private equity in emerging markets - research

Private Equity Investments in CEE

Group 2 Kwesi Charles Khoi Mai Eleonora Martignoni

Follow both bottom-up and top-down approaches

Failing to distinguish between signal and noise

Various and reliable data sources Purely focused on economic fundamentals

Independent methodology Improper sector screens

Robust scoring system No connection between first and second level screens

All countries in the world are covered Biased region and country selection

Past Reports Analysis

Past reports

Independent methodology A C B D E

Various and reliable data sources A C B D E

Follow both bottom-up and top-down approaches A B D E

Robust scoring system E A

All countries in the world are covered A B

Past Reports Strengths

Past reports

Failing to distinguish between signal and noise A C B D E

Purely focused on economic fundamentals C B D E

Improper sector screens C D E

No connection between first and second level screens A C B D E

Biased region and country selection A C B D E

Past Reports Weaknesses

Past reports

Democracy

•  Eliminate Bottom 15

Corruption

•  Eliminate Bottom 15

Growth

•  Eliminate less than 6% Growth

Screening

Economical

•  GDP Growth •  GDP per Capita •  FDI •  Inflation •  Openess •  Gov. Debt

Social

•  Working Age Population

•  Education •  Unemployment •  Life Expectancy

Political

•  Stability •  Corruption

Legal

•  Rule of Law •  Ease of

doing business

Tech

•  Mobile phone penetration

Screening

Screening

FDI Stability

Rule of law GDP Growth

Income Per capita

Inflation Openness

Corruption Ease of Doing Business

Working age Population Education Gov. Debt

Unemployment Life Expectancy

Mobile Phone Penetration

Value for the Country’s Indicator – Min value of the indicator

Max Value of the Indicator – Min value of the indicator

10

Static

•  Last year

Dynamic

•  Average past 10 years

Screening

Entering

•  Entrepreneurial Culture

•  Population •  GDP Growth •  Banking Scores

Investing

•  Credit Depth •  GDP per Hour •  Labour Cost •  Tax Rate

Exiting

•  M&A Attractiveness

•  Stock Market Depth

Screening

Eliminate

Excluded Countries

Afghanistan El Salvador Iceland Mexico Sudan Antigua and Barbuda Equatorial Guinea Iran Myanmar South Sudan Bahamas, The Eritrea Iraq Netherlands Syria Barbados Gambia, The Ireland North Korea Turkmenistan Bermuda Germany Italy Portugal United Kingdom Central African Rep. Greece Jamaica Puerto Rico United States Chad Grenada Japan Saudi Arabia Uzbekistan Dem. Rep. Of Congo Guinea Bissau Laos Seychelles Yemen Dominica Haiti Malawi Somalia Zimbabwe

Screening

Eliminate Screen

0.0

2.0

4.0

6.0

Asia CEE LatAm MENA SSA

Political

0.0

5.0

10.0


Social

3.4 3.6 3.8 4.0 4.2 4.4


Economical

0.0

2.0

4.0

6.0

8.0


Legal

0.0

2.0

4.0

6.0


Technological

Asia CEE LatAm MENA SSA 136.8 149.3 132.5 148.0 116.4

Screening

Eliminate Screen Select

Country Entrepeneurial

culture Population

GDP Growth

Banking Scores

Credit depth GDP per

hour Labour cost Tax

MeA Attractiveness

Stock Market Depth

Average Score

Bulgaria 3 1.7 3.1 2.5 0 0.4 10 7.4 1.9 3.8 3.38

Croatia 0.9 0.8 0.2 5 5 6.9 5.3 10 1.2 2 3.74

Czech Rep. 10 2.5 0.4 10 5 6.5 3.9 0.5 10 5.8 5.47

Estonia 7.4 0 5.1 5 5 3.3 5.1 0.1 0 1 3.2

Hungary 7 2.4 2.5 0 0 3.7 6.6 0 6.3 4.8 3.32

Latvia 0 0.3 10 0 5 2.3 7.6 4.6 0 0 2.98

Lithuania 3.5 0.5 8.8 2.5 10 5 7.7 2.2 1.2 4.6 4.61

Poland 6.1 10 4.7 7.5 10 4.3 6.4 2.7 8.8 10 7.04

Romania 0.4 5.5 9 7.5 5 0 9.2 2.3 5 2.2 4.61

Slovak Rep. 1.7 1.1 3.7 10 0 7.4 5.6 0.8 6.3 5.4 4.21

Slovenia 9.1 0.2 0 2.5 0 10 0 5.8 1.2 3.4 3.22

Screening

Poland

Czech Rep.

Romania

Country reports

Country reports

Questions?

