September 11, 2017

Worthy Insights / Opinion Pieces / Advice

Mauldin Economics – Irving Fisher and Japan – Charles Gave 8/23

Oaktree – Yet Again? – Howard Marks 9/7

WSJ – Why American Students Need Chinese Schools – Lenora Chu 9/8

  • “After putting her son in an elite state-run school in Shanghai, an American mother finds that the U.S. education system could learn a few things from China – most of all that teacher knows best.”


FT – Red hot competition for private equity deals will hit returns – Chris Flood 9/9

  • “Private equity managers have raised around $260bn so far this year and are on track to surpass the industry’s annual fundraising record of $369bn registered in 2007, according to Prequin. The data supplier reckons that 811 managers are currently on the road looking to raise a further $578bn. “
  • “As a result, competition for deals among private equity managers is red hot at a time when many equity markets are trading at or close to their all-time highs. This is fueling concerns that profitable deals are becoming increasingly difficult to identify for private equity managers, which are now sitting on a record $1tn of excess capital that they have been unable to put to work.”
  • “Thomas Toth, a managing director at Wilshire Associates, the consultancy, says the amount of excess capital is ‘very substantial’ and has helped push up prices paid for deals. He says assets are being acquired on multiples of 10 (measured as total enterprise value as a multiple of underlying earnings), beyond the previous peak of 9.7 times, registered in 2007 before the financial crisis.”
  • “’We don’t expect to see private equity managers generate the same levels of returns that investors have been accustomed to,’ says Mr. Toth.”
  • “Wilshire’s working assumption is that private equity managers, on average, will generate annualized returns of 9.4% over the next decade, down from its 11.2% 10-year estimate in 2009.”
  • “He says that any rush to put money to work by private equity managers will ‘further compress’ future returns.”
  • “But just 6% of private equity managers plan to invest less money over the next 12 months, while 62% plan to invest more, according to Preqin.”
  • As to whom is raising this money,
  • “Apollo Global raised the bar for private equity fundraising to a fresh high last month when the New York-based investment manager said it had gathered $24.7bn for its latest buyout fund, the largest of its kind.”
  • “CVC Capital Partners raised around €16bn while Silver Lake gathered $15bn for its fifth buyout fund. KKR attracted $13.9bn for its 12th Americas fund and a further $9.3bn for an Asia-focused fund, while 3G and Bain are looking to raise $10bn and $7bn respectively.”
  • “Jeffrey Hooke, a finance lecturer at Johns Hopkins Carey Business School, says that institutional investors, such as US public pension schemes, and their consultants feel more comfortable with established ‘name brand’ managers, even if smaller, lesser-known companies might offer better return prospects.”
  • “Mr. Hooke examined funds run by the 18 largest private equity managers and found that three-quarters, including some funds run by KKR, Silver Lake and Bain, failed to beat the S&P 500 consistently between 2006 and 2016.”
  • “Mr. Hooke says the lavish marketing budgets of large private equity managers entice potential clients and that institutional investors could achieve better results if they themselves acquired holdings in the types of companies targeted by buyout funds.”
  • Not surprisingly, “those funds that have performed better than average tend to launch during periods of notable equity market weakness.”


Reuters – Trust issues? China targets a $3 trillion shadow banking industry – Engen Tham 9/9

  • “The trusts, at the heart of a vast shadow banking industry, are being pressured to step up compliance and background checks, and are being pushed towards greater transparency.”
  • “But the fast-growing 20 trillion yuan ($3 trillion) industry, whose lending operations are cloaked behind opaque structures, will be tough to rein in, according to employees at some trusts.”
  • “One of the biggest challenges facing regulators is that many trusts employ a baffling array of structures, and funnel money through complex webs of beneficiaries, which makes untangling transactions extremely difficult.”
  • “The practices of the trusts, and the speed at which the industry is growing, have made them a target for Beijing as it tries to keep a lid on risky lending, cool overheated markets and control corporate debt.”
  • “In April, Deng Zhiyi, head of the CBRC’s trust department, warned of ‘severe risks’ from funds flowing into the real estate, coal and steel sectors through trusts.”
  • “The industry is now roughly a tenth the size of China’s commercial banking sector.”
  • “However, the regulator set out in detail in April certain structures that the trusts should not use, such as money-pooling schemes and structuring products to avoid restrictions on leverage.”
  • “That was ‘a signal for financial institutions that from a legal and enforcement perspective, we are entering a stricter period,’ said Armstrong Chen, financial compliance partner at King & Wood Mallesons.”
  • “Trust firms will also have to start registering the details of their products, identifying the ultimate borrower of funds, this year, said Chen, who is in regular contact with the regulators.”
  • “Chen said the requirement would improve transparency, but people at trust firms say it will still be difficult to detect the use of the under-the-table agreements typical of the industry.”
  • “Despite these changes, the government’s job managing the trusts keeps growing. In the first half of this year, trust loans increased by 1.31 trillion yuan, which compared with 279.2 billion in the period last year, according to central bank figures.”

Reuters – China studying when to ban sales of traditional fuel cars: Xinhua – Tom Munroe and Yawen Chen 9/9

  • “China has begun studying when to ban the production and sale of cars using traditional fuels, the official Xinhua news agency reported, citing comments by the vice industry minister, who predicted ‘turbulent times’ for automakers forced to adapt.”
  • “Xin Guobin did not give details on when China, the world’s largest auto market, would implement such a ban. The United Kingdom and France have said they will ban new petrol and diesel cars from 2040.”
  • “To combat air pollution and close a competitive gap between its newer domestic automakers and their global rivals, China has set goals for electric and plug-in hybrid cars to make up at least a fifth of Chinese auto sales by 2025.”
  • “Under the latest proposals, 8% of automakers’ sales would have to be battery electric or plug-in hybrid models by next year, rising to 10% in 2019 and 12% in 2020, but the rules would not be enforced until 2019, a year later than initially planned, the sources said.”

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