“Challenging” Latin American investment environment highlights private equity value

BY Fraser Tennant

Latin American economies experienced a “challenging” 2014 with decreasing foreign demand, falling commodities prices and a reversal of asset flows back to developed markets contributing to an economic slowdown that significantly impacted the region’s private equity activity.

Data presented and analysed in ‘Private equity roundup for Latin America’ - the latest in EY’s series of private equity reports examining fundraising, investment activity and exits across a range of developing economies – shows that although total deal value increased marginally to US$4.3bn in 2014, the number of PE transactions actually fell by 18 percent to 76 (101 deals totalling US$4.5bn took place in 2012).

Despite these figures, the report does not suggest that investors are looking to withdraw from the region. On the contrary, many investors appear to be increasing their commitments with fundraising increasing by 73 percent over 2013 to US$9.0bn with nearly 60 firms in the region said to be actively fundraising.

“It is a maxim of private equity that many of the best deals are made during the worst of times," observe the authors of the ‘Private equity roundup for Latin America’ report. “While the current downturn in certain sectors of Latin America’s economy hardly qualifies as the 'worst of times,' clear dislocations continue to make the operating environment increasingly challenging. Despite this, the industry has yet to see an exodus of capital. Indeed, fundraising figures and LP surveys confirm that investors continue to fund new vehicles and are maintaining or increasing their commitments.”

Although overall growth in Latin America has slowed, there are significant differences between individual countries – Mexico and Brazil in particular, the region’s two largest economies. The IMF expects Mexico’s economy to grow by 3.5 percent in 2015 and Brazil’s by 1.4 percent.

In terms of regulatory impacts, Latin America still has a long way to go, such as dealing with security issues and corruption, but structural reform programs are underway.

For Latin America the current environment is a challenging. However, the EY report does highlight the “compelling” value of private equity, offering as it does the “operational expertise and financial discipline to help savvy entrepreneurs weather macro headwinds".

Overall, investment is encouraged and positive outcomes are expected in Latin America.

Report: Private equity roundup Latin America

Global power shift to result in backward trajectories for advanced economies by 2050

BY Fraser Tennant

A global economic power shift could put advanced economies such as North America, Western Europe and Japan on a backward trajectory by 2050, according to the latest in PwC’s series of ‘The World in 2050’ reports.

Published this week, the report – ‘The World in 2050: Will the shift in global economic power continue?’ – presents long-term projections of potential GDP growth up to the year 2050 for 32 of the world’s largest economies (84 percent of total global GDP).

Key findings in the PwC report include: (i) UK GDP is likely to fall behind Mexico and Indonesia by 2030 – this could push the UK and France out of the top 10 by 2050; (ii) long-term UK growth (averaging 2.4 percent to 2050) could be better than other large EU economies, including Germany, France and Italy; (iii) China will clearly be the largest economy by 2030, but its growth rate is likely to revert to the global average in the long run; (iv) India could challenge the US for second place by 2050; and (v) Nigeria and Vietnam are set to be the fastest growing large economies over the period to 2050.

“Emerging economies like Indonesia, Brazil and Mexico have the potential to be larger than the UK and France by 2030," claims John Hawksworth, PwC’s chief economist. “Indonesia could rise as high as fourth place in the world rankings by 2050 if it can sustain growth-friendly policies.”

The PwC report also suggests that the world economy is set to grow at an average of around 3 percent per year from 2015 to 2050, doubling in size by 2037 and then nearly tripling by 2050. However, the report concedes that there is likely to be a slowdown in global growth after 2020.

A forthright Mr Hawksworth said “Europe needs to up its game if it’s not to be left behind by this historic shift of global economic power, which is moving us back to the kind of Asian-led world economy last seen before the Industrial Revolution.

“The US may hold up better, provided it can remain at the global technological frontier, and the UK could also perform well by G7 standards if it remains open to trade, investment, people and ideas.”

Report: The World in 2050 - Will the shift in global economic power continue?

HSBC in tax dodging scandal

BY Richard Summerfield

British banking group HSBC Bank plc is facing potential legal action in both the US and the UK over claims that the bank conspired with clients of its Swiss subsidiary, helping them avoid paying tax in the run up to the financial crisis.

According to a number of leaked bank account files, HSBC helped over 100,000 clients across 203 countries to hide around $118bn worth of assets. The documentation, which was leaked to a number of global media outlets, has sparked an outpouring of outrage across Europe, the US and elsewhere. Though the relevant tax authorities have had access to the leaked files since 2010, HSBC’s misconduct is only now being made public.

Prosecutors in the US have begun to intensify their investigations into HSBC’s conduct given the revelations, and are now looking into allegations that the bank may also have manipulated currency rates as part of its wider malfeasance. The US Department of Justice may also choose to re-evaluate the $1.9bn deferred prosecution agreement reached with the bank in 2012 as a result of the leak. In the UK, the bank may face possible criminal charges.

