Category: Events

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.

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.

Finance, policy, and global warming; A Q&A with Dr. Robert Litterman

Dr. Robert Litterman, an expert in risk management and quantitative investment strategies, returns to MIT Sloan Feb. 28 to deliver the second of three lectures he will give as the inaugural recipient of the S. Donald Sussman Award.

Robert Litterman

In advance of his talk, Litterman discussed the need for appropriate emissions pricing, the asset allocation model that bears his name, and the role of academia in the development of financial policy.

The first of your three lectures at MIT Sloan was a strong argument that pricing of carbon emissions worldwide must incorporate the cost of the risk emissions pose to society. Have you seen any indication that governments are moving toward appropriate pricing of emissions?

The most important recent development has been the announcement just last week by the Chinese Ministry of Finance that local tax authorities in China will soon berequired to institute a carbon tax. We don’t have much information yet about the level of the tax, or how robust it will be, but this positive development, coupled with the announcement of a carbon tax to take effect in South Africa in 2015, means that carbon taxes will not exist in Europe, Australia, California, China, South Africa, and South Korea.

However, the most important current front on which to focus in carbon pricing is the negotiation to institute a uniform global tax on carbon emissions in aviation. These negotiations are taking place in the International Civil Aviation Organization, the global body that governs civil aviation. Such a tax would be a strong signal that there is a global recognition that appropriate incentives are required to avoid wasting the remaining capacity of the earth’s atmosphere to safely absorb emissions.

The United States position in these negotiations remains unclear. Despite the current administration’s rhetoric about supporting market-based solutions in climate policy and the strong environmental record of Secretary of State John Kerry, there has been no clear signal from the U.S. government that it will support the creation of a market-based-mechanism to institute an appropriate price for emissions in commercial aviation, a policy that the aviation sector committed to more than a decade ago. Without appropriate incentives both airlines and the public will be led to continue their current inappropriate behavior, which creates excessive emissions. Sadly, if this waste of the atmosphere’s capacity to safely absorb emissions leads to much higher than necessary emissions prices in the future both the aviation sector and those who wish to fly will pay the price. In fact, even though aviation is currently a small part of the climate problem, because of its steep demand curve for future emissions capacity, it is in aviation’s best interest to lead the effort to immediately price emissions globally at an appropriate level in all sectors in order to efficiently allocate this remaining scarce resource across time.

Your second lecture at MIT Sloan will discuss the Black-Litterman model for asset allocation, which you developed at Goldman Sachs in 1990 with former MIT Sloan professor Fischer Black. Two decades later, what is your assessment of the model?

The Black-Litterman model has proven to be a very useful tool for building portfolios. As I will discuss in my second lecture, the incorporation of a prior that centers asset expected returns on equilibrium values provides a framework that allows investors to more flexibly express their views.

The model has been usefully employed in asset allocation contexts as well as portfolio construction of actively managed portfolios. The performance of Black-Litterman optimized portfolios, however, depends not so much on the Black-Litterman framework as the accuracy of the views that are supplied by the investor.

Thus, the benefit of Black-Litterman is to allow investors to efficiently allocate risk to take advantage of their forecasts. This is particularly valuable in contexts where there are constraints, transactions costs, or other trade-offs, for example, the use of leverage or balance sheet constraints.

In recent years many other academics and practitioners have extended Black-Litterman in ways not imagined early on. See, for example, Attilio Meucci’s paper, “The Black-Litterman Approach: Original Model and Extensions.”

As the inaugural recipient of the S. Donald Sussman Award, what has been the highlight of your experience visiting MIT Sloan and meeting with finance faculty and students?

Even though I was an assistant professor at MIT over 30 years ago, coming back to give a public lecture was a unique opportunity for me to participate in this incredible center of intellectual excellence. Obviously, coming back in the context of the Sussman Award, and having the opportunity to invite my family and friends to listen to a talk on a topic that I feel very passionate about was a personal highlight. Beyond that, the substantive discussions that took place with both students and faculty over lunch and during the afternoon of the day of the first lecture were very useful. And finally, I remember the dinner in the MIT Museum was lots of fun in an incredibly nice venue.

MIT Sloan this year is debuting the MIT Center for Finance and Policy, which will connect academics and policymakers in the public and private sectors to develop better, more informed financial policy and decision-making. Considering the recent financial crisis, what role do you see for the academic world in the development and support of financial policy?

Academia provides an incredibly important opportunity for impartial and informed debate about many of the most important issues in finance. This academic debate provides the backdrop for the development of financial policy and practice. I have had a rather unique opportunity in my career to participate in all three venues: in academia for two years at MIT, in government policy development for five years within the Federal Reserve system, and then for a 25 year career on Wall Street in the private sector.

All three venues—academia, the public sector, and the private sector—are important, but the incentives in each are different, and those incentives matter. Only in academia are participants rewarded for developing knowledge for its own sake. This independence and high ideal is a precious aspect of the academic environment, although for those who choose this venue it is unfortunately necessarily coupled with a frustrating amount of subjectivity in the recognition of valuable contributions.

Nonetheless, both public policy and private practice are eventually constrained, as they should be, by the knowledge that flows from the free and open academic debate. The better these sectors are connected to and communicate with academia, the better off will be the functioning of financial markets. Bringing academic insights to the public and private sectors is a key aspect of both my role as a board member of the Heller-Hurwicz Economics Institute at the University of Minnesota, and as the Executive Editor of theFinancial Analysts Journal. Facilitating this cross-sector communication of knowledge is incredibly important and I look forward to the contribution of the MIT Center for Finance and Policy.

Visit MIT Sloan Finance on TechTV here to view the S. Donald Sussman Lecture videos.