financial investors, privatisation and regulation eape-presom conference in delft 22./23.3.2007
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Financial investors, privatisation and regulation
EAPE-PRESOM conference in Delft
22./23.3.2007
2
Structure
1. Finance as driver for privatisation I: Excess private liquidity
2. Finance as driver for privatisation II: Lack of public finance
3. New financial investors: Private Equity and Hegde funds
4. The European agenda: More deregulation and market-opening
5. An alternative agenda: Stricter control of financial investors, a broader framework for the public sector
3
Industrial Capitalism
Households= Savers
Entrepreneurs= Investors
Financial markets are driven by enterprises who need money to finance their investments
Undersaving
4
Mature capitalism
Productive
Investors
Financial markets are driven by firms and individuals who have much money and search for profitable investment opportunities – which
become increasingly rare.
Oversaving
Savers:Rich individuals
Corporations
5
Finance-led capitalismProductive
Investors
Under these circumstances financial investors become the key actors in the game
Oversaving
Savers:Rich individuals
Corporations
Financial investors
Mergers + acquisitions
Speculation
Privatisation
6
Development of nominal GDP and financial stocks worldwide, 1980-2010
0
50
100
150
200
250Tr
illio
n $
Nominal GDP 10,1 29,4 31,7 44,5 63,3
World Financial Stocks 12 64 93 140 214
1980 1995 2000 2005 2010*
Source: McKinsey Quarterly, January 2007, Mapping the global capital markets, p.8
7
Financial stock as % of GDP worldwide, 1980-2010
109
218
292
316
338
0
50
100
150
200
250
300
350
400
1980 1995 2000 2005 2010
Source: McKinsey Quarterly, January 2007, Mapping the global capital markets, p.8
8
Internationalisation of Financial Markets I
Source: International Monetary Fund: Working Paper WP/06/69, S. 35
International financial stocks (assets + liabilities) as % of GDP
9
Internationalisation of Financial Markets II
International financial stocks as % of international trade (exports + imports) und Außenhandel (Export + Import)
Source: International Monetary Fund: Working Paper WP/06/69, S. 36
10
0,0
10,0
20,0
30,0
40,0
50,0
60,0Tr
illio
ns $
Financial assets invested by institutional investors, 1980 - 2005
World 3,0 13,7 36,6 55,0
USA 2,2 6,6 19,5 26,5
EU 0,7 3,5 10,4 15,6
1980 1990 2000 2005
Sources: OECD Institutional Investors, 2001; International Financial Services, Financial Market Trends Europe vs. US 2006, October 2006: 5; IFSL,. Fund M anagement, August 2006:
11
Institutional Investment 1992 - 2005
0
10
20
30
40
50
60tri
llions
of D
olla
rs
total 16 25,4 36,2 55
Pension funds 4,8 7,5 10,3 20,6
Insurance 6,3 9,4 11,5 16,6
Investment funds 3,4 6,2 11,3 17,8
1992 1996 2000 2005
12
Wage share in the USA, Japan and the EU-15, 1975-2005
65
67
69
71
73
75
77
79
81
wag
e sh
are
in %
of G
DP*
EU-15 USA JapanQuellen: European Economy, 6/2002 und 6/2004, Statistical Annex, jedw eils Table 32
* bereinigt um Veränderungen der Beschäftigtenanteile
13
Shares of profit and investment in the EU-15, 1975-2005
18
20
22
24
26
28
30
32
34
in %
of G
DP
share of investment
share of profits
Linear (share ofprofits)Linear (share ofinvestment)
14
Vicious circle: Redistribution, slow growth, unemployment
Redistribution Slow growth Unemployment
15
Profit share
Investment
Financial marketsUnemployment Wage shareGrowth
Consequences of slow growth and redistribution: explosion of financial markets
16
Corporate tax rates in the EU, 1995-2006
15
20
25
30
35
40
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
tax
rate
in %
* w ithout Cyprus and Malta; source: Schratzenstaller 2007, p. 93
EU15
8 New members*
EU23
17
Corporate tax rates in the EU, 1995-2006
15
30
45
60
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
tax
rate
in %
EU 15
EU8
EU23
Germany
UK
France
Poland
source: Schratzenstaller 2007, p. 93
18
Redistribution from bottom to top
Higher net profits
Lower net wages
More liquidity Growth of FM
Low investment
Weak growth
Pressure on Public budgets
Privatisation = Private investment
Public Divestuture
Higher profits
Threat for: - infrastructure - public services
Redistribution – Financial Markets - Privatization
19
Specifics of Private Equity
1. Limited number of ultimate investors (Banks, pension funds, HNWIs)
2. Offshore domicilation (EU: 60%)
3. High leverage (60-80%)
4. Active management5. Strategic perspective: sale after 2
-7 years
20
Non-quotedEnterprise
Investor
(Banks, Pension funds
HNWIu.a. )
Bank
PE Firm
Purchaseprofit
Loan
Investment
Cash-flow
Profit participation
fee
interest
Management
Fund
Sale ?
