Last year, the president signed FIRRMA into law, clarifying how CFIUS will treat investments made by private equity funds subject to future regulations, and simultaneously expanding CFIUS' jurisdiction to encompass non-controlling investments in "critical infrastructure" and "critical technology" companies, as well as companies that maintain or collect sensitive data of U.S. citizens (collectively "Sensitive U.S. Businesses"). This expanded jurisdiction will have a significant impact on foreign investors generally, as well as U.S. private equity funds with foreign general or limited partners.
On October 5, 2018, the president signed Public Law 115-254 into law – the Better Utilisation of Investments Leading to Development Act of 2018 (BUILD Act). The BUILD Act creates the United States International Development Finance Corporation (IDFC), a new wholly owned government corporation. It will replace the Overseas Private Investment Corporation (OPIC) and transfer, among other functions, the Development Credit Authority from the U.S. Agency for International Development (USAID) to the IDFC. It is subject to reauthorisation in seven years.
An increasingly sophisticated and active OCIE division, innovative market disruptors, a maturing credit cycle, and a philosophical change in how the private fund industry views and utilizes litigation are likely to lead to increased regulatory scrutiny and litigation risk for advisers (and their funds) in 2019. With that backdrop, we are pleased to present our Top Ten Regulatory and Litigation Risks for Private Funds in 2019.
The UK's new regime introducing a charge to UK tax on non-UK residents' investment gains from UK commercial real estate is unfortunately complex, making it difficult for investors to understand the practical impact on any particular existing or proposed holding structure. However, although the regime is not yet even in force and its impact on the market still in process, it is possible to suggest some basic rules of thumb which may be helpful in starting an analysis.
The Situation: The Office of Compliance Inspections and Examinations ("OCIE") of the U.S. Securities and Exchange Commission has released its 2019 Examination Priorities ("Report"). The Result: The Report details key areas where OCIE currently intends to focus its examination resources in 2019. The Report's key areas that should be of particular interest for private fund advisers (e.g., advisers to real estate, hedge, private equity, and venture capital funds) include fees and expenses, conflicts of interest, portfolio management and trading, digital assets, and cybersecurity.
On 13 December 2018, the Finnish Government published a legislative proposal aimed at eliminating problems in tax legislation relating to the establishment of private equity funds in the form of limited partnerships. The taxation of investors in private equity funds operating in a form of a Finnish limited partnership has, in certain respects, been based on established case law and tax practice. The taxation of foreign investors was originally eased through a special provision enacted in 2005 (Income Tax Act section 9(5)). When the special provision applies, an investor, having limited tax liability in Finland and being a limited partner in Finnish PE fund operating in a form of a limited partnership, is taxed for its share of the income of the fund only to the extent the income would be taxable if received directly by that investor.
The United States recently enacted the Foreign Investment Risk Review Modernization Act (“FIRRMA”), which both expands jurisdiction and codifies recent practices of the Committee on Foreign Investment in the United States (“CFIUS”). As a result, CFIUS may now review the national security implications of acquisitions of control by foreign investors of U.S. businesses, certain minority investments and real estate acquisitions.
With the signature of President Trump on August 13, 2018, the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA) became law. FIRRMA represents the most significant changes to the law governing the Committee on Foreign Investment in the United States (CFIUS or Committee) since the creation of the U.S. foreign investment regime in 1988. Although prompted primarily by national security concerns with Chinese investments, the legislation will affect investments by all non-U.S. investors, including investors in private equity and other funds. The changes reflect a trend across advanced markets for greater scrutiny of investments made via fund vehicles.
On May 30, 2018, the Federal Reserve Board issued a notice of proposed rulemaking and asked for comment on a proposed rule to simplify and tailor compliance requirements relating to the regulation implementing section 13 (commonly known as the “Volcker Rule”) of the Bank Holding Company Act (“BHC Act”) (the “Proposal”). The Proposal was developed jointly with the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Securities and Exchange Commission, and the Commodity Futures Trading Commission (together, the “Agencies”).
Ten years ago, private equity funds and hedge funds were practically nonexistent in Puerto Rico. This has changed dramatically as the result of two main developments: the enactment of Act 185-2014, known as the Private Equity Funds Act and (ii) the influx of financial industry professionals moving to the island to take advantage of the tax benefits available under Acts 20 and 22 (for a more detailed discussion of those benefits, please see Puerto Rico's Act 20 and Act 22 – key tax benefits).
On March 1, 2018, the Administrative Measures for Outbound Investments by Enterprises (??????????) (“Circular 11”) issued by the National Development and Reform Commission (the “NDRC”) went into effect. In addition to regulating direct outbound investments by Chinese companies in general, Circular 11 introduces a new regulatory framework administered by the NDRC governing Chinese companies’ sponsorship of, and investment in, offshore private equity investment funds.
It has become an established industry norm to see independent directors appointed to the boards of offshore hedge funds. It is no longer a 'check box exercise' to confirm independent directors have been appointed. Institutional investors are increasingly concerned about the composition of the board, the experience and skill set of its members and the day to day relationship between both the board members themselves and the board and the investment manager.
By way of a June 10 2016 order, the Insurance Regulatory and Development Authority of India (IRDAI) set up a committee to evaluate the risk-based capital approach and market-consistent valuation of liabilities of Indian insurance business. The committee's report, released on July 17 2017, noted that after almost 15 years of promoter-run business (almost all existing entities are joint ventures with foreign companies), the Indian insurance industry is still dominated by government-owned public sector companies, and private insurance players in India are largely owned by well-established businesses.
By a number of measures, private equity transactions hit a post-financial crisis high in the UK in 2017. An abundance of dry powder and more relaxed debt terms from lenders, combined with the rates at which private equity sponsors are able to raise bonds and loans reaching all-time lows, has contributed to a busy 12 months for the market. This growth may also be in part attributable to private equity funds having become more comfortable with the new political landscape in the UK, as the dust begins to settle 18 months on from the Brexit referendum.
On December 15, 2017, a Conference Committee established by the House of Representatives and the Senate released a unified agreement on the “Tax Cuts and Jobs Act” (the “Conference Agreement”) in the wake of the passages of the House version of the Tax Cuts and Jobs Act on November 16, 2017, and the Senate version on December 2, 2017.
