro-active steps should private equity and hedge funds is taking to improve their image in the eyes of the public? What actions should be taken and could the industry as a whole do a better job at communicating with regulators and investors in Europe?
Question 7: Many institutional investors are currently “sitting on the sidelines” and allocating less of their total portfolio during this financial crisis. Do you believe that hedge funds and private equity firms will receive the same, higher or lower percentage allocations from pension funds, endowments, foundations and family offices after this crisis is over? Why?
Part 5: Further Reading & VideosStuart Langridge