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Private and Confidential
August 2006
The following sections are delivered through Astraea. The links below
will take you to those sections.
Perspective
In August, the embarrassment of Lebanon and the drama of terror suspect
arrests in connection with flights at UK airports drew attention once
again to the interconnected nature of our world. Globalisation of
humanity is a natural progression as we grow in prosperity and intelligence.
But that is surely being tested by our willingness to wage war.
What is the cost of war? It seems that the investment in arms and
training, the damage to prosperity locally, the deaths and the devastation
must result in some benefit. It is not the alleviation of terror
- that increases as we hype ourselves into melodramatic trauma.
It is not democracy - that may not even be what some states want and the
role models are tarnished. Is it freedom? Or just the opportunity
to join the modern world? Perhaps so, but there are small groups
that benefit. As well as a general economic vitalisation being a common
side effect of waging war, war enriches some. Defence spending has
doubled in 5 years, having hardly grown in the previous 10. Oil
companies are raking in the cash. Especially if you're winning; hearts
at least. Doesn't that mean the country that sues for war is obliged
to a higher moral standard? The conflict of interest demands that
war can only be in self-defence. Once you move beyond your borders,
people of good character demand an extraordinary ethic. It is not
good enough simply to know better, to be "right". Parents
and teachers always know better, yet the good ones nurture using experience
as a tool, but safely. And the bad ones are those conjured up by
Charles Dickens, The Wall (Pink Floyd) and, unfortunately, ourselves today
in the Middle East.
It seems that America needs our support, even our love. It is emotionally
torn between loyalty and pride, virtue and hubris. It is a beautiful
country with an important history and a diverse culture. It has
been born from the pains of liberty from Independence to Emancipation,
but now needs to go all the way. It is great for business, but failing
on politics and ethics, despite the love of the people. It has allowed
the world to operate with two sets of rules; one for America and one for
everyone else. That is not right. The culture of competitiveness
must give way to one of cooperation soon. It is not appropriate
to "win". America must instead "do it right".
Where is the common sense? We keep talking
about war - a war on terrorism. Yet we perpetuate terror in fighting
terrorists, as the Israeli debacle in Lebanon showed most recently.
We must change the language of politics. We must sue for peace not
war. A Peace on Terrorism doesn't fit well in one's mouth, but it
sits comfortably in one's mind for that is what we truly want: peace.
And we need to reduce terror by bringing peace, not war. War is
a vicious spiral of degradation. Peace is a virtuous spiral of well-being.
Our world today can only survive in peace.
Top
Investment, Finance & VC
According to Q2 numbers, Europe's economy is growing faster than the
US or Japan. Growth across the 25 members of the European Union
(and the 12-nation euro currency group) was 0.9% in the quarter,
up from 0.8% in the first quarter and representing 2.8% over the year.
Comparable growth figures for the US and Japan were 0.7% and 0.2%.
However,Europe is lagging behind its economic rivals when it comes to
creating new jobs. During Q2, unemployment across the EU was unchanged
at 8%, some distance behind the US with 4.8% unemployment or Japan at
4.1%. But much of this is in the recently joined emerging economies.
Poland has the highest jobless rate in the EU, with a 15% jobless toll.
Slovakia is second in the unemployment league, with 14% out of work. European
inflationary concerns persist and the European Central Bank has been signalled
the likelihood of further interest rate rises in order to curb inflation.
France's economic growth in the second quarter of 2006 was praised as
"exceptional" at 1.1% expansion. France's GDP had grown by 0.5%
in the first three months of 2006 and is expected to grow by 1.9% for
2006 as a whole. France's economy has been slowly turning around, and
the government has made it a priority to boost growth and cut the unemployment
rate.
The US domestic scene is dominated by a precarious economy. Balanced
between a large trade deficit and waning influence over global oil.
