A Greek tragedy?

BY Richard Summerfield

It would appear that after much debate – and many billions of euros – the Greek debt crisis may finally be entering the end game.

On Tuesday 30 June, the International Monetary Fund (IMF) confirmed that Greece had failed to make its latest €1.5bn debt repayment, officially placing the country ‘in arrears’. Greece’s missed payment is the largest in the IMF's history and the country becomes the first ever ‘advanced economy’ to be placed in arrears. The ‘default’ by Greece also brings about the end of the country’s second bailout programme.

In a last gasp attempt to prevent default, the Greek government proposed a new two year bailout programme which would be supplied under the European Stability Mechanism, which provides Europe’s bailout fund. The proposal was made shortly before the IMF’s payment deadline.

In a letter sent to the European Commission, IMF and European Central Bank, incumbent Greek prime minister Alex Tspiras asked for a new loan of €29.1bn to cover debt maturing in 2017.

In order to secure the fund, Mr Tspiras claimed that he would accept all of the conditions put forward by the country’s creditors provided there were a few minor amendments. The Greek government is seeking, in terms of the country's value-added tax system, a special 30 percent discount for Greek islands, many of which are in remote and difficult-to-supply regions, be maintained. With regard to pension reforms, Mr Tsipras asked that changes to move the retirement age to 67 by 2022 begin in October, rather than immediately. He has also requested a special ‘solidarity grant’ be awarded to the country’s poorer pensioners. This grant, Mr Tspiras notes, would be phased out by December 2019. “Our amendments are concrete and they fully respect the robustness and the credibility of the design of the overall programme,” said Mr Tsipras.

At the time of writing the approval of this third bailout seems highly unlikely. Many senior European figures, particularly those in Germany, appear unwilling to deal with Mr Tspiras and his finance minister Yanis Varoufakis. Mr Tspiras’ decision to call a referendum for Sunday 5 July, in which the country will decide whether it wants to accept creditors' bailout conditions, has proven to be a contentious one. German chancellor Angela Merkel noted that “the door to talks with the Greek government has always been, and remains, open", adding, however, that talks could not take place before Sunday’s poll.

With fierce criticism of the referendum ringing around Europe, a no vote appearing most likely, and a €3.5bn payment to the ECB due on 20 July, Greece’s time in the euro may be drawing to a close.

News: Greece debt crisis: IMF payment missed as bailout expires

Lone Star to acquire Home Properties in $7.6bn deal

BY Fraser Tennant

In a transaction valued in the region of $7.6bn, global private equity firm Lone Star Funds has announced its intention to enter into a definitive agreement to acquire Home Properties, Inc., the publicly traded multifamily real estate investment trust. 

Under the terms of the agreement, Lone Star Funds will acquire all of the outstanding common stock of Home Properties for $75.23 per share in an all-cash transaction. The agreement, which includes the assumption of existing debt, will, upon completion, see Home Properties become a privately held company.

“We are pleased to enter into an agreement to acquire Home Properties and look forward to working with their talented team to complete this transaction and integrate the Company's portfolio into Lone Star Funds' existing multifamily portfolio," said a delighted Hugh J. Ward III, co-head of real estate investments at Lone Star Funds.

“This is Lone Star Funds' second large, recent apartment purchase following the 2014 acquisition of a 64 property, 20,439 unit portfolio, and is consistent with our strategy of buying primarily Class B apartments, including workforce housing, located in in-fill markets with strong underlying fundamentals."

The Lone Star Funds/Home Properties definitive agreement does, however, contain a ‘go shop’ provision which allows the latter firm to solicit alternative proposals from third parties for 30 days from 22 June, the date of the announcement.

"The Home Properties team has built a great company, as reflected by our strong platform, unique assets, and differentiated business strategy," said Edward J. Pettinella, President and Chief Executive Officer of Home Properties. "We believe this transaction with Lone Star Funds provides our stockholders with compelling value for their investment, consistent with our long-term strategy."

Concurrent with the Lone Star Funds, Home Properties has also entered into an agreement to contribute a portfolio of up to six portfolios, totalling 3246 units, to UDR, Inc, a $13bn multifamily real estate investment trust, in exchange for cash and newly issued units.

But a potential threat to the dealmaking extravaganza has arisen in the past few days with the revelation that national securities firm Faruqi & Faruqi, LLP is investigating the board of directors of Home Properties over potential breaches of fiduciary duties in connection with the sale to Lone Star Funds.

However, for the present, the Lone Star Funds/Home Properties transaction is still expected to close in the fourth quarter of 2015.

News: Lone Star Funds to buy Home Properties for $7.6 billion, including debt

A ‘climate of fear’ breeds unethical behaviour within financial institutions claims new research

BY Fraser Tennant

New research into the reasons why employees of financial institutions can become partial to unethical conduct has been published this week by PwC and the London Business School.

The research study, ‘Stand out for the right reasons: why you can’t scare bankers into doing the right thing’, was designed to investigate the role of emotions in determining when and why employees behave creatively as opposed to unethically when competing with colleagues.