Real estate, buyout, infrastructure, debt, secondary, energy and other closed-end funds (each, a ‘Fund’) frequently seek to obtain the benefits of a subscription credit facility (a ‘Subscription Facility’). However, to the extent that uncalled capital commitments may not be available to support a Subscription Facility (for example, following expiration of the applicable investment or commitment period, a Fund’s organisational documentation does not contemplate a Subscription Facility) or a Subscription Facility already exists, alternative fund-level financing solutions may be available to Funds based on the inherent value of their investment portfolios (each, an ‘Investment’).
King & Wood Mallesons recently launched its five annual DealTrends report (Report) for private M&A in Australia. The Report draws off actual private M&A deal data in the Australian market and is the only one of its kind currently being produced for the Australian market. The Report gives insight into the changes in market practice for private M&A and the data collected allows us to differentiate for a variety of factors, including deals involving PE sponsors. Below we highlight the standout trends in private M&A over the last five years, recent material developments and areas in which PE sponsors are significantly diverging from the broader M&A market.
In 2010 the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) eliminated the private fund adviser exemption. Prior to Dodd-Frank, many managers to hedge funds and private equity funds relied on this exemption from registration as investment advisers. After Dodd-Frank, many private investment fund managers were required to register with the U.S. Securities and Exchange Commission (SEC) as investment advisers. These investment advisers are now subject to significant on-going compliance obligations and examination by the SEC.
The Inland Revenue (Amendment) (No.2) Ordinance 2015 (the ‘Amendment Ordinance’) came into effect on July 17, 2015, extending Hong Kong profits tax exemption to offshore private equity (PE) funds.
In 2014, the SEC formed the Private Funds Unit (PFU), a multi-disciplinary task force designed to specifically address matters that had surfaced during their initial round of ‘presence examinations’ for private funds, which commenced in 2012. Since that time, much has happened. Examinations revealed material weaknesses and deficiencies among private equity firms in the areas of valuation, performance reporting, disclosure to limited partners and conflicts of interest. The staff of the SEC has commenced enforcement actions against a number of private equity firms and indicated that the industry can expect additional enforcement actions related to the above issues.
The China Insurance Regulatory Commission (CIRC) recently issued new regulations that relax restrictions on the investment of insurance proceeds by allowing insurance capital to be used for the formation of private equity funds within the PRC. The Circular of the China Insurance Regulatory Commission on Matters relating to the Formation of Insurance Private Equity Funds (the Circular) was released on 10 September 2015 and aims to further enhance the unique advantages of the long-term investment of insurance funds, support economic development and prevent potential risks. The Circular sets out the categories, investment objectives, governance structure, management and operation and registration and regulation of private equity funds formed by insurance capital (insurance PE funds).
For most family offices, engaging in direct investment PE deals really means finding the right partner, and the diligence required to find the right PE partner for direct deals is much more involved, and probably less of a metric-based exercise than selecting a good asset manager.
On 17 July 2015, the Inland Revenue (Amendment) (No.2) Ordinance 2015 (Amendment Ordinance) was published in the Gazette. The Amendment Ordinance, which takes effect retrospectively from 1 April 2015, extends the existing profits tax exemption benefiting non-residents (offshore funds) to effectively allow offshore private equity funds to take advantage of the exemption.
On July 23, 2015, the Internal Revenue Service (IRS) issued long-awaited proposed regulations discussing the taxation of management fee arrangements commonly used by private equity funds and their management. The proposed regulations address the tax treatment of disguised payments for services under Section 707(a)(2)(A) of the Internal Revenue Code (the Code) where a partner has rendered services to a partnership in a capacity as other than a partner. By specifically classifying certain fee arrangements, including particular carried interest mechanisms, as disguised payments for services, the proposed regulations target purportedly abusive situations where private equity funds use management fee waivers to convert services income, taxable at the ordinary rates, into income items meriting capital gain treatment.
In a recent speech to the Practising Law Institute’s Private Equity Forum, Norm Champ, Director of the SEC’s Division of Investment Management, discussed the SEC’s increasing attention to the growth in ‘alternative mutual funds’, or open-end mutual funds that feature investment strategies more typically seen in private funds. Similar to recent speeches and discussions related to the SEC’s oversight of hedge funds, previously discussed in this newsletter last November, Champ’s speech contained useful guidance about the types of risks the SEC is monitoring in the alternative mutual fund space, but it also conveyed that the SEC will be ramping up inspection into whether investment advisers to these funds are fully complying with their duties.
Loans secured by interests in hedge funds and, to a lesser extent, private equity funds have been a staple of many banks’ credit offerings for years. However, the Dodd-Frank Wall Street Reform and Consumer Protection Act (Pub. L. 111-203, H.R. 4173) (Dodd-Frank) in general, and the part thereof known as ‘the Volcker Rule’ in particular, have raised a basic question: “Can a banking institution subject to the Volcker Rule (which is virtually every banking institution in the U.S.) continue to make and enforce hedge fund and private equity fund secured loans?”
In March, the SEC settled two enforcement actions involving private equity. The two actions are just the latest indicators of the SEC’s wide ranging and close scrutiny of the private equity industry, which has been ongoing for some time. We are hearing multiple speeches by SEC Staff focused on perceived compliance problems in the private equity industry. Focusing on both registered and unregistered investment advisers, the SEC has expressed concern with virtually every type of violation, large and small, of which a private equity investment adviser is capable. From the manner in which the offering is conducted to violations of fiduciary duties - improper valuations of portfolio assets, conflicts of interest, favouring some clients over others, improper use of unregistered broker-dealers and finders, general solicitation in private placements, inaccurate disclosures – nothing is being overlooked.
This briefing explains the attractions for international managers, sponsors and investors of the Cayman Islands as the jurisdiction in which to domicile a private equity fund.
For most of the past two decades, private equity (PE) funds have had only two types of competition: strategic investors and each other. Special purpose acquisition companies, business development companies and hedge fund side pockets all emerged during this period, but none have really challenged the primacy of PE funds. In the past few years, however, a new form of competitor has emerged: their own limited partners (LPs). To be more specific, the threat is coming from high net worth (HNW) families that used to form the backbone of many PE funds, before institutional money came pouring in.
According to the Federal Aviation Administration’s ? ‘FAA Aerospace Forecast (Fiscal Years 2011–2031),’ the commercial air carrier industry will grow by a remarkable 3.7% over the next five years. System capacity in available seat miles – the overall yardstick for how busy aviation is on a global scale – will increase 4.5% in 2011 and is expected by the FAA to grow thereafter at an average annual rate of 3.6% through 2031.
