Quote of the Week: Uncorrelated Returns


April 30, 2014

GDP growth is uncorrelated to return on equity…


Who said it: Jonathan Nelson Providence Equity Partners.


In Context: At the recent Milken Institute global conference, four PE executives spoke positively about investing in US companies, despite economic uncertainty and a slowing GDP growth rate. It is the asset they consider when buying, not external factors or even economic trends, that determine whether a leading PE firm will make the purchase, agreed panelists. While there are some countries where the fund managers won’t invest, it usually matters little where the company or the asset is located and it was in that context that Jonathan Nelson, made the above statement.

The notion promulgated from the podium is that PE invests in companies, not countries. That may be true for the four that spoke at the conference, but a recent Bain Insights article suggests that some GPs have been relying on momentum to generate returns and that they will have to “shift gears” to succeed, particularly in emerging markets, because they are not getting the returns they were expecting. After surveying another year of disappointing results from their emerging market investments in 2013, many private equity investors in Brazil, Russia, India and China are rethinking their emerging market strategies. Returns of emerging market PE funds have been trending lower for nearly a decade. Even the best performers’ results have dropped steadily from their vintage peak, said the report. Bain offered some key ways to turnaround their returns with greater focus on operations, smarter deal terms, and better due diligence. (Image source: Milken Institute)


Where we found it: The Tell

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