by Jeff Powell
Clearly NGOs around the world are too diverse to allow meaningful generalizations of their reactions to the evolving crisis. Some have seized the opportunity, embracing new ideas and reaching out to different actors and constituencies. Others are grafting new issues on to an old agenda: add crisis and stir. Still others are finding their agenda drowned out, at the same time as direct debits get cancelled and stock-market dependent foundations pull up the funding drawbridges.
Here in the UK, development and environment NGOs have come together with the Trades Union Congress in an unprecedented coalition (which, in the name of transparency it should be stated that the author is a part of), initiated by the Bretton Woods Project. The Put People First coalition (PPF) has come together around a short manifesto highlighting jobs, social justice and the environment. The focus for the time being is on the G20 meetings in London in April and then in St. Andrews in November. It's too early to say whether the coalition will be longer-lasting, and if it will be able to get beyond the 'lowest common denominator' politics which held back the Make Poverty History campaign in 2005.
On finance, PPF has joined the general chorus for increased transparency and accountability, without yet articulating a clear vision of what this means. More developed are its ideas on eliminating tax havens, drawing on the groundwork done by the Tax Justice Network. The investigation that TJN inspired in The Guardian has shamed the Labour government into its first tentative (and long-overdue) steps on tax havens, particularly those in the City of London or UK protectorates. Gordon Brown has announced plans to discuss multilateral exchange of information on offshore accounts at the G20 meeting. The PPF coalition is trying to use the crisis as an opportunity to broaden the reform agenda to include a re-invigoration of public services and a shift of economic priorities towards environmental sustainability. Managing the need to focus on shorter-term policy developments with these longer-term objectives will not be easy.
Similar networks and coalitions have formed across Europe. Brussels-based groups Eurodad (the European network of NGOs working on debt, development and poverty reduction) and CONCORD (the European Confederation of Relief and Development NGOs) have started to work with some European trade unions at National and Supra-national level. Like the UK's PPF, Eurodad has a developed campaign on capital flight issues. Groups in these networks with a history of advocacy on financial issues include Germany's World Ecology Economy and Development (WEED), the Dutch group SOMO and of course the ATTAC network which, with others, has been working for over a decade on issues of regulating and democratising finance.
At the international level, the key cue for NGO policy positions comes from agreed positions at the World Social Forum in Brazil, earlier this year. The WSF attempts to bridge the (sometimes elusive) divide between NGOs, trade unions and social movements. While it is short on details, and the process of getting from A to B is absent, the principles of the WSF statement ('Put finance in its place') are radical and clear. They include a call to “implement a global mechanism of state and citizen control of banks and financial institutions” and the creation of “regional reserve currencies”. Taking up the issues of financial sector reform is Re-thinking finance, a new coalition which brings together the Bretton Woods Project, Eurodad, Amsterdam-based Transnational Institute, the Asian network Focus on the Global South, and Latin American network Choike.
In the coming months the ability of all of these NGOs to sharpen and deepen their analysis of financial sector issues, and their capacity to communicate these ideas to a wider audience and build broad-based movements for fundamental change is critical if the crisis is to be transformed into opportunity.
Wednesday, May 18, 2011
Tuesday, May 10, 2011
In the Hot Seat: Private Equity and the Financial Crisis
by Sherif H. Elkholy
Private Equity History
For a long time spanning from the 1980s private equity has been one of the main drivers of market-based finance, catalyzing the transformation of the processes and institutions of direct finance. Back then private equity was a specialized form of finance characterized by its long-term investment strategy, its hands-on approach, and its capacity to add tangible value by investing in companies. This changed significantly over the 2003-2007 boom cycle: private equity was no longer confined to savvy investors, it no longer needed to have a long-term horizon, and it no longer needed to add real value in order to make money. This was made possible by three factors: a seemingly endless supply of cheap debt (annual LBO debt issuance rose from $71 billion in 2003 to $669 in 2007), growing reported profits across all sectors (16% annual growth in the S&P 500 earnings from 2003 to 2007), escalating asset prices (41% growth in US valuation multiples and 43% in European valuation multiples between 2003 and 2007), and more portfolio allocations to private equity by institutional investors (around triple the historical amounts). Then came the perfect storm.