A number of private equity funds and hedge funds are structured as limited partnerships that are governed by the terms of a limited partnership agreement (an ‘LPA’). A recurring theme in private equity fund investing is the use of ‘side letters’ between individual limited partners and the general partner of the fund. Side letters can range in scope from administrative matters to providing substantive rights to limited partners. Questions and issues inevitably arise as to the type of provisions that can be included in a side letter (which, in most cases only benefit the recipient of the side letter) as opposed to being incorporated into the limited partnership agreement itself (which generally benefit all limited partners of the fund).
In Islam, money is not a commodity and cannot be traded for profits. It is just a medium of exchange and it stores value. Money, therefore, must be invested in projects and ventures for the generation of activities, for the benefit of mankind and in the process, for profit.
The leading global private equity managers, in terms of funds raised and diversification of assets, are predominantly based outside the EU, either in North America or elsewhere. Indeed, the private equity managers that are most attractive to investors today are often located within emerging markets. But how will such third-country managers access European institutional capital following implementation of the Alternative Investment Fund Managers directive (AIFMD)? Indeed, given the challenges created by the AIFMD, will they want to?
During challenging economic times, investors in real estate joint ventures need to be creative and flexible when considering strategies to preserve the viability of the venture and its projects. This is especially true when it comes to deciding if and how additional capital should be raised, if that becomes necessary to see the venture through difficulty.
The recent real estate downturn that impacted the US and global economies has reached far beyond the real estate and mortgage finance sectors themselves. Within the private investment fund world, one would assume that real estate funds and distressed debt funds would bear the brunt of the economic crisis of the last two years. However, this has not been the case – instead, the crisis has spread well beyond these traditional boundaries and has affected private investment funds in other sectors as well as the investors in these funds.
Recently, voices have been heard in the market claiming that private equity funds of funds are dead. Those voices generally argue that an expected decline in returns will put more pressure on limited partners (LPs) to save costs by investing in funds themselves and they assume that the decline in overall fundraising levels alleviates access problems, which was one of the reasons why LPs have worked with funds of funds in the past.
The ties that bind the limited partners that invest in real estate funds to the general partners that manage them have been worn hair-thin by the financial crisis. How can the two 'sides' best work together now?
Before the financial crisis, it was not unusual for general partners (GPs) to create funds that were targeting equity commitments of US$1 billion, US$3 billion, US$5 billion – and still be oversubscribed.
As we all know, the complexity and administrative burden of the global tax systems facing tax directors is at an all-time high and continues on the ascent. With deficits increasing in most parts of the world, in part due to the global financial crisis, governments are focusing on expanding revenue streams and on greater regulation and transparency. A key industry that governments around the world are looking for 'donations' from is private equity.
Since their inception, Islamic banks have been criticised for not using participatory (profit and loss sharing) modes of financing such as musharakah and mudharabah. Generally, scholars argue that participatory financing is the key to achieve the main goal of equitable distribution of wealth in society. There has been little progress in this area and Islamic banks still heavily rely on less risky financing modes such as murabahah and Ijarah.
Venture capital and private equity (PE) firms are finding it increasingly difficult to raise money from their backers – limited partners (LPs) – who are becoming more demanding about the current models of return and the safety of their cash.
All the traditional asset classes, such as equities and property, in which pension funds invest, share an underlying flaw: the investor can only profit when asset values increase. As we have seen over the last couple of years, this is far from guaranteed.
The private equity industry is currently experiencing an adjustment phase after a period of excess. For those who are able to recover quickly from the hangover, there are certainly opportunities that are worth considering, but many of the current generation of firms will find it difficult to survive in their current form.
The PE industry’s agility and resilience in adapting to the adverse market conditions of the last two years will serve it well as the market continues to recover. So far, the outlook for 2010 is positive, with leverage returning to some markets, the value of acquisitions increasing and exit opportunities on the rise.
Private equity investment in Africa has been active for many years, with solid track records emerging in the last decade. The most successful deployment of private equity in Africa has applied best practices, including identifying risks, defining the path to liquidity, and anticipating changes in judicial and regulatory frameworks. Understanding these factors is critical to ensuring that private equity investments in Africa will generate attractive returns over time.
After the initial bout of finger-pointing recriminations about the risk management failings which precipitated the credit crisis, debate soon turned to when the recovery might be expected to come. Now, hardly a day goes by without some form of significant comment about the march out of recession and who may lead that march.
Emerging economies now capture a larger share of global private equity activity than ever before and the markets are quickly maturing as investors take more controlling stakes in companies.
Statistics from the Emerging Markets Private Equity Association (EMPEA) showed that the emerging markets share of global private equity fundraising has risen from 5% in 2004 to 20% as of June 2009 and from 7% to 24% of global private equity investment totals during the same period.
We now have confirmation of what everyone has been living through: fundraising and investment levels in emerging markets fell by over 50% in the first half of 2009 compared to the same period in 2008, according to the latest figures put out by the Emerging Markets Private Equity Association (EMPEA). A total of 84 emerging market funds raised US$16 billion in the first six months of 2009, way down on the US$36 billion garnered in H1 2008. Investment figures tell the same story.
For socially responsible investors who have been trying to round out their portfolios with allocations in REITs or other real estate investments, the landscape may seem awfully barren right now.
As hard as investors may look, for example, they are not going to find any US REITs that specifically label themselves as “green” or “socially responsible”. Even traditional mutual funds have little to offer.
A fund without a fund is an oxymoron – but not in the increasingly crowded world of private equity (PE) and venture capitalism.
Financiers are using so-called fundless structures as their calling card to enter India, where an estimated 350-400 PE funds are already jostling for space.
Jaganath Swamy, a former McKinsey and Company consultant and a Wharton MBA, has used one such structure when he headed back to India after a short stint with a large PE fund in New York. He chose to launch a pledge fund after he saw that a number of limited partners (LPs) in the US were unhappy with India-focused funds.
The dodo (raphus cucullatus) was a flightless bird native to the island of Mauritius. It stood about a metre tall, weighed about 20kg, lived on fruit and nested on the ground. The dodo has been extinct since the mid-to-late 17th century. It is commonly used as the archetype of an extinct species because its extinction occurred during recorded human history and was directly attributable to human activity. The phrase “to go the way of the dodo” means to become extinct or obsolete, to fall out of common usage or practice, or to become a thing of the past.
