Chinese investors at home in US

BY Richard Summerfield

The Chinese economy has been experiencing a well documented slowdown and re-tooling. As a result, many Chinese businesses have begun to look overseas for their next growth opportunity.

Chinese foreign direct investment has climbed considerably, with investment into the US skyrocketing,  according to a new report from the Rosen Consulting Group and the Asia Society, titled 'Breaking Ground: Chinese Investment in US Real Estate'.

In 2014, Chinese outward FDI flows totalled $116bn, around $18.1bn of which entered the US market. A year later, Chinese outward FDI flows totalled $118bn, with $22.3bn flowing in to the US

The real estate market has been an increasingly attractive investment destination for Chinese businesses in recent years. In the US residential segment, Chinese acquirers spent around $93bn between 2010 and 2015. Accordingly, China has overtaken Canada as the lead foreign investor in the US residential space.

Much of the foreign capital has been concentrated in New York, Los Angeles and San Francisco, with the remaining volume spread widely across the rest of the country. The housing market in California and New York accounted for 35 percent and 7 percent of all transactions, respectively.

Furthermore, Chinese funded projects under construction or planned in the US totalled at least $15bn by the end of 2015. “What surprised me most is the speed of Chinese investment growth, but also the breadth of asset types and geographical locations,” says Arthur Margon, a partner at Rosen Consulting Group and lead author of the report.

Although the tightening of capital controls may impact upon Chinese acquisitions in the residential space in the short term, it is likely that Chinese investment in the US real estate space will continue to climb - particularly as there is an ever widening field of Chinese real estate investors, many of whom have yet to dip their toe in the American market.

Report: Breaking Ground: Chinese Investment in US Real Estate

Infrastructure investment boosts global economies claims new report

BY Fraser Tennant

A large-scale investment in infrastructure is the answer to the stumbling economic growth rates in many large economies, according to PwC’s new ‘Global Economy Watch’ report.

This stumbling growth or “sizable negative output gaps” identified by PwC provides a snapshot of the amount of spare capacity in an economy by estimating how close it operates to its potential level of output. Moreover, of the G7 group of countries, only the UK and Germany are anywhere near to closing the gap, while Italy is furthest adrift, reveals PwC.

“We don’t expect this to change soon, since our main scenario sees global growth of around 2.5 to 3 percent this year, the fifth year of below trend growth measured in market exchange rate terms," confirms Richard Boxshall, a senior economist at PwC. “The UK saw growth slow to a slightly-below-trend rate of 0.4 percent in the first three months of 2016, while the US grew at a lethargic rate of 0.1 percent quarter-on-quarter.

The answer, claims PwC, is to boost growth rates by investing in infrastructure – a strategy that the professional services firm claims would boost aggregate demand through increased construction activity and employment in the short-term and increase the potential supply capacity of an economy in the long-term.

To this end, PwC has set out four key investment principles for policymakers to utilise when deciding where to invest: (i) ensure it meets a need, identifying current and future needs, supplementing the base case analysis with a range of scenarios including optimistic and pessimistic cases; (ii) ensure consistency with other objectives, including social and environmental as well as economic goals.; (iii) ensure the numbers add up, as governments with a relatively low net debt position and healthy public finances (e.g., Germany and Canada) can boost aggregate demand/long-term supply capacity via infrastructure-led programmes; and (iv) ensure it will benefit the wider economy, factoring in both the long-term effects as well as the direct and indirect impacts.

“This type of investment is once again being touted as the key to unlock our low growth environment – but the effectiveness of this policy will ultimately depend on how many shovel-ready projects in different economies meet the principles we’ve outlined," concludes Mr Boxshall.

PwC’s Global Economy Watch is a monthly publication which examines the trends and issues that are affecting the global economy, detailing the latest economic projections for the world’s leading economies.

Report: Global Economy Watch

PE exits in Africa reach nine-year high, new data confirms

BY Fraser Tennant

A focus on value and a diversification of approach caused private equity (PE) exits in Africa to reach a nine-year high in 2015, according to newly published data from EY and the African Private Equity and Venture Capital Association (AVCA).

In ‘How private equity investors create value’, EY and AVCA’s (the pan-African industry body which promotes and enables private investment in Africa) fourth annual analysis of the ways private equity investors create and preserve value in their companies in Africa, PE firms are noted as having exited 44 companies in 2015 – an increase from 39 in both 2014 and 2013.

This uptick in exits took place despite the fact that PE firms have retained their investments for a longer period – while waiting for the right moment to exit – due to ongoing macroeconomic uncertainty, with the average hold period being 6.1 years in 2015, compared to five years in 2014.

“The last two years have seen an increase in the number of PE firms making exits in the African markets,” said Graham Stokoe, EY’s Africa private equity leader. “PE firms clearly are focused on adding value to their portfolio companies and are diversifying their approaches to help achieve this, including helping their portfolio companies expand geographically and bringing in new management.