Where it Currently Stands
The financial crisis has hit all the pressure points of private equity at once. Corporate earnings are down thus negatively effecting the financial position and the fundamental value of companies owned by private equity funds. Asset prices are also down, thus deferring any divestiture of companies by private equity owners. More critically, debt markets are extremely tight, virtually freezing the previously flourishing leveraged buy-out market. Finally, portfolio allocation to private equity by institutional investors is down due to limited liquidity and heavy losses across all asset classes. The immediate problem which private equity has to wrestle with is keeping it’s investments afloat. It is unavoidable that many private equity owned companies will default on their debt obligations- simply because the debt levels piled up during the boom years are not in line with current earnings. However, every cloud has a silver lining. Amidst the financial crisis many babies are being thrown out with the bath water- the smartest private equity companies will pick up under-valued high quality businesses for a fraction of the fair value... if they have the liquidity to do so.
The Future of Private Equity
Private equity is facing the ultimate truth test. A close look at the private equity model of the 1980s reveals that private equity had a lot of shared similarities with bank-based finance: investment decisions premised on relationships and knowledge of companies, hands-on control, monitoring through board representation, active management, and long-term “buy and hold” approach. Private equity needs to re-invent itself back to this initial form and it needs to do so fast to guarantee a place in the new financial system which will rise from the ashes of the global crisis. Whatever form private equity will take in the coming years, it will most certainly involve less fees, more work, real operational value-add, and less debt. For the real economy, perhaps this shake out is not so bad after all.
Private Equity History
For a long time spanning from the 1980s private equity has been one of the main drivers of market-based finance, catalyzing the transformation of the processes and institutions of direct finance. Back then private equity was a specialized form of finance characterized by its long-term investment strategy, its hands-on approach, and its capacity to add tangible value by investing in companies. This changed significantly over the 2003-2007 boom cycle: private equity was no longer confined to savvy investors, it no longer needed to have a long-term horizon, and it no longer needed to add real value in order to make money. This was made possible by three factors: a seemingly endless supply of cheap debt (annual LBO debt issuance rose from $71 billion in 2003 to $669 in 2007), growing reported profits across all sectors (16% annual growth in the S&P 500 earnings from 2003 to 2007), escalating asset prices (41% growth in US valuation multiples and 43% in European valuation multiples between 2003 and 2007), and more portfolio allocations to private equity by institutional investors (around triple the historical amounts). Then came the perfect storm.
Where it Currently Stands
The financial crisis has hit all the pressure points of private equity at once. Corporate earnings are down thus negatively effecting the financial position and the fundamental value of companies owned by private equity funds. Asset prices are also down, thus deferring any divestiture of companies by private equity owners. More critically, debt markets are extremely tight, virtually freezing the previously flourishing leveraged buy-out market. Finally, portfolio allocation to private equity by institutional investors is down due to limited liquidity and heavy losses across all asset classes. The immediate problem which private equity has to wrestle with is keeping it’s investments afloat. It is unavoidable that many private equity owned companies will default on their debt obligations- simply because the debt levels piled up during the boom years are not in line with current earnings. However, every cloud has a silver lining. Amidst the financial crisis many babies are being thrown out with the bath water- the smartest private equity companies will pick up under-valued high quality businesses for a fraction of the fair value... if they have the liquidity to do so.
The Future of Private Equity
Private equity is facing the ultimate truth test. A close look at the private equity model of the 1980s reveals that private equity had a lot of shared similarities with bank-based finance: investment decisions premised on relationships and knowledge of companies, hands-on control, monitoring through board representation, active management, and long-term “buy and hold” approach. Private equity needs to re-invent itself back to this initial form and it needs to do so fast to guarantee a place in the new financial system which will rise from the ashes of the global crisis. Whatever form private equity will take in the coming years, it will most certainly involve less fees, more work, real operational value-add, and less debt. For the real economy, perhaps this shake out is not so bad after all.
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