Private equity – be it Islamic or otherwise – is not dissimilar to the perfect marriage. Both parties enter into an agreement for better or for worse and stick through it. More popularly known as venture capital in the western world, private equity is slated to be the new frontier for Islamic finance.
In the real estate world, the mantra is “position, position, position”. The same may be said for hedge funds based in Latin America. Proximity to the real action gives local managers an advantage over funds managed at a distance. We would not have said this in the mid-1990s when Latin America was an intense focus of investor interest in major financial centres and there was a proliferation of emerging markets mutual funds. It was perceived that the best perspective was achieved from a distance (on high?) looking towards the region from the northern hemisphere where one could observe matters without all the baggage that local investors and naysayers brought to the process.
There is no doubt that Asia has felt the force of the global economic crisis. As credit conditions have tightened, deal flow across the region has grounded to a virtual halt. At the same time, those initial public offering windows that were previously available have been firmly shut, meaning private equity investors looking for an exit will have to rely on strategic buyers themselves in equally short supply.
For so long at opposite ends of the investment spectrum, private equity (PE) and venture capital (VC) are increasingly converging as the hunt for returns forces the adoption of new strategies.
Until recently, the idea that PE funds and VC funds could be looking for returns in the same areas would have seemed as improbable as the collapse of Lehman Brothers.
The divergence of PE and VC as asset classes began so long ago and had become so pronounced that only the more experienced players in the field remembered that the terms were virtually synonymous until the early-1990s. However, the world has changed and we have seen the beginning, at least, of a convergence at the boundary between PE and VC.
Private equity has always thought of itself as the sober end of asset management. In a perfect world, this is how all companies would be managed – lean decision-making bodies focused on well-defined objectives, perfectly aligning capital with business management, away from the short-termism of public markets.
After a decade of steady growth, Central America is weathering the global financial downturn comparatively well and continues to offer regional opportunities for private equity. Historically, this small, diversified region has suffered from armed conflict, political instability, weak institutions and a lack of legal frameworks and enforcement. However, stable democratic governments allied with disciplined fiscal policies brought an unprecedented period of growth in the past decade with steady growth rates on average above 5%.
The non-existent primary market for equities over the better part of last year may have delayed at least five exits for Sequoia Capital India Advisors Pvt Ltd, but that has not stopped the Indian arm of the Silicon Valley-based venture firm from trying its hand at something new.
Sequoia has been aggressively investing in listed companies since October, rather uncharacteristic for a firm that has been doing only private market deals since it started investing in India in 2000.
Going by the state of capital markets in the early months of 2009, it really did not look like 2009 will be the year of exits for private equity (PE) funds. But if the recent market action is any indication, this may well be the year of open market exits. PE funds like ChrysCapital, Citi Venture Capital International (CVCI), Sequoia Capital India, 2i Capital, IL&FS Investment Managers (IIML) and the 3i Group have sold stakes in their portfolio companies either partially or fully.
When the economic downturn is telling on one's existing portfolio, what are the options left with the private equity investors? Either stay with the company and ride the downturn, or sell them to any other buyer and cut your profits (or losses). And this is likely to generate a lot of interest in the private equity secondary market too.
Investments made by private equity funds, hedge funds and other investment vehicles in companies that had been planning to raise money from the capital markets through initial public offerings (IPOs) have come back to haunt the founders of many such firms.
Companies owe their investors at least Rs4,000 crore for their inability to come out with IPOs within a specified time frame, a precondition for such investments, according to a Mint analysis of data provided by Nexgen Capitals Ltd, the investment banking arm of Delhi-based stock broker SMC Global Securities Ltd.
Investors in private equity funds, known as limited partners or LPs, are sensing opportunities to buy-out the positions or commitments to private equity managers from other LPs that want to limit their exposure to private equity, or do not have the money to meet their so-called unfunded commitments.
In industry parlance, such deals are known as secondaries and private equity managers are referred to as general partners or GPs.
Just 40 venture capital funds raised US$4.3 billion in the first quarter of 2009, according to Thomson Reuters and the National Venture Capital Association (NVCA). This level represented the smallest number of venture funds raising money in a single quarter since the third quarter of 2003. Dollars commitments however, reflected a slight increase over the previous quarter when US$3.5 billion was raised.
Rating agencies appear to have played a leading role in the current crisis that the real estate market in the UK finds itself in by overestimating the credit risk of property-backed debt instruments. The public should be able to expect – and to be protected by – the objective exercise of professional judgement by a responsible and regulated group, and the rating agencies failed in this regard. Did valuers also contribute to the crisis, by failing to discourage banks from lending high proportions of the ramped price of property, and by overestimating the value of property assets and property funds?
The economic slowdown has India’s venture capital firms (VCs) focusing more on shepherding firms they have invested in, and going slow on chasing new deals.
“In the first half of the year, we will focus on existing businesses, and the second half depends on how the first half goes,” says Sandeep Murthy, partner, Kleiner, Perkins, Caufield and Byers, and Sherpalo Ventures.
For too long, private equity firms have been managed as investment vehicles, and not enough like businesses that need to succeed in a maturing market. The time is ripe for that to change and, to a large extent, that change is being foisted on today’s players. In fact there is a good case to be made for today’s private equity to take some of the medicine they have for so long told others to swallow.
As private equity (PE) firms find it difficult to raise capital in difficult economic times, they are offering limited partners (LPs) more incentives to put in their money.
Making the most of the situation, LPs are now demanding a greater say in the use of and returns on the money they commit to PE firms.
LPs are entities that include public and corporate pension funds, insurance companies, high net worth individuals, universities and other endowments that are the source of money for PE firms, which then establish funds to invest.
Venture capitalists invested US$28.3 billion in 3,808 deals in 2008, marking the first yearly decline of total investments since 2003, according to the MoneyTree Report by PricewaterhouseCoopers and the National Venture Capital Association (NVCA), based on data from Thomson Reuters. Venture investments in 2008 represented an 8% decrease in dollars and a 4% decrease in deal volume from 2007. Investments in the fourth quarter of 2008 totalled US$5.4 billion in 818 deals, the lowest amount of dollars invested since the first quarter of 2005 and a 26% drop from the US$7.3 billion invested in the third quarter of 2008.
