Author Archives: MIT Sloan Finance Group

MIT Sloan Private Equity Symposium addresses the need for new markets

Private equity firms must expand beyond their traditional geographic interests and industry expertise to be successful, Bain Capital’s Steve Pagliuca told a gathering of industry professionals at the 10th Annual MIT Sloan Private Equity Symposium on April 5.

Steve Pagliuca

“The successful players are going to have a huge value-added focus,” said Pagliuca. “You’re going to have to have a global reach, deeper expertise, and the ability to find and evaluate the best deals in the market.”

Pagliuca, managing director of the global investment firm and co-owner of the Boston Celtics, was the closing keynote speaker at the symposium, headlined, “Growth Beyond Traditional Markets.” It was held at the MIT Media Lab.

Pagliuca explained that private equity firms need to search for new markets now that tough economic times are reducing returns investors can expect from U.S. and European investments.

He noted that Chinese leaders “wake up every day” looking for ways to put capital to work to lift their people out of poverty. India’s government is working to become friendly to investment. And Brazil and Latin America are “very exciting places these days,” with strong natural resources.

As those countries grow, Pagliuca said, businesses need capital and expertise to grow, creating opportunities for private equity firms.

Global presence isn’t enough. Private equity firms must have deep knowledge of many industries to “grow and transform and build” businesses in those regions. For instance, Bain has energy, health care, retail, industrial, and high technology divisions. It also offers companies every level of capital—venture, debt, and private equity.

Pagliuca, a member of the nonpartisan Campaign to Fix the Debt, said that the federal government must do more to control the national debt, which he called a drag on the economy and private equity investment.

The national debt could be cut in 15 years by raising taxes and cutting spending by .3 percent annually, Pagliuca said.

MIT Sloan students organized the symposium, which was attended by approximately 250 private equity and venture capital industry leaders and students. Students selected the theme and the panels on creating middle market operational value, energy, health care in Latin America, technology, and finance.

Phil Canfield, managing director of Chicago private equity firm GTCR, and Gary Loveman, CEO of Caesars Entertainment Corp., also gave keynote addresses.

“This is a great example of action learning—working an event outside the classroom, finding it relevant to the industry you aspire to work in, and gaining management experience,” said Mike Reynolds, MBA ’14, one of the organizers of the symposium.

The symposium was sponsored by Choate Hall & Stewart LLP, Ernst & Young, Mekko Graphics, and Pitchbook.

Fear of the Future-ization of Swaps

Dr. John Parsons (right)

Title VII of the Dodd-Frank Act mandates the regulation of the OTC swaps market in a fashion that parallels the pre-existing regulation of futures markets. Although the Act was passed in 2009, many of its provisions are only now beginning to take effect. One current manifestation is the resorting of derivative trades across the two marketplaces as traders reassess the relative cost of swaps versus futures in light of the changed regulations, moving important pieces of the business from the OTC swaps marketplace over to futures exchanges. The futures industry is actively encouraging the trend as it designs new “swap futures” products designed to mimic the payoffs to swaps while benefitting from the regulatory rules applicable to futures markets.

The process is being called the futurization of swaps.

In January, the Commodities Futures Trading Commission (CFTC) hosted a public Roundtable to get input from the industry and academic experts on the process. Dr. John Parsons, Senior Lecturer in the Finance Group at Sloan and Head of the MBA Finance Track, was one of the invited participants. Dr. Parsons has covered the futurization process on his blog, “betting the business” since the first big waves began in August of 2012.

His comments at the Roundtable made 3 points:

1. They’re all just derivatives.

For any liquid swap contract, the futures exchanges can produce products which mimic the financial properties of the swap. So from a social point of view, it’s a matter of indifference whether the risk is marketed on a futures exchange or on the new regulated swap execution facilities.