The nation faces an economy that has been bolstered by regional housing
bubbles, if not a national one, yet continues to experience inflation
buoyed by consumer sentiment. US consumer spending rose by the largest
amount for six months in July, a sign that the slowdown in the economy
may not be happening. The Commerce Department said that spending
rose by 0.8% in July, the best figure since January, and double the 0.4%
gain in June. Yet separate figures showed that inflation remains a problem;
non-food, non-energy annual consumer price inflation hit 2.4% in July.
This is the largest figure in four years and above the US Federal Reserve's
preferred range of 1% to 2%.
The
housing market in the US is certainly deflating. Sales of new-built
homes in the US fell in July by 4.3% from June, their biggest drop since
February, to 1.07 million units. Sales of existing homes fell to
their lowest level since the start of 2004. The number of houses
available on the market reached a ten-year high. Part of the dampening
is due to a string of interest rate rises in the US that has made potential
home buyers nervous. The average price of a new home fell to $ 230,000
in July, from $ 233,000 in June, just above the $229,200 recorded in July
2005.
Housing had bolstered consumer spending, stock markets and employment.
The downturn will be bad for all. The following reports by John
Mauldin paint a foreboding picture. The first is a chart from David
Rosenberg, North American economist for Merrill Lynch. Quoting:
"The chart below is rather intriguing - the NAHB homebuilders index
leads the S&P 500 by 12 months and with a near-80% correlation - a
correlation that over time has actually strengthened, owing to the growing
influence that the real estate market has exerted on the overall economic
and financial landscape over the past five years. In fact, we can trace
almost two-percentage points of the 3 1/2% average annual rate in real
GDP over that time frame to the boom in housing construction and home
prices - the direct impact on homebuilding, the spin-offs to other sectors
like real estate services, architecture, engineering, legal, etc and the
multiplier impact from the 'wealth effect' on consumer spending, especially
on home improvements and household furnishings."
Further analysis in Barron's on housing, Lon Witter argues that there
has not been a housing bubble but a lending bubble. Look at this data:
-
32.6% of new mortgages and home-equity loans in 2005 were interest
only, up from 0.6% in 2000;
-
43% of first-time home buyers in 2005 put no money down;
-
15.2% of 2005 buyers owe at least 10% more than their home is worth
(negative equity);
-
10% of all home owners with mortgages have no equity in their homes
(zero equity);
-
$2.7 trillion dollars in loans will adjust to higher rates in 2006
and 2007.
Russia, an oil rich country, on the other hand has finished paying off
its $ 22.5 billion Soviet-era debt to the Paris Club of international
sovereign creditors ahead of schedule. Its huge oil and gas wealth
has allowed it to fast-track the repayments, and this has saved $ 7.7
billion servicing costs. Russia even agreed to pay a $ 1 billion premium
to certain creditors in compensation for lost interest. Some, including
Germany, had objected to Russia repaying its debt in one lump sum because
they would miss out. The move will cut the debt burden inherited
by Russia from the Soviet Union by more than 90% to $ 3 billion. The Paris
Club consists of 19 members including the US, UK, France and Japan.
Russia has come a long way since a default on the debt, built up during
the life of the Soviet Union, triggered a Russian financial crisis in
1998. The early repayment could boost Russia's sovereign credit
rating, which would help attract inward investment. The turnaround
in fortunes parallels the trajectory of the price of oil.
As Thomas Friedman articulated in recent articles in ForeignPolicy and
the Ecologist, Russia, Iran and
others are demonstrating the law of petropolitics: the more free money
the government gets from oil, the less it needs worry what others think
and tends to reduce government integrity and transparency. These
characteristics can even be seen in the good ol' USA where fear reigns
beneath the surface and personal freedoms are invaded by an executive
without integrity.