US venture capitalists are forecasting a difficult 2009 for the country’s economy, the capital markets and the venture industry as the global financial crisis takes its toll on the entrepreneurial ecosystem. According to the respondents of the third annual National Venture Capital Association (NVCA) Predictions Survey, the coming year will be met with a slowdown in investing across most sectors and a continued weakened exit market. However, most venture capitalists surveyed predict a recovery in 2010 when the initial public offering (IPO) market is expected to re-open and those companies and venture firms that weathered the storm will emerge strongly.
One of the main types of insurance private equity houses will look at is that covering management liability, typically covered by directors and officers’ insurance (D&O). D&O covers any individuals with a board seat on any of their portfolio companies. As board members, these individuals’ fiduciary duty is to act in the best interests of the company. A common issue is one in which someone questions whether a private equity house representative has made a decision that benefits the private equity firm rather than the portfolio company. D&O also covers other liabilities associated with being a company director, such as an instance in which board members are sued in the event of an environmental problem.
The ongoing credit crunch has led to a huge number of high-yield real estate debt funds trying to cash in on the distress: There are now close to 70 such funds, and they are attempting to raise US$40 billion. Some are veteran investors that have operated in real estate debt for 20 years or more, but many others are newcomers. The funds use different strategies, usually including some combination of CMBS, mezzanine, preferred equity, whole loans, B-notes, RMBS and, increasingly, originating new loans.
When people talk about private equity, they are referring to shareholdings in companies that are not listed on a public stock exchange. Non-listed companies are not subject to the same level of government regulation and disclosure rules as listed ones. Since there also is no “daily market” where the stock is regularly traded, private equity is less liquid than publicly traded equity. And anyhow, those smaller companies have far less outstanding stocks to be traded or negotiated, leaving little room for sufficient volatility. Moreover, the transfer of private equity in such companies is mostly regulated by law, the articles of association or even stipulated in shareholders’ agreements.
Heterogeneous is not an adjective one would use to describe the private equity industries in the Asian region. Quite the opposite in fact; countries in the Asian region range from more developed markets such as Japan, Australia and Hong Kong and Singapore to up-and-coming countries such as China, India, Indonesia, Thailand and Vietnam. The diverse histories, political, regulatory and economic structures offer investors a plenitude of opportunities, but also mean association bodies play a vital role in transmitting education, training the next generation of private equity funds, and lobbying governments for conditions to encourage continued development of the industry not in just their own countries, but throughout the region.
With the financial crisis continuing to wreak havoc in many of the world’s economies, access to capital is becoming harder and dearer. Despite heavy injections of liquidity from governments, lending has slowed to a trickle across most industries and markets. Bankers’ reluctance to offer finance stems from widespread uncertainty about the length, intensity and consequences of the current crisis. This poses significant challenges to the private equity industry, which has enjoyed unprecedented growth over the past decade thanks partly to unfettered access to cheap credit. Private equity firms are likely to feel the impact of tighter lending terms both at the level of their deal flow, and in their ability to manage the companies they have acquired. This is a market context that will require discipline, judicious planning and innovation from private equity practitioners if they are to survive the financial crunch and emerge stronger.
Venture capitalists invested US$7.1 billion in 907 deals in the third quarter of 2008, according to the MoneyTree™ Report from PricewaterhouseCoopers (PwC) and the National Venture Capital Association (NVCA) based on data provided by Thomson Reuters. Quarterly investment activity was down 7% compared to the second quarter of 2008 when US$7.7 billion was invested in 1033 deals. Despite the turmoil in the global financial markets in the US, venture capital investing remained within historical norms in the third quarter of 2008.
The number of private equity real estate funds pursuing opportunistic returns amid the fallout from the credit crunch continues to grow rapidly. In a recent position paper, fund of funds manager Clerestory Capital Partners argues that “equitable terms” for all investors is a principle worth defending.
Venture capital performance showed positive returns across all investment horizons ending 30 June 2008, according to Thomson Reuters and the National Venture Capital Association (NVCA).
The one-year all venture private equity performance index (PEPI) showed the greatest change from 1Q2008, falling 8.2% to 5.1% in 2Q2008. Historically, short-term horizons show significant fluctuations quarter–over-quarter based on current exit market conditions. Overall, the closed IPO window in the second quarter did drive lower one-year return numbers. The next largest consecutive quarterly change occurred in the three-year time horizon where all venture PEPI decreased by 1.1% quarter-over-quarter. Five-year and ten-year performance also posted modest declines from the previous quarter, decreasing 0.2% and 0.6% percentage respectively. Twenty-year performance figures showed a small quarter-over-quarter increase to 16.9% from 16.8% in the first quarter.
The amount of capital being sought for high-return private equity real estate funds is at a record high. At the same time, many institutional investors are sidelined by the denominator effect or by a tactical decision to move slowly in an uncertain market that is awash in fund offerings.
In this environment, many quality managers are struggling to reach fund-raising targets, and several of them have offered to improve terms in an effort to gain a competitive advantage over the field (or remain competitive with the field).
Emerging markets private equity fundraising is on track to significantly beat 2007 totals. Led by Emerging Asia, 104 funds dedicated to investments in emerging markets raised more than US$35 billion in capital in the first half of 2008, a 68% increase over the amount raised during the same period in 2007, according to the Emerging Markets Private Equity Association (EMPEA). The total value of private equity funds raised in the first two quarters of 2008 exceeds the US$33 billion raised during all of 2006.
Stock markets that have fallen for most part of 2008 are delaying private equity, or PE, transactions and also increasing the use of convertible instruments where an investment is converted into equity at a later date at the prevailing price.
The delay is because both the companies and investors are holding out for a better deal. For companies, a better deal means a higher valuation. For private equity firms, it means a lower valuation.
Venture capital investments in US cleantech companies grew by 41% to US$961.7 million in 2Q2008, up from US$683.5 million in 1Q2008, according to an Ernst & Young report based on data from Dow Jones VentureOne. This is the highest total cleantech investment on record, and comes amidst a quarter in which overall venture capital investment was down by nearly 8%. Year-on-year cleantech investment follows this upward trend, increasing 83% from 2Q2007.
Asia has experienced rapid growth in alternative investments in recent years, fuelled by investors’ search for increased alpha in emerging markets and by institutional players broadening their investment horizons to diversify geographical risk. Assets allocated to hedge funds, private equity and, increasingly, real estate and infrastructure funds have seen significant growth. This has led to alternative assets starting to become part of the investment mainstream.
