The World Is Not Very Flat In Emerging Markets......

Turkish Economic Growth: Is It Sustainable?

With the exception of a brief drop in GDP during the last financial crisis, the Turkish economy has been on a spectacular growth path for over a decade now. With it's history of volatile and painful crashes, it would only be prudent for investors to ask themselves if the country can sustain the current growth rates.

If we look back and try to analyze growth trends, impact of various global crashes have almost always hit Turkey harder than any other country. The country also has a history of creating homegrown economic disasters, as was the banking crash of 2001.

Although we should never dismiss historical trends, we must also analyse the ever changing financial environment if we are to create good forecasts in any emerging market, including that of Turkey.

One of the primary negative trends in the Turkish economy stems from run-away consumer demand, which seems to be unstoppable. This growth is further instigated by local banks willingness to extend easy retail credit to millions of people with very little credit history.The result is an explosion of the current account deficit, where local production cannot keep up with consumer demand and therefore imports of products and services outpace exports. This gap is widening and therefore forcing the country to rely increasingly upon foreign capital (primarily in the form of 'hot-money'). This is a dangerous trend, especially if global investors ever get even the slightest chill over the prospects of the economy.

On the other hand, there is a tremendous homegrown entrepreneurial environment that has flourished over the past five years. The pace of new start-ups (which traditionally has been the growth engine all around the globe) is nothing but stunning and the flow of funds (although not accurately and formally recorded) is very significant. The overall structure of the economy is also very different today than it was a decade ago and can withstand a much stronger impact (although it is still far from invincible, as some may think).

So, is the economic growth sustainable? Yes, but only if the government regulators can slow consumer demand and therefore in-turn slow the deterioration of the current account. One way for them to do this is to introduce tighter regulation of the retail credit sector. Banks (especially their foreign partners) must realize that if there is a crash in the local economy that is a result of retail credit defaults, they cannot merely exit the country and leave the mess to be cleaned up by the government (another bail out). Accountability, it would seem is a curiously elusive term.

Having said this, the sustainability questions should not only be confined only to the Turkish economy. Investors should be very careful in analyzing other similar scenarios such as in Brazil, South Africa and Argentina. These countries seem to be registering economic growth similar to that of Turkey.

This is an inherent risk of emerging markets. That is why they are so exciting!

 

Greece Vows to Address Budget Slippage.... again?

There is yet another declaration from the Greek government to they would address yet another slippage of budget targets. I'm not sure anymore why the government is still holding on to what many investors are now calling a dream. Almost 100% of institutional and individual investors I speak with acknowledge the fact that the Greek government will default. Can anyone point to someone who thinks otherwise at this point in time? There are even investors who are convinced that Greece (along with several other periphery EU countries) will be either forced out of the EURO or will simply choose to leave. Obviously in this scenario, the fist one out will have most to gain (this is another discussion to be had in due time).

Among all the negative news and all the declarations that we have heard over the past two years with regard to Greece, there is a silver lining... of sorts. No one in the world will be shocked when the default comes and to this end, it has been priced into everything that the Greek finance ministry has done over the past several years.

All we can hope for at this point is for strength and patience for all Greeks. There are volatile times ahead.

 

 

Evolution of the Chinese Private Equity Sector

Guo Guangchang, one of the most prominent investors in China, is betting big on the fast-growing domestic market.

via dealbook.nytimes.com

According the an article in the New York Times, some Chinese private equity firms are looking for deals to invest outside of the country. We can draw several conclusions from this event, of which the foremost should be the acknowledgement that that Chinese economy is rapidly transforming from an 'emerging market' to a 'developed market' (if you have to categorize).

This important act of diversification will prove well in an environment where many global investors are increasingly concerned with whether China will continue to keep its break-neck growth. It is a great way to mitigate any homegrown (domestic) risk. It is also a great investment strategy based on consolidation and international growth for local Chinese portfolio companies.

Obviously there are also several other conclusions we can draw from this: the high valuations in the Chinese market (which the article claims is one of the primary drivers for PE firms looking outward) is an indication that real incomes (and therefore real costs) are also on the rise in a country that relies on low cost manufacturing labor to keep its economy on the growth path. To this end, it is increasingly becoming clear that the Chinese economy must undergo significant transformation into an innovation/services based market.

 

Scrutiny between G20 peers?

The U.S., China and five other large economies will face deeper scrutiny from their peers to ensure their policies don’t derail a global expansion that finance chiefs bet is strong enough to absorb recent shocks.

via www.bloomberg.com

We have all witnessed the tragic financial collapse of both global conglomerates as well as global economies over the past four years. As heartbreaking as these events are, it is very important for the international community to learn from its mistakes move forward.

One thing I’ve personally ‘learnt’ from the past four years of the unprecedented economic value destruction is the demoralizing similarities between the G20 and the ECB; two very critical organizations.

Both organizations convene regularly to discuss global issues. Both organizations often seem to pass judgment on those nations (and/or corporations) who have stepped out of line.

…neither organization has the teeth to actually enforce their agenda and to this end, nothing concrete ever comes about from these meetings.