Oil companies are raking in the cash with impunity too as shown by BP's
ability to withstand the media debacle that has resulted from the company's
neglect of a primary feed pipeline in Alaska. Top executives at BP are
facing legal action brought by shareholders accusing them of knowing about
corrosion which shut a pipeline in the Prudhoe Bay oilfield in Alaska,
the US's largest oilfield which accounts for 8% of US production. The
investors say they have been let down by failures to repair the pipe ,
which has been partially closed after a leak, drastically cutting the
field's 400,000 barrels per day output. Documents filed with the court
accuse BP executives of being aware of the problem of corrosion but alleges
they took "no substantial steps to remedy the situation". A congressional
committee is set to examine BP's management of the site. It is unclear
how this cost will be shared between BP - which owns a quarter of Prudhoe's
output - and ConocoPhillips and ExxonMobil, who own the rest. The
threat to this supply comes as conflict in the Middle East and worries
over supplies from Nigeria have prompted oil prices to hit record highs
recently.
Other commodities continue to be buoyed by strong demand from emerging
nations such as China and India at a time when supplies are tight.
The world's largest mining firm, BHP Billiton, has posted record profits
- buoyed by high metals and oil prices. Net profits for the year
to 30 June surged 63% to $ 10.45 billion. The massive profits came despite
a strike at a Chilean mine, responsible for 8% of the world's copper,
where BHP is the majority owner.
Japan's recovery continues as unemployment fell in July to 4.1%, down
from 4.2% the previous month. The steady improvement in the labour market
should help to lift the economy. However, household spending fell in July
1.3% from a year earlier, cool and rainy weather being blamed. This
was the seventh month in a row that there has been a year-on-year decline,
and worse than analysts' predictions of a 0.8% drop.
Germany continued its stable recovery showing the best quarterly growth
figures since 2001, with the economy growing by 0.9% in Q2. The unemployment
rate dropped for the fourth month in a row in July with a better than
expected fall of 84,000 and German unemployment is now running at a rate
of 8.2%, down from 9.5% at the start of this year. Reductions in
the budget deficit and an upturn in the world economy helped to cut unemployment
and boost growth. Germany had laboured under slow growth and high
unemployment till a couple of years ago. Now increased domestic demand
is helping to change the picture. Investment in the construction
sector was a major factor in fuelling growth. The World Cup also played
a part in helping to lift growth. Merkel plans to raise taxes, a move
that may be unpopular and counterproductive if not effectively applied.
The global development report, issued by the UN Conference on Trade and
Development, said Japan and Germany need to do more to help stimulate
the world economy because the US was having to shoulder too much of the
burden of sustaining worldwide demand for goods and services and any big
downturn in the US could have serious global repercussions.
UNCTAD said that both countries should start buying more imports.
Their rationale does not ring true and further reinforces the need to
measure economic wellbeing, as well as general national wellbeing, with
more constructive tools than GDP. GDP accounts positively for all
the weapons sent to the Middle East and the bombs dropped in Iraq and
Lebanon, but does not account for the destruction of infrastructure or
loss of life. Other measures like Quality of Life Indicators, even
Gross National Happiness, are more transparent. The impending downturn
also would not look as bad if the measure of success was more balanced.
China's 500 largest companies saw combined profits rise by more than
a fifth to 642.8 billion yuan ($ 80.4 billion) last year. Profits
rose 23%, according to the China Enterprise Confederation, while combined
sales totalled $1.8 trillion. China's red-hot economic growth has been
driven by growth in the energy, chemicals, steel and banking sectors.
Oil firm Sinopec is China's most profitable, with returns of $ 2.8 billion
in 2005. This represented a 108% increase on Sinopec's earnings compared
with the previous year, as profits were boosted by oil prices that surged
to record highs. China's four other most profitable firms were electricity
supplier State Power Grid, China National Petroleum Corporation, the Industrial
and Commercial Bank of China and China Mobile. Energy firms have benefited
from dominant positions in the marketplace while reforms to laws governing
foreign investment in finance firms have boosted bank returns. Of the
500 companies included in the list, 349 are state owned.