Appendix

Criteria Area Importance Lower Upper Difference Evaluation Definition i want

Stability Political 3 -2.89 1.92 5 last year Reflects perceptions of the likelihood that the government will be destabilized or overthrown by unconstitutional or violent means, including politically-motivated violence and terrorism. high

GDP growth Economical 3 -3% 14% 17% average 10

years

Annual percentage growth rate of GDP at market prices based on constant local currency. Aggregates are based on constant 2005 U.S. dollars. GDP is the sum of gross value added by all resident producers in the economy plus any product taxes and minus any subsidies not included in the value of the products. It is calculated without making deductions for depreciation of fabricated assets or for depletion and degradation of natural resources. high

FDI Economical 3 -3% 36% 40% average 10

years

Foreign direct investment are the net inflows of investment to acquire a lasting management interest (10 percent or more of voting stock) in an enterprise operating in an economy other than that of the investor. It is the sum of equity capital, reinvestment of earnings, other long-term capital, and short-term capital as shown in the balance of payments. This series shows net inflows (new investment inflows less disinvestment) in the reporting economy from foreign investors, and is divided by GDP. high

Income per capita Economical 3 251 103858 103607 last year

GDP per capita is gross domestic product divided by midyear population. GDP is the sum of gross value added by all resident producers in the economy plus any product taxes and minus any subsidies not included in the value of the products. It is calculated without making deductions for depreciation of fabricated assets or for depletion and degradation of natural resources. Data are in current U.S. dollars. high

Rule of law Legal 3 -2.45 1.95 4 last year Reflects perceptions of the extent to which agents have confidence in and abide by the rules of society, and in particular the quality of contract enforcement, property rights, the police, and the courts, as well as the likelihood of crime and violence. high

Corruption Political 2 8 91 83 last year Corruption perception Index, as compiled by Transparency International low

Inflation Economical 2 0% 29% 29% average 10

years

Inflation as measured by the consumer price index reflects the annual percentage change in the cost to the average consumer of acquiring a basket of goods and services that may be fixed or changed at specified intervals, such as yearly. The Laspeyres formula is generally used.

low

Openess Economical 2 0% 398% 398% last year Merchandise trade as a share of GDP is the sum of merchandise exports and imports divided by the value of GDP, all in current U.S. dollars. high

Working age population Social 2 0% 86% 86% last year

Total population between the ages 15 to 64 is the number of people who could potentially be economically active. Population is based on the de facto definition of population, which counts all residents regardless of legal status or citizenship--except for refugees not permanently settled in the country of asylum, who are generally considered part of the population of the country of origin. high

Ease of doing business Legal 2 1 189 188 last year

Ease of doing business ranks economies from 1 to 189, with first place being the best. A high ranking (a low numerical rank) means that the regulatory environment is conducive to business operation. The index averages the country's percentile rankings on 10 topics covered in the World Bank's Doing Business. The ranking on each topic is the simple average of the percentile rankings on its component indicators. low

Gov. debt Economical 1 3% 124% 121% last year

Cumulative total of all government borrowings less repayments that are denominated in a country's home currency. Public debt should not be confused with external debt, which reflects the foreign currency liabilities of both the private and public sector and must be financed out of foreign exchange earnings. low

Education Social 1 4 20 16 last year School life expectancy (SLE) is the total number of years of schooling (primary to tertiary) that a child can expect to receive, assuming that the probability of his or her being enrolled in school at any particular future age is equal to the current enrollment ratio at that age high

Unemployment Rate Social 1 0.0% 67.0% 67% last year Labor force participation rate for ages 15-24 is the proportion of the population ages 15-24 that is economically active: all people who supply labor for the production of goods and services during a specified period. low

Life Expectancy Social 1 45 83 38 last year Life expectancy at birth indicates the number of years a newborn infant would live if prevailing patterns of mortality at the time of its birth were to stay the same throughout its life.

high

Mobile Phone Penetration Technological 1 0 290 290 last year Mobile-cellular telephone subscriptions per 100 inhabitants high

Average Score per region Asia CEE LatAm MENA SSA Grand Total

First tier criteria

Stability 4.9 6.4 5.6 5.1 5.1 5.4 GDP Growth 5.9 4.2 4.7 5.1 5.2 5.0

FDI 2.1 2.5 1.9 1.9 2.3 2.2 GDP per capita 0.5 0.9 0.7 2.0 0.2 0.7

Law 4.6 5.6 4.6 5.7 4.1 4.8

Second Tier Criteria

Corruption 3.4 4.3 3.7 4.3 3.1 3.7 Inflation 7.6 8.0 6.9 8.3 7.1 7.5 Openess 1.9 2.6 1.5 1.9 1.6 1.9