In many respects, the HSBC revelations are indicative of a dubious culture permeating the banking sector, and the latest revelations will do little to convince the public that banking and financial institutions can be trusted. With many of the wounds from the financial crisis still raw, HSBC’s alleged collusion with tax dodging clients will undoubtedly provide a significant setback for those attempting to clean up the industry’s image. As the UK’s general election is mere months away, the issues of tax avoidance and corporate misconduct are likely to remain high on the political agenda in the short term.

Given the potentially damaging nature of the revelations, HSBC has moved swiftly to calm the quickening storm. In a statement the bank said, “We acknowledge that the compliance culture and standards of due diligence in HSBC’s Swiss private bank, as well as the industry in general, were significantly lower than they are today. At the same time, HSBC was run in a more federated way than it is today and decisions were frequently taken at a country level.”

News: HSBC could face U.S. legal action over Swiss accounts

S&P agrees $1.5bn settlement

BY Richard Summerfield

After years of legal wrangling, credit rating agency Standard & Poor's has agreed to pay the federal, state and D.C. governments around $1.5bn to resolve several lawsuits covering the firm’s role in the 2008 financial crisis.

While the settlement does not bring an end to the scrutiny placed upon the wider ratings business (indeed, S&P’s competitors Fitch and Moody’s are still embroiled in legal battles), the agreement does bring to a close an embarrassing chapter in S&P’s history. The firm, much like its rival agencies, stood accused of issuing falsely inflated ratings of mortgage-backed securities during the housing boom of 2004 to 2007, which contributed to the onset of the 2008 financial crisis. “As S&P admits under this settlement, company executives complained that the company declined to downgrade underperforming assets because it was worried that doing so would hurt the company’s business,” said Attorney General Eric Holder. “While this strategy may have helped S&P avoid disappointing its clients, it did major harm to the larger economy, contributing to the worst financial crisis since the Great Depression.”

Under the terms of the agreement, S&P’s parent group, McGraw Hill Financial Inc, will pay $687.5m to the US Department of Justice, and $687.5m to 19 states and the District of Columbia, which had all filed similar lawsuits. According to S&P, the firm agreed to the settlement in order “to avoid the delay, uncertainty, inconvenience and expense of further litigation".

S&P has also reached a separate $125m settlement agreement with the California Public Employees’ Retirement System. The pension fund opened legal proceedings against S&P in 2009.

The agreement reached between S&P and the DOJ is a so-called ‘no fault’ deal. Accordingly, the firm has admitted no wrongdoing as part of the settlement. No fault agreements have been particularly unpopular in the past and the S&P agreement has drawn fierce criticism from some circles. Critics of the plan have been particularly vocal in their opposition to the deal as S&P was not found to have violated the law under the terms of the deal. Some commentators had hoped that the firm would be held accountable for its actions, in order to act as a preventative measure in the future.

News: S&P reaches $1.5 billion deal with U.S., states over crisis-era ratings

Axis Capital & PartnerRe Ltd agree $11bn merger

BY Richard Summerfield

Axis Capital Holdings Ltd and PartnerRe Ltd announced on 25 January that the two firms had agreed to an $11bn merger which will reshape the reinsurance market by creating the world’s fifth largest global reinsurer.

As a result of the deal, the amalgamation of the two firms will create a speciality insurer and reinsurer with more than $7bn in combined gross premiums written and over $14bn in available capital. The firm will also have a speciality insurance arm with around $2.5bn in gross premiums.

The transaction, which is being treated as a merger of equals, has been unanimously approved by the boards of both Axis and PartnerRe, and is expected to close in the second half of 2015, pending the approval of the two company’s shareholders. In a statement announcing the deal, it was confirmed that PartnerRe and Axis Capital’s shareholders will own approximately 51.6 percent and 48.4 percent of the combined company, respectively.

The combined firm will be headquartered in Bermuda, where Axis and ParterRe are already based. The new firm will maintain a presence across five continents, including offices across 39 different locations employing around 2300. As a result of the merger, the newly combined firm expects to achieve considerable annual cost savings of around $200m in the first 18 months of operations. With duplicate offices in various locations including New York, Bermuda and Ireland, there will likely be a number of job losses, though how many are at risk has not been disclosed.

Axis’ incumbent chief executive Albert Benchimol will take up the same post with the newly combined company. PartnerRe’s chairman Jean-Paul L. Montupet will serve as non-executive chairman, while current Axis chairman Michael Butt will serve as the new company’s chairman emeritus.

In a statement, Mr Benchimol expressed his pleasure at having agreed the considerable merger. “This transformational combination will leverage the complementary strengths of both companies and create an organisation with the size and breadth to enhance product and service offerings, maximise growth opportunities, optimize portfolios, and deliver both economies of scale and capital efficiencies” said Mr Benchimol. “The combined company will have three strongly positioned businesses – a top-five global reinsurer, a $2.5bn speciality insurance underwriting business, and a highly successful and growing life, accident and health franchise – all with increased strategic flexibility.  As a top five global reinsurer with leading positions in a number of specialty lines, we will be strongly positioned to turn the challenges presented by the structural changes in the reinsurance market into opportunities.”

News: Two Big Reinsurers, PartnerRe and Axis Capital, Merge in $11 Billion Deal