Private Equity: how it works
21
22
23
Problems
1. Short-term strategies at the cost of employees and strategic investment
2. Financial overburdening through rising indebtedness
3. „Recapitalisation“ through extra-dividends and bonusses
4. Increasing problems of exit
24
Specifics of Hedge funds
1. Offshore – domililation (>80%)
2. High barriers to entry (>10 Mill.$)
3. High fees and profit participation (20%)
4. Very high leverage (often >90%)
5. Strategies• Financial speculation• shareholder activism
25
Investor
(Pension funds
HNWIu.a. )
Bank
HF FirmLoan
Investment
Cash-flow
Profit participation
feeManagement
Hedge fund
Hedge funds: how they work
Arbitrage
SpeculationBonds, equity
Derivatives, currencies
„Shareholder activism“e.g. high dividends,
outsourcingProfit
Interest
26
27
Problems through Hedge funds
1.De-stabilisation through Speculation(securities-, bank-, and currency crises)
2. Impact on corporate governance (Shareholder Value Orientation)
28
Systemic Problems
1. Contagion to all financial investment through competition and proliferation
2. Enhanced financial instability (Securities-, bank-, and currency-crises)
3. Enhanced social inequality and suppression
29
The European agenda
For Financial Markets
- Fight against special rights für governments in privatised corporations
- Revision of the MiFID with the aim to remove national investment restrictions
30
The European agenda
For services of general interest
- preparation of a white paper on social services with a
- very extensive interpretation of „economic activity“
- = privatisation through the backdoor
31
Alternative Agenda
For Financial market regulation
1. More information and transparency
2. Restrictions on Leverage
3. For PE: No special dividends, bonuses etc.
4. For HF: Voting rights only after one year
5. For institutional investors: No investment in Hedge funds or similar instruments
32
Alternative Agenda
For public services
- Political definition of public sector as an alternative to private provision of services
- Services in the public sector are exempt from the competition rules
- Development of democratic management methods for the public sector.
- Re-nationalisation of privatised firms or sectors
33
Asset under Management, worldwide, 2005, $ trillions
privately managed
22,2
"Alternative" management"
1,5
Institutional management
55,0
total $ 78,7 trillions, of which:
34
Institutional Investors
Three groups
1. Pension funds: $ 20 trillions
2. Insurance: $ 17 trillions
3. Investment funds $ 18 trillions Total: $ 55 trillions
35
Privatisation Proceeds 1990-2000
0,0
20,0
40,0
60,0
80,0
100,0
120,0
140,0
160,0
180,0
Global 33,2 48,5 33,5 58,2 68,9 70,2 89,7 153,3 139,2 141,9 100,1
EU-15 15,6 23,9 48,9 30,6 27,5 35,5 46,6 67,5 60,2 61,6 46,8
CEE 0,1 0,6 1,0 2,3 3,2 7,1 4,1 4,4 2,9 4,2 5,7
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
source: OECD, Recent Privatizatuion Trebds, 2001
36
EU15 Privatization proceeds 1977-2004
10595
74,568,2
38,621,3
20,115,515
11,911,3
5,55,35,14,9
ItalyUK
GermanyFrance
SpainPortugal
NetherlandsFinland
SwedenAustriaGreece
BelgiumDenmark
IrelandLuxembourg
Billion Euro (PPP)Source: V.P. Morano, 2005, The Future of Privatization in Europe
= 497,2 bn. $