As the pace of business in the Middle East and North Africa accelerates, family businesses are looking to raise funds, sell out, restructure or offload non-core assets. Deregulation is opening new opportunities for Greenfield investment. Governments are increasingly willing to divest assets in privatisation sales. The list goes on.
Going forward, this means a growing number of private equity deals will originate from situations in which trust, transparency and good corporate governance are vital. As origination streams diversify beyond the usual sources, savvy industry players will embrace the reality that the full alignment of interests of all parties is becoming the key to sustainable growth.
With limited partner interest increasing towards Africa as a whole, it’s hardly surprising that West Africa is seeing a dramatic increase in funds being raised for investment there. It is, according to CDC investment manager and Togo national Jean-Marc Savi de Tove, “one of the most dynamic regions in Africa”.
Asian Venture Capital Journal (AVCJ) Research figures show that after a year of private equity industry upheaval, the Asia Pacific industry is at last registering the effects of the downturn in the asset class. Although private equity and VC capital under management across the region continues to grow, its rate of growth has slowed and almost every other industry metric is down on last year.
Venture capitalists invested US$7.4 billion in 990 deals in the second quarter of 2008, according to the MoneyTree™ Report from PricewaterhouseCoopers (PwC) and the National Venture Capital Association (NVCA) based on data provided by Thomson Reuters. Quarterly investment activity was essentially flat compared to the first quarter of 2008 when US$7.5 billion was invested in 977 deals. Growth in the clean technology and Internet-specific sectors contributed to the solid level of investing seen in the quarter.
Fundraising in emerging markets has exploded. In 2003, just US$3.5 billion was committed to funds operating in emerging private equity markets, according to figures compiled by the Emerging Markets Private Equity Association (EMPEA); by 2007, that figure had shot up to nearly US$60 billion. It’s an incredible success story, and one that has gone far from unnoticed by private equity fund administrators seeking growth in new markets.
2007 was another stellar year for private equity (PE) in MENA. The billion dollar deal milestone was broken for the first time with the Egyptian Fertilizers Company deal. Fund-raising for existing funds remained strong, and the first billion dollar fund was raised. Exits, once a mirage, are becoming more common with 18 exits reported in 2007, up from six in 2005.
While venture capitalists continue to view the US as the global leader in technology development and innovation, they also recognise specific pockets of technology innovation worldwide, according to a survey by Deloitte LLP and the National Venture Capital Association (NVCA).
With a 78% leap in emerging market PE fundraising last year (up to US$59 billion), secondary investors and intermediaries are preparing for an increase in deal flow in this space.
Emerging markets exposure is already becoming an accepted part of the secondary landscape, as Thomas Liaudet, principal at Campbell Lutyens, which acts as an intermediary on secondary sales, explains: “More and more frequently we see an emerging markets component to portfolio sales. And we see a bigger component of emerging markets funds in the portfolios. We feel this is because we have seen more and more funds raised for emerging markets and the secondary market is a derivative of the primary.”
The burgeoning class of Indian entrepreneurs is making a beeline for VC funding to kick-start their ventures. It becomes an imperative to foray into the mindset of the venture capitalist to know what clicks with him. At a conference on private equity for IT/ITeS & Technology held by IVCJ in May, at the Hotel Leela Kempinski, Mumbai, some of the prominent figures of the VC community such as Srini Vudayagiri, MD, Lightspeed Venture Partner; Manik Arora, founder and MD, IDG Ventures India; Sandeep Singhal, Nexus India Capital Advisors Pvt Ltd; and Tejus Sawijani, partner, Singularity Ventures delved into what goes into procuring early stage financing.
After the excesses of investing at dizzying valuations throughout 2007, many of us in the Indian real estate private equity arena are now taking stock of where we are and where we are going in the year ahead in 2008.
Islamic finance has been widely acclaimed as the fastest-growing sector within the financial arena. Industry reports indicate the size of global Islamic assets to be over US$500 billion, with growth rates of 15% to 20%. Much of this growth and development has been within the debt and related capital markets sectors such as sukuk and commodity murabahah.
Private equity firms, having experienced a record-breaking first half of 2007, were among the first to feel the effects last summer when the credit markets came to a standstill.
The meltdown in the US subprime mortgage market has prompted commentators to remark on the end of the abundant supply of cheap and easy debt and warn of tougher investment conditions for private equity funds.
Summer jitters surrounding the failure by Deutsche Bank and JPMorgan to sell down £9 billion of senior debt underwritten in the acquisition by Kohlberg Kravis Roberts of Alliance Boots have reverberated into the UK private equity market.
Concern gave way to alarm in the autumn following large losses suffered by some of the world's most influential lenders. US banks Citigroup and Merrill Lynch projected billion-dollar mortgage-related write-downs and HSBC revealed that it expects to write down US$925 million (£449.17 billion) of investment banking debt in the third quarter of 2007.
Over the last few years, financial institutions offering Islamic products have taken a number of important steps to keep pace with developments in the global private equity and venture capital industry. As private equity and venture capital investments become increasingly sophisticated and innovative and seek new pools of investors, including Islamic investors, growth in Islamic private equity and venture capital funds can be expected to mushroom.
Numbers are beginning to lose their relevance in the frenetically paced Indian private equity (PE) market.
It is now a given that investments in this market will grow manifold each year and this is likely to continue for the next three to five years, at least.
That investor confidence is only growing stronger is evident not just from the entry of some of the world’s largest PE firms in 2007 – Providence Equity Partners Inc and Apax Partners – but also from the increasing diversification of fund sources.
The private equity industry has been on a tremendous expansionary cycle in recent years, following the technology sector-led slowdown between the years 2000 and 2003. For instance, for the year 2005 alone, industry estimates put the total amount of private equity fund raising at over USD230 billion (a 75% jump over the 2004 figure), and the total size of private equity investments at USD135 billion (up 20% on the previous year’s number).
It is impossible to overlook the massive profits investors have earned in the Indian market over the past several years. However, beyond the tech-heavy activity that has driven much of these profits, there are many new and interesting areas that private equity and venture capital firms are now aggressively looking to take advantage of. The Indian market is certainly unique. A solid understanding of this market and some behavioural adjustments will be required from investment players who are new to India in order to maximise the returns for their investors. In addition to the required capital, proper research in a challenging market, subtle and savvy managerial skills, and a healthy dose of patience must also be invested to ensure success.