Working Age 7.7 7.7 7.5 8.3 6.4 7.4 Ease of Business 5.2 6.6 4.6 5.5 2.8 4.8

Third Tier Criteria

Education 5.3 6.6 5.7 6.3 3.6 5.2 Unemployment 9.2 8.0 9.0 8.6 7.5 8.3

Gov. Debt 6.8 6.6 7.0 6.3 7.4 6.9 Life Expectancy 6.7 7.6 7.6 7.7 3.2 6.2

Mobile 3.5 4.38 3.8 4.4 2.4 3.6 Weighte tot Score 136.8 149.3 132.5 148.0 116.4 134.5

Regional Scores

Region Number of countries

in top third Number of countries

in the region Percentage of top

countries Average score for the

region Average score for top

quartile countries Asia 10.0 21.0 48% 136.8 161.9 CEE 11.0 22.0 50% 149.3 166.9 LatAm 5.0 18.0 28% 132.5 159.8 MENA 7.0 14.0 50% 148.0 164.2 SSA 1.0 29.0 3% 116.4 150.6

Top Third Scores

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0 Political

Economical

Social Legal

Technological

Asia

CEE

LatAm

MENA

SSA

Regional Ranking

Indicator Source Definition

Entrepeneurial culture

VCPE Attractiveness Index

Weighted Index based on innovativeness index, capacy for innovation, scientific journals, ease of starting a business, simplicity of closing a business and corporate R&D

Population World Bank Total population living in the country

GDP Growth World Bank Annual percentage growth rate of GDP at market prices based on constant local currency.

Banking Scores S&P BICRA Index

The BICRA analysis for a country covers all of its financial institutions that take deposits, extend credit, or engage in both activities. The analysis considers the relationship of the banking industry to the financial system, and furthermore to its sovereign.

Credit dept World Bank Credit depth of information index measures rules affecting the scope, accessibility, and quality of credit information available through public or private credit registries. The index ranges from 0 to 6.

GDP per hour Total Economy Database

GDP per capita in 2013 US$ (converted to 2013 price level with updated 2005 EKS PPPs) divided by Annual hours worked per worker

Labour cost Eurostat

Total Labour Costs cover wage (direct remunerations, bonuses, and allowances) and non-wage (social contributions plus employment taxes) costs less subsidies. They do not include vocational training costs or other expenditures such as recruitment costs, spending on working clothes, etc.

Tax World Bank Total tax rate measures the amount of taxes and mandatory contributions payable by businesses after accounting for allowable deductions and exemptions as a share of commercial profits.

MeA Attractiveness Cass M&A Research Center

The index aims to cover all of the areas of a country’s development which are relevant for M&A attractiveness purposes. It is an equally-weighted average composition of five factor groups: Regulatory and Political, Economic and Financial, Technological, Socio- economic, and Infrastructure and Assets

Stock Market Dept VCPE Attractiveness Index

Weighted Index based on market cap of listed companies, number of listed domestic companies, trading volume, IPO activity, M&A activitity, Ease of access to loans, Interest rate spread, NPL, financial market sophistication

Country Selection Factors

0.0

2.0

4.0

6.0

8.0

10.0

Bulgaria Croatia Czech Republic

Estonia Hungary Latvia Lithuania Poland Romania Slovak Republic

Slovenia

Market Selections Scores Entrepeneurial culture Population GDP Growth Banking Scores

0.0

2.0

4.0

6.0

8.0

10.0



Slovenia

Company Management Credit depth GDP per hour Labour cost Tax

0.0 2.0 4.0 6.0 8.0

10.0



Slovenia

Exit MeA Attractiveness Stock Market Depth

Country Scores

0

10

20

30

40

50

60

70

Labor force with secondary education (%

of tot)

Labor force with tertiary education (% of tot)

Poland EU

0

10

20

30

40

50

60

70

Hourly Labor Cost

-4%

-2%

0%

2%

4%

6%

8%

2003 2006 2009 2012

GDP Growth Poland OECD

Poland

Czech Republic

0

10000

20000

30000

40000

50000

60000

Railways, goods transported (million ton-

km)

Roads, goods transported (million ton-

km)

OECD Czech Republic

0.00

1.00

2.00

3.00

4.00

5.00

6.00 32

33

34

35

36

37

2010 2011 2012 2013

FDI VC PE rank

-

5,000.00

10,000.00

15,000.00

20,000.00

25,000.00

GDP per Capita

Romania

0.00

20.00

40.00

60.00

80.00

100.00

Bulgaria Romania Latvia Lithuania Ukraine Poland Czech Republic

Slovak Republic

Croatia Albania Slovenia Hungary

Gov Debt

private equity in emerging markets - research

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