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Private Equity: Venturing Forwards

 3 min read / 

As an industry, private equity (PE) is incredibly flexible; the ability to respond to rapidly changing market conditions is what has set it out in the past. However, in times of monumental shifts in practice, such flexibility may not be enough.

Inflexion 

 As Bain & Company highlights in its ‘Global Private Equity Report’ for 2014, the industry today is at an inflexion point. The diagnosis of “in the doldrums” follows from the fact that deal value, and count, has not deviated much from past years. The increasingly competitive environment, fuelled by an availability of debt (a result of low interest rates in developed nations), has compounded this, and made good deals hard to find at the right price.
Despite this, the past year has seen capital distribution flow towards Limited Partners, contributing to a consistent positive cash flow. The reasons for this fall largely on ubiquitous dividend recapitalisations, and an increasing number of exits; however, such moves have begun to limit portfolios, which could contribute to future risk if funds fail to re-diversify. The major upside to such capital distribution is that it not only puts the industry in the spotlight for future investors, but also gives it more freedom to formulate strategies (as it instils investor confidence).

 The Effects of Volcker 

 Investor confidence is an important facet to note, as the industry is rapidly changing following post-2008 regulations. The one to keep an eye on is the Volcker rule, which came into effect April 1st 2014 (with compliance expected by July 2015). With the aim of trying to constrain the exposure that contributed to the financial crash, the regulation limits investment in ‘covered funds’ (which include PE) to 3% of a banks Tier 1 regulatory capital.
The effects of the Volcker rule can already be seen, with firms like J. P. Morgan spinning off their PE arm. This trend is due to the fact that increasing pressure on banks limits their ability to operate effectively; in the PE industry, 3% of Tier 1 capital limits the size of acquisition that such an arm could make, and thus limits the potential for profits. Many banks see the stress of continuing to operate in the industry outweighing their presence.
However, this is not the case for all banks, as some see huge opportunity being created by the void. For example, Morgan Stanley recently raised $1.7bn for ‘Fund IV’, which will target China and South Korea. Such an opportunity has a lot of promise, as its previous three funds are thought to be returning a net internal rate of return of over 20% (in part why Fund IV was able to raise such capital).

 Everything To Lose

 With the Volcker rule settling into place, the PE industry is likely to become much more focused on independent funds. Whilst this could contribute to more of a niche-focus, this may not necessarily be a bad thing. Indeed, the Volcker rule is not the main issue for the industry; instead, the challenge for General Partners is formulating distinctive investment angles, following an oversupply of funds. With developed nations looking to raise interest rates in the next year, this oversupply will wither, but not before asset prices are pushed up – the industry has everything to lose in the meantime.

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Asia

Google to Open Artificial Intelligence Centre in China

 2 min read / 

Google AI China

Google will be opening its first artificial intelligence (AI) research centre in China, despite many of its services being blocked there.

Fei-Fei Li, Chief Scientist of Google Cloud, said:

“I believe AI and its benefits have no borders. Whether a breakthrough occurs in Silicon Valley, Beijing or anywhere else, it has the potential to make everyone’s life better for the entire world. As an AI first company, this is an important part of our collective mission. And we want to work with the best AI talent, wherever that talent is, to achieve it.”

The research centre will focus on basic AI research, and will consist of a team in Beijing, who will be supported by Google China’s engineering teams.

Google’s search engine and its Gmail are banned in China. However, the country has 730 million internet users, making the market too large to ignore.

Google is not the only tech giant facing restrictions in China. Facebook is also banned, while Apple’ App Store has been subject to censorship. In order to comply with government requests, Apple removed many popular messaging and virtual private network (VPN) apps from its App Store in China earlier on this year.

China has recently announced plans to develop artificial intelligence, and wants to catch up with the US. However, human rights groups are concerned by China’s use of artificial intelligence to monitor its own citizens.

Keep reading |  2 min read

Companies

A Deal Looks Likely for Disney’s Fox Takeover

 2 min read / 

Disney's Fox Takeover

The Story

Disney is on the cusp of confirming a deal to buy most of 21st Century Fox in a $60bn deal, reports claim. The sale would see Disney acquire 20th Century Fox film studios as well as Sky and Star satellite broadcasts in the UK, Asia and Europe, according to the BBC.

21st Century Fox would retain broadcasting network Fox News and Fox Sports 1. While both would remain independent initially, they “could consider a merger later with the Murdochs’ publishing company, News Corp.,” reported Bloomberg’s David Hellier and Anousha Sakoui.

Fox CEO James Murdoch could potentially be offered a senior position at Disney once the deal is done.

Why It’s Important

Fox has reassessed its place in the current media landscape and decided that to in order to be successful it would need to scale up. Disney has the scale that Fox lacks. By consolidating their efforts around news and sports, Fox will be able to play an important role in the media industry.

On the other hand, Disney’s acquisition will extend the company’s reach. Plans to roll out a new Disney streaming service could benefit from the increased international exposure, where there appears to be the most growth.

Disney would also acquire Fox’s streaming service Hulu, opening new opportunities for Disney to compete with the likes of Netflix and Amazon Prime Video.

Keep reading |  2 min read

Companies

ExxonMobil under Shareholder Pressure

ExxonMobil Shareholder

The world’s largest oil group has agreed to publish the impact of climate policies on its bottom line.

In recent years, shareholders of the world’s largest oil and gas conglomerates have been pushing companies to publish analysis of the threat they face from climate change and the threat of green policies. In a regulatory filing, Exxon announced that it would change how it reports its results to include a paper on how climate policies are hurting its business. The proposal was backed by around 60% of Exxon’s shareholders back in May, which was led by the New York state employees’ retirement fund. The move follows Exxon’s gradual shift towards addressing climate change; in the 90s, the group campaigned against the Kyoto protocol but has since committed to reducing emissions.

Keep reading |  1 min read

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