Amongst the various asset classes on offer (from equity funds to alternatives), Islamic finance has developed a wide range of products in the areas of real estate and private equity. There are various reasons for this, but key drivers include the predilection of Shariah-compliant structures towards asset-backed investments, and more recently the burgeoning activity observed across the GCC region in these two asset classes.
The real estate private equity fund market has dominated the real estate landscape and is arguably the most significant driver of real estate transactions today. Through the first half of 2007, capital flows to real estate were still very strong. Our survey respondents have raised more than US$225 billion of capital since 1991 with more than US$38 billion raised in 2006 and US$23 billion raised in the first half of 2007. An additional 35 funds with targeted capital of US$35 billion are in the process of being raised. Considering the returns on alternative investments over the past year, real estate private equity performed comparatively well on a risk-adjusted basis. In light of the strong fund performance, 84% of our survey respondents believe that capital flows to real estate will increase or at least remain at the same high level for the balance of 2007 and for 2008.
Differing definitions of a hedge fund abound (which are sometimes confused with other funds such as private equity or real estate investment pools) but for our purposes, and with the view of setting up an international hedge fund in Singapore, the following assumptions are made: that it is deemed to be a “collective investment scheme” as described by the Securities and Futures Act of Singapore, and will have a strategy of investing in instruments where valuations are readily discernable with minimal dispute (such as listed equities, bonds); and that the manager is remunerated generally on a manager fee based on the entire value of assets under management, as well as an incentive fee based on a proportion of profitable capital gains made from those assets. The offerings are not meant for the general public but for accredited investors and operate within strict limits to general solicitation and advertising.
Islamic finance has witnessed tremendous growth over the past years, both in terms of the growth of the entire industry and in terms of the development of new and more sophisticated products that meet the increasing yet unmatched demand for structured products and comply with the principles of Shariah law. The global Islamic finance industry is valued today at approximately US$800 billion.
It is well known that the private equity industry is in the midst of a dramatic evolution in size and influence. Less well appreciated is the beginning of a sea change in transparency and corporate governance. This will transform it from a low profile, private industry dominated by a deal-making culture into one that conforms to a far greater extent with the norms of the public-listed markets.
Venture capital firms, led by Silicon Valley’s best of breed, have raised close to US$2 billion (Rs8,000 crore) for investment in India since January 2006, according to informal industry estimates.
The money will be invested in seed and early-stage companies over the next four to five years. This is indeed small compared with the estimated US$10 billion that private equity firms have allocated for India during the same period, but an important step towards reviving start-up funding in the country. Start-up funding almost disappeared after venture capitalists burnt their fingers in the 2000-01 Internet bust.
Although the bulk of activity and growth in Islamic finance lies in the Muslim world, the US remains an important market for many Islamic investors because of its depth and diversity. Many foreign-based institutions that have long invested in the US continue to do so, and many new, significant entries have been made over the last few years. As Islamic finance has grown both quantitatively and qualitatively worldwide, so have the number and sophistication of its participants.
Eureka Private Equity is a comprehensive online portal providing one-stop service for private equity and venture capital professionals. This portal provides daily news stories about the global private equity and venture capital industry.
In addition to the free news service, Eureka Private Equity also has a global suite of private equity fund databases covering 5,000 funds across all regions in this alternative investment universe – a significant increase of over 250% since it was first launched in 2005.
Asia has perhaps the richest and most diverse cultural, linguistic and political environment in the world. This diversity provides a wealth of opportunities for the expanding private equity community, but also some formidable challenges.
Some private equity firms have responded to this diversity by focusing on Asia’s more developed markets, or on those where they have specific, in-house expertise. Others believe that, despite the challenges of adapting the private equity model to diverse jurisdictions, the value to be gained from such an approach outweighs the structural and political risks.
The forging of new relationships with Middle Eastern investors (beyond those with the region’s merchant families and investment houses which have, for some time, been investors in the private equity asset class) has brought with it new and complex issues of culture, commerce and religion. In light of the compelling size of the pool of available Islamic capital estimated at between US$300-500 billion, private equity funds and their general partners (GPs) may be well advised to learn about accommodating the concerns of Islamic investors.
Gridstone Research, an equity research start-up in Mumbai, had secured venture capital funding from three investors last March. The investors included Charles River Ventures, Helion Venture Partners and finally Maverick Capital, a US$10 billion (Rs41,000 crore) American hedge fund.
Fundraising for emerging markets private equity in 2006 appears on track to match or beat the record-breaking 2005 numbers. In 2005, fundraising topped US$22 billion, or almost four times the US$5.8 billion raised in 2004. For year 2006 through 1 November, EMPEA estimates that US$21.9 billion has been raised already (see Figure 1).
The BVCA represents the vast majority of UK-based private equity and venture capital firms and their advisors. The UK private equity industry is the largest and most dynamic in Europe accounting for more than half of the whole European market, and is second in size only to the United States on the world stage. This means the BVCA is today the single most authoritative voice of the UK industry when speaking with the media or negotiating with government, Parliament, European Commission and Parliament, regulators and other statutory bodies.
Robust growth in emerging markets private equity fundraising continued in 2006, albeit at a less explosive pace than in 2005. 162 emerging markets private equity funds raised US$33 billion in capital commitments in 2006, representing a 29% increase over the US$25.8 billion raised in 2005. In 2005, fundraising quadrupled from the US$6.5 billion raised in 2004. (See Figure 1 for historic fundraising totals 2003-2006.)
The private equity industry has been in a tremendous expansionary cycle in recent years, following the technology sector led slowdown between the years 2000 and 2003. For instance, for the year 2005 alone, industry estimates put the total amount of private equity funds raised at over USD230 billion (a 75% jump over the 2004 figure) and the total size of private equity investments at USD135 billion (up 20% on the previous year’s number).
Following the launch of Eurekahedge’s online private equity fund databases, Eurekahedge is proud to announce the release of the hardcopy directories – Fund of Private Equity Funds Directory 2007 and Global Private Equity Fund Directory 2007 – which contain 650 and 3,000 funds respectively, and are the largest hard copy resources available of this type.
The inaugural 2006 edition of the Eurekahedge Fund of Private Equity Funds Directory contains information on 654 funds managing US$167 billion in assets, as we endeavour to serve as the market-monitor for another growing segment of the alternative investments landscape. Figure 1, charting the growth (by number of funds) of the funds of private equity funds (FoPEFs) in our databases over the last decade, corroborates this.