“While the economic environment still poses challenges, PE firms continue to find ways to create value in their portfolios in the region and find new opportunities for exits.”

The EY/AVCA analysis highlights financial services as remaining the most common sector for exits in 2014 and 2015 (24 percent), with consumer goods and services (16 percent), industrials (14 percent) and healthcare (14 percent) also active during this period. In addition, the PE firms surveyed said highlighted the financial services, retail and consumer products, and education sectors as being the most interesting sectors for future investment.

“Our annual Africa PE exit study continues to show that despite changing macro-economic dynamics (including currency fluctuations, valuations trending upwards, and an intermediary landscape), PE firms are still continuing to outperform public markets, particularly in sectors such as finance, retail and fast-moving consumer goods, where there is burgeoning consumer demand," said Dorothy Kelso, AVCA’s head of research.

The EY/AVCA findings – based on PE exits between 2007 and 2015 and data drawn from detailed interviews with former PE owners of exited businesses – were published to coincide with the 13th Annual AVCA Conference in Addis Ababa, Ethiopia.

Report: How private equity investors create value

Two-thirds of UK firms victims of cyber crime

BY Richard Summerfield

There can be little doubt that the digital economy is changing our day to day lives. For consumers and companies alike, the advent of the digital age has forever altered the way we do business. According to data from the UK Office for National Statistics, in 2014, e-commerce sales were £573bn across non-micro businesses, up from £335bn in 2008.

Companies are discovering that technology has a pivotal role to play in their future development and prosperity, according a new report from Ipsos MORI and the Institute of Criminal Justice Studies. The 'Cyber Security Breaches Survey 2016' report notes that over half (53 percent) of all businesses say online services form a core part of the goods and services they provide, at least to some extent.

Yet despite this reliance on cyber activity, the report suggests that firms in the UK are  increasingly exposed to cyber criminality as a result of their unwillingness – or even inability – to properly tackle security.

The report, commissioned by the UK government’s National Cyber Security Programme to survey UK businesses on their approach to cyber security and the costs they have incurred from cyber security breaches, found that two of every three big business firms surveyed were breached at some point over the last year. In total, 24 percent of UK businesses were breached. The majority of those firms were medium or large enterprises.

The most common types of cyber security breaches were viruses, spyware or malware, and impersonation of the organisation. Only half of all firms surveyed had implemented basic security controls across five major areas laid out under the government-backed Cyber Essentials Scheme. Given that just three in 10 organisations have written cyber security policies, and only 1 in 10 have any formal processes for managing such incidents, it is clear that companies must become better organised when it comes to protecting themselves.

According to digital economy minister Ed Vaizey, the breaches are particularly troubling. He said: “The UK is a world-leading digital economy and this government has made cyber security a top priority. Too many firms are losing money, data and consumer confidence with the vast number of cyber attacks. It's absolutely crucial businesses are secure and can protect data."

Report: Cyber Security Breaches Survey 2016

Peer-to-peer evolution

BY Richard Summerfield

Peer-to-peer lending has, over the course of the last decade, established itself as one of the fastest growing areas of FinTech; however, the process has also evolved into the increasingly popular marketplace lending. 

It is important to note that today’s marketplace lending has gone beyond merely matching lenders to borrowers (although this type of peer-to-peer lending is still popular in a number of markets, chief among which is China). Instead, marketplace lending has become, according to a new report from PwC, a “broad range of financing activities that cross asset classes and investor types”. The report, 'From idea to innovative market leader: A roadmap for sustainable marketplace lending growth', also notes that “marketplace lending has become a viable business with enough promise that many traditional financial institutions big and small have taken notice and are beginning to actively respond".

The evolution of marketplace lending has been swift. Marketplace lenders have evolved from merely offering unsecured consumer and small business loans and are now able to provide new forms of innovation well beyond their traditional lending markets.

PwC classifies marketplace lenders as any non-bank organisation that is primarily a digital operation. Marketplace lenders are generally unfettered by a past of traditional banking and are typified by their dynamism and agility, particularly compared to their traditional peer-to-peer rivals.

Marketplace lenders, according to the report, usually progress through a four-stage roadmap which consists of: (i) building a foundation; (ii) refining their core lending business; (iii) expanding and innovating; and (iv) looking beyond core lending.

However, as they progress through this framework, it is imperative that companies be mindful of the risks inherent in operating in the marketplace lending space. Companies face myriad risks if they do not keep refining their business and expanding and innovating continuously. Given how quickly the market moves, new platforms are always looking to emerge and disrupt incumbent businesses with even newer technology and innovations. If companies are not careful, the disrupters can quickly become the disrupted.

Report: From idea to innovative market leader: A roadmap for sustainable marketplace lending growth