We all continue to see the ineffectiveness of the ECB against the collapse of the periphery EU nations. In addition they continue to raise interest rates, as if to intentionally push the PIGS to leave the Euro zone. The latest comedic initiative comes from the G20. They seem to think that each member state will actually interfere with the economic policy of another member in order to prevent financial instability.

I wonder when we’re ever going to learn from these mistakes and move forward.

Emerging market valuations for Internet companies finally at an end.... again.

Alisher Usmanov, who together with fellow Russian billionaire Yuri Milner owns about 10 percent of Facebook Inc., said he’s cautious to invest more money into Internet companies as prices may have peaked.

via www.bloomberg.com

I was based in San Francisco during the first dot com wave and I can assure you that the euphoria of the moment was such that no one thought the stratospheric valuations would ever go down... no matter what.

Sound familiar to the recent real estate & credit market bubble?

It's why I'm always so very puzzled with the valuations placed on the likes of Facebook, Twitter or LinkedIn... by the very institutions who built up and popped the first tech bubble.

In many emerging markets, valuations are based more on instinct or on emotions rather than actual facts. One reason is because hard reliable fact is sometimes not available in these markets.

One can draw very similar conclusions with the way investors value some Silicon Valley tech companies. The problem here is that there is plenty of hard fact available and common sense would tell anyone that the remarkable valuations simply cannot be justified.

What goes up will certainly come down at some point. I believe investors are finally coming to terms with this fact.... again.

'Too Big to Fail' in Emerging Markets.

If Goldman Sachs were to hit a hypothetical financial rock, would it be allowed to fail — to go bankrupt as did Lehman — or would it and its creditors be bailed out?

via economix.blogs.nytimes.com

Here we are again. After one of the worst financial crisis the world has seen since the great depression, we are back at square one. Are certain banking/investment institutions too big to fail?

Many people don't realize this but the problem is even more significant in the emerging markets as governments and regulatory institutions often allow certain companies to grow out of control.

Sectors within emerging markets do not have the depth that we see in other more industrialized nations. To this end, an entire sector is often either controlled by one incumbent or there are only a few competing companies. Many of these conglomerates are family owned operations and have intimate government connections.

The 'unthinkable' happens and we should never expect otherwise.

Instead of trying to figure out if certain institutions are 'too big to fail' we may want to concentrate our focus on 'how to prevent the failure of these institutions'.

BRIC nations no longer emerging markets

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via economictimes.indiatimes.com

It's about time. Finally, Jim O'Neill of Goldman Sachs has indicated that the term BRIC is a an outdated reference that excludes some very dynamic emerging economies such as Mexico, South Korea, Turkey and Indonesia.

Many global emerging market investors and private equity GM's had actually been voicing their opinions to this outdated classification for the past five years or so. In fact, there are many investors I've come across who feel that Russia should not have been included in the BRIC's in the first place.

These types of classifications can become counter-intuitive in a dynamic and rapidly changing world. This is why it is important to continuously review the merits and parameters of these terms.

We should really stick to our traditional terminology of 'Developed, Growth, Emerging, and Underdeveloped' categories.

...back to basics.

Scott M. Sperling Sees No Double-Dip Recession - NYTimes.com

Scott M. Sperling, co-president of Thomas H. Lee Partners, says the threat of a double-dip recession has lessened, and that crucial credit markets are “as robust as we’ve seen” since the financial crisis.

via dealbook.nytimes.com

I'm not sure what the reference point is with regard to the 'threat' of a double dip recession leveling off, but from the many other smaller private equity players I speak with in the emerging markets, they continue to be concerned about the economy not necessarily 'sliding' back into a recession but 'falling' into one due to a significant global event. It is this 'hitting the wall' risk that is sometimes tricky to mitigate... specially for PE firms.

Scott M. Sperling Sees No Double-Dip Recession - NYTimes.com

Scott M. Sperling, co-president of Thomas H. Lee Partners, says the threat of a double-dip recession has lessened, and that crucial credit markets are “as robust as we’ve seen” since the financial crisis.

via dealbook.nytimes.com

Moving forward in EMEA with Private Equity

I am being asked about the social uprisings across the Middle East region on a daily basis and its effects on private equity so I thought to write some of my thoughts on the matter.

The first thing we should remember is that in the long run, what is happening in the Middle East emerging markets are akin to the fall of the Soviet Block in the 80's. They are socially, politically and economically a game changing phenomenon for the region... which is clearly long overdue. The shift, however gradual, of power from the hands of the few to the hands of the many is something we should all cheer for.

The second thing we should remember is that this transformation will not be an overnight event. Even if actual power changes hands, the effort required to transform the social, political and economic constitutions of these states will be difficult. I guess it all starts with the first step.

So, what does this mean for private equity?

Valuations are all over the map and there is a reason for this. It is critical for PE firms to put additional weight in determining the political exposure for each company in the region. There is a chance that those companies with strong state connections may be at high risk. There is also the risk of maneuvering through the liberalization of the economy. No one knows how it will unfold and transitions such as these have historically proven to be filled with a variety of risks for investors.

Having said this, beyond the immediate short-term, there is tremendous economic potential throughout the region. I predict it to be one of the highest growth areas in the world within the next three years... taking it's place next to the Asian and South American emerging economies.

It is time for private equity do its homework and mobilize.