2. Dodd-Frank leveled the playing field.

The swap industry complains that futurization is a case of regulatory arbitrage. But the truth is the other way around. It was the lack of regulation pre-Dodd-Frank that gave the OTC swaps market its edge. By imposing (i) universal regulatory supervision, (ii) transparency and (iii) clearing on the majority of swaps contracts, the Dodd-Frank act has erased the major regulatory differences between the two markets. Furturization is a natural result of eliminating regulatory arbitrage.

3. Keep your eye on the ball.

The OTC swaps market continues to be the only option for illiquid and customized derivative products. It makes no sense to try and fashion duplicative rules for two parallel market structures – one for futures exchanges and a second for swap execution facilities – that are both well suited for liquid and standardized derivatives. Instead, regulators should tailor the rules for the swap marketplace to suit the service that the swaps marketplace is uniquely capable of providing.

A video of the Roundtable is available on the CFTC website, here, and the transcript is available here.

A set of Dr. Parsons’ blog posts on various aspects of the subject of futurization can be found here.

At Africa conference, World Bank VP foretells optimistic future in African economies

Makhtar Diop

A simple show-of-hands at the MIT Sloan Africa Innovate Conference demonstrated just how far the continent has advanced in recent years.

Makhtar Diop, vice president for Africa at the World Bank, addressed the audience and asked how many of them planned to return to Africa following their MIT education. Dozens of hands shot up.

“That tells me you think you can make money,” Diop said. “Just 10 years ago, no hands would have been raised.”

The theme of the conference, held March 16 and 17, and Diop’s keynote address, was devoted to celebrating economic success in Africa while addressing challenges.

“African economies have been growing at an unprecedented rate in the last decade, growing at nearly 6 percent since 2008,” he said. “Even if we take into account the global crisis of 2009, Africa has been sustaining a 5 percent growth rate. Many times we have been seen as too optimistic, and we used to be criticized at the World Bank because we were routinely projecting a growth rate of 5 percent. Today it’s not the exception; it’s the rule, consistent across countries.”

Some of that growth is due to forces outside control of African countries—the rise in the prices of gold and cocoa, the primary exports of Ghana, for example. But that is only part of the story, Diop said. Improved governance and macroeconomic management is directly influencing economic improvement, and that influence is measurable.

“International evidence shows this is the underlying cause of economic growth,” Diop said. “This is very hard work. It is not only luck and good conditions which led to growth in Africa.” This has resulted in Africa as a new destination for foreign direct investment, he said.

“The financial uncertainty and deregulation of the Euro zone drove down capital flows to developing countries [worldwide] by about 9 percent in 2012,” he said. “Yet, the same flows increased by more than 3 percent [in Africa], and reached a record high of $38 billion last year. African public debt is increasingly viewed by investors as an asset class, with a robust return.”

In discussing threats to continued economic growth in Africa—conflict and continued poverty remain among the primary risks—Diop tempered concerns of potential challenges with discussion of mitigation initiatives. He stressed the importance of responding quickly and effectively when conflict threatens investor confidence, and noted a significant portion of the World Bank’s lending portfolio was focused on initiatives that provide basic infrastructure, agriculture, health, education, and social services to lacking regions.

In his introduction of Diop, MIT Sloan Deputy Dean S.P. Kothari noted MIT’s role in Africa’s economic growth through education of students from the continent, collaboration with institutions at the forefront of change, and the continued role of advanced technology in shaping Africa’s future.

Conference organizer Funke Michaels, SF ’13, was struck by Diop’s description of African demographics, where 35 percent of the population is under 25 years old.

“This speaks to the future of Africa, the promise of drive and entrepreneurship,” she said.

Conference co-chair Philip Emeka Obi, MBA ’13, hopes the conference, and ongoing conversations globally, will help sustain interest in Africa’s increasing economic health.

“There is a growth wave in Africa,” he said. “And it’s the next economic frontier, with billions being invested.”

This was the third annual Africa Innovate Conference at MIT Sloan. The event featured speakers and panels addressing entrepreneurship and innovation in a wide array on industries, from media and entertainment to food and agriculture. It was held at MIT Media Lab.