The study is based on a survey of 2431 managers from UK financial services representing banking, insurance and wealth management.

The PwC/London Business School research reveals that when financial institutions take a ‘get tough’ approach to poor employee performance in terms of behaviour and reaching targets, they risk creating a climate of fear and breeding more unethical conduct in financial services – an outcome at odds with what regulators, businesses and the public actually want.

“We are not suggesting that rules and penalties for bad behaviour should be abandoned as it’s essential that people know what is acceptable and what isn’t, and criminal behaviour should be punished," said Duncan Wardley, people and change director and behavioural science specialist at PwC. “This is about the sorts of pressures that push ordinary, well-meaning people into behaving less ethically that they would want to by cutting corners and hiding mistakes.

As a counterpoint to this, the research also found that when managers were presented with situations where the positive outcomes of success were highlighted rather than the negative consequences or punishment for poor performance, they were more excited and much more likely to demonstrate innovative behaviour.

Mr Wardley continued: “Regulators and financial services leaders can change behaviour within companies by increasing emphasis on the positive outcomes of good performance, instead of solely focusing on the negative outcomes of the bad behaviour they want to stamp out.”

Additionally, whilst the study shows that the issue of monetary reward is still a contentious issue involving a public and regulatory desire for further sanction, it also recognises that too much pay regulation can ultimately be self-defeating.

“Tough medicine prescribed by regulators to curb conduct issues meets the public appetite for retribution," believes Tom Gosling, head of pay, performance and reward at PwC. “But pay regulation based purely on pay structures and penalties can unintentionally create the very conditions that make unethical behaviour more likely.

"An approach to pay regulation that focuses too much on pay instruments, deferral, and clawback can create the emotional states in which creativity is crowded out, focus on financial rewards is maximised and unethical behaviour is more likely.”

Report: Stand out for the right reasons - why you can’t scare bankers into doing the right thing

Africa’s arrival

BY Richard Summerfield

Private equity’s interest in the continent of Africa has never been higher, according to a new report from EY.

The firm’s report , 'Private equity roundup Africa', notes that PE has spread across many of the emerging markets with vigour in recent years. Indeed, many developing regions, including Latin America, Eastern Europe, India and Asia have attracted considerable interest from PE groups. However, PE’s interest in Africa is particularly strong.

Fundraising on the continent trended higher in 2014 than in recent years, as investors sought exposure to Africa’s seemingly unlimited potential. The value of transactions conducted in Africa nearly doubled over the course of last year, as PE firms across the continent put billions of dollars to work following significant fundraising activities. Exits continued to gather momentum in 2014, achieving an eight year high.

The outlook for the industry in Africa looks particularly positive, although the continent is still battling with political instability, economic torpidity and mass poverty. However, the emergence of a burgeoning middle class and the rise of consumer culture will play a transformative role in the economic fortunes of Africa.

Much of Africa’s recent growth has been marked by development in a number of consumer-related sectors - most notably the retail and consumer products space, the financial services sector and the technology, media and telecoms industries. This diversification of industries has had a positive effect on employment. Though we are a way off Africa becoming an economic power, the recorded growth, and potential for further economic development across the continent, are very real.

Investors in Africa will have obstacles to overcome in the years ahead, but the interest of both domestic and international investors across a range of industries will go some way to plugging the investment gap Africa has suffered for decades.

Report: Private equity roundup for Africa 2015

The times they are a-changing

BY Richard Summerfield

The insurance industry is changing at an unprecedented level according to a new report from PwC. 'Insurance 2020 and Beyond: Necessity is the mother of reinvention' reviews  developments in the industry set against PwC’s initial projections, and is based on interviews with more than 80 chief executives officers around the world.

The insurance space is at an important crossroads. Going forward, the industry will need to deal with significant changes to customer behaviour and acclimatise to technological advancements and new distribution and business models. More stringent local, regional and global regulatory developments will also contribute to the changing nature of the industry between now and 2020.

The report, which took five years to produce, notes that digital developments in particular have had a significant impact on the insurance space – an impact that is likely to grow over the next five years. Digital developments have helped insurers to enhance their customer profiling, develop sales leads, tailor their financial solutions to individual needs and, for non-life businesses, improve claims assessment and settlement.

Many of the firms surveyed said they have taken steps to improve their digital distribution channels. They have initiated new programs to help integrate their product lines into a client’s life, with pay-as-you-drive applications for smartphones just one example of such integration.

Going forward companies will be required to utilise ever more sophisticated sensors, big data analytics and communicating networks as the much lauded ‘Internet of Things’ becomes more commonplace. Jamie Yoder, PwC Global Insurance Advisory Leader, notes, “The emerging game changer is the change in analytics, from descriptive (what happened) and diagnostic (why it happened) analysis to predictive (what is likely to happen) and prescriptive (determining and ensuring the right outcome).”

Report: Insurance 2020 and beyond: Necessity is the mother of reinvention