Over the last ten years, private equity has increasingly become a significant portion of most institutional portfolios. The private equity class is defined as investments in private companies or partnerships that invest in them. During the period from 1996 through year-end 2005, investors committed nearly US$1.6 trillion to private equity funds. Despite a drop in private equity commitments following the bursting of the technology bubble in 2000, investors averaged more than US$166 billion in annual commitments to the asset class in 2003-2005.
The Asia-Pacific private equity market has emerged over the past five years as a market of increasing interest to international investors. Asia Pacific has become an increasingly important destination for international capital as a result of structural changes brought about by the 1997/98 Asian financial crisis and ongoing liberalisation efforts, as well as continuing rapid economic growth and increasing globalisation. The Asia-Pacific private equity market has matured with the emergence of well-established fund managers, with experienced teams and proven track records.
For most private investors, the private equity market is not easy to break into. And for those who get in, there are many pitfalls, not least the high cost of most vehicles catering to smaller, private investors.
Private equity is a hot topic today because of its terrific performance over the last few years, the ever larger deals being pulled off and the creation of publicly-listed retail vehicles by big US brand names like KKR, Apollo, Blackstone, Carlyle, etc.
Eurekahedge announces the launch of a specialised private equity database: the Eurekahedge Global Private Equity Real Estate Fund Database and Directory. This product comprehensively covers 350 specialist real estate funds and will continue to grow with this fast developing part of the private equity industry.
The potential benefits of funds of funds are lively debated in the private equity industry. How can a fund of funds manager justify the additional fee layer? Do funds of funds deliver excess returns? We argue that fund of funds investors may indeed benefit from attractive risk-adjusted returns: firstly, because diversification does reduce volatility; and secondly, because diversification may even increase returns. Nevertheless, funds of funds managers that want to justify their services going forward will have to add value beyond the common claim for premier fund selection and diversification.
Asia is currently reaping the benefits of being the developed world’s emerging market of choice, with new billion-dollar funds, and now, big deals to match. Yet the Middle East, driven by a combination of rising oil prices and internal reform and revitalisation, is equally in the spotlight as a new cluster of high-growth economies. Add the fact that several of Asia’s prime investment destinations – especially India – are positioned to tap the dynamism in both regions, and there seems plenty of cause to link the two together. PEAsia talked to experts in both regions, for perspective on the new Middle Eastern/Asian private equity connection.
Monster transactions in China have recently monopolised the private equity headlines. Is the opportunity worthy of the hype? Despite many risks, a combination of liberalisation and investor innovation is widening the scope of possible activity, giving investors new ways to tap China’s growth story.
Of the US$20 billion invested in Asian private equity transactions in 2005, US$5.75 billion was spent in the People’s Republic, and that inflow is weighted towards the leviathans.
To say that the Asian markets have been a hotbed of opportunities for investors of all stripes in the recent past would be to acknowledge the obvious. And yet, it is as good a starting point as any in reviewing the growth and performance of Asian private equity (PE) funds in 2005.
The BSE Sensex, the benchmark of large-cap Indian stocks, has climbed vertiginously past 8,000, an appreciation of almost 80% from the troughs of 4,505 on 17 May 2004. Foreign Institutional Investors (FIIs) have poured in close to US$17 billion into the Indian equity markets since January 2004, over 44% of the cumulative foreign flows since the markets were opened to foreign investors in 1993. The Indian market is in the grip of a euphoria; often seen in the past 15 years, always holding promise, but seldom failing to disappoint. Therefore it is both natural and fair to question the nature and sustainability of the current Indian opportunity and what it holds for hedge funds.
My tenth issue of Piranha Soup continues the theme of the ninth version. It was focused on rough times in fixed income, particularly credit derivatives. Now I turn to rough times in equities with an emphasis on whether it is time to enter the short side of the stock market. The madness of crowding into the "credit, energy, Asia, emerging markets" growth story will reach a point of froth this winter. Below I make a case for profit in short side beta and alpha.
Hedge funds have led the charge in the alternative investment community as a viable and growing segment of the buy side/asset gathering industry. Some of the brightest and smartest people from the industry have not only started hedge funds, but lately have started large "institutional", multi-strategy funds that span the globe looking for opportunities in which to trade. However, lately, as a technology provider to this industry, we at Gravitas are noticing with increasing frequency, private equity firms "spinning out" of larger institutions and establishing their own identities. Furthermore, many "hybrids" have followed in their own rite.
Private equity is a rapidly expanding industry in the Asia-Pacific region. It is estimated that there are over 500 private equity funds, managing over US$100 billion. They invest in sectors ranging from technology to healthcare. Some of the world's leading private equity funds are active in Asia. There are also some very large domestic private equity investors such as Government of Singapore Investment Corporation and JAFCO.
This is indeed a very special gathering; there are not many industry venues where both sides of the alternative asset management family are brought together to talk about matters in common. Of course, what we are here to talk about today is how these two disciplines are moving towards each other in many different ways - this is the notion of convergence. While this process is just getting underway in Asia, it is very far advanced in the US and Europe, and perhaps by discussing the trends we've seen you will have some insight into what may happen here.
Equity long/short strategy is a strategy through which a fund manager buys undervalued stocks which are expected to outperform, and short sells overvalued stocks which are expected to underperform. This type of portfolio is sometimes called “market neutral”, although strictly speaking a market neutral portfolio is achieved only if the long exposure balances the short exposure so as to eliminate systemic market risk. Some market neutral funds even go one step further to eradicate industry risk by making pair-wise bets within each sector, but such an objective can only be achieved if strict risk controls are kept constantly in place. Market neutral portfolios are perceived to be a lower risk type of hedge fund. In reality, however, most equity long/short funds tend to range between a slightly net short position to 100% net long, depending on whether the manager is bullish or bearish on the market, although recently some have widened those ranges.
Diggle has over 16 years of experience in trading equities and equity derivatives in both Asia and Europe. He was formerly Head of Asian Equity Derivative Trading as well as former Head of European Emerging Markets at Lehman.
The Artradis Barracuda fund is an Asian equity arbitrage fund. It employs multi-strategy market neutral trades such as warrant arbitrage, index arbitrage, stock class arbitrage, convertible bond arbitrage, volatility arbitrage, volatility dispersion and dividend arbitrage.