Unfortunately success has also spread inequality. The sales of
the top 500 accounted for 78% of China's total gross domestic product
last year, up from 74% in 2004 and 56% in 2001. Despite the overall growth
in returns, the survey revealed that many Chinese firms are struggling
to boost profitability. The top 85 companies accounted for 85% of overall
profits.
As readers know the banking sector in China has attracted much foreign
interest and large public and private equity deal have been done this
year. Now foreign banks eager to do business with Chinese retail
customers are reviewing new rules that may force them to incorporate in
China, put down 1 billion yuan ($125 million) in additional capital and
pay higher taxes. China's regulators are finalising details of the
rules. The draft rules say authorities will "encourage and guide"
overseas banks which want access to the retail market to set up onshore
entities with registered capital of 1 billion yuan. That would come on
top of the money needed to open branches. The move appears aimed
at aligning the rules for foreign and major nationwide domestic lenders,
which need to cough up 1 billion yuan to secure banking licenses, as the
domestic banking market opens in accordance with pledges made when Beijing
joined the World Trade Organisation in 2001.
James Montier of DKW, who has shown good evidence that tested models
beat experts in a wide range of fields from medical diagnosis to fund
management, will be intrigued by Kaburobos. 10 Kaburobos, or robot
fund managers, developed by Trade Science and Monex Beans from Japan will
be available from next year. Each offers a different investment
strategy built on algorithms back tested 15 years. Koichi Kato,
Trade Science CEO, asks "which are you going to choose - a fund manager
you don't know or a robot with a clear track record?" The business
of fund management is going to get tough soon.
A new study "Its All About Me" by Arijit Chatterjee and Donald Hambrick
examines narcissism in the executive ranks of 105 IT firms. The
found that narcissistic bosses tend to make bigger decisions with more
volatile consequences. This is not a good leadership quality although
it may be appropriate in certain circumstances. If you've been wondering
about the narcissistic tendencies of your company's CEO, here's what to
look for:
-
The prominence of the CEO's photo in the annual report
-
The CEO's prominence in company press releases
-
The length of the CEO's "Who's Who" entry
-
The frequency of the CEO's use of the first person singular in interviews
-
The ratio of the CEO's cash compensation to that of the firm's second-highest
paid executive
-
The ratio of the CEO's non-cash compensation to that of the firm's
second-highest paid executive
Responsible Investing
China is also revising corporate law. It has passed a new bankruptcy
law that will address not only state but also private firms for the first
time. The Corporate Bankruptcy Law is aimed at increasing investor confidence.
The legislation, which gives greater protection to creditors, will apply
to foreign and domestic firms alike. The former law provided no obvious
way to liquidate a firm or share the assets between creditors and workers.
This new legislation will give creditors greater protection if a firm
is bankrupt, whereas in the past redundant workers were paid off first.
The move brings China more in line with market-based countries, where
it is standard practice to pay creditors first. The bill will also permit
firms that are struggling financially to request reorganisation.
The Thompson
Extel, UKSIF and Extra-Financial Survey 2006 has some interesting
charts. Key issues are outlined. To quote:
"...Alongside the continuing growth
of SRI lie two key issues: Firstly, it is apparent from our wider
research while that SRI is dismissed in some quarters as a "fad", a way
elements of the market are seeking to manufacture business opportunities,
and not really a genuine issue for investors, we would refute that strongly,
and see the output from the Survey very clearly s u p p o rting our view,
it is interesting how the rapid rise in SRI and oil & gas prices over
the last year has worked through to influence investor sentiment in SRI
terms. Resource efficiency and cost of carbon are both areas with a far
higher profile this year than last In a way, this is encouraging, as both
are very pertinent to financial performance of companies, and it has long
been the case that SRI has been dismissed as "soft", and something intangible,
not exactly related to balance sheets. However, the crux of SRI is long-term
sustainability - which companies are operating and set up to continue
to deliver value over the longer term, based on their business practices
and their understanding of the wider implications of what they do, and
the environment in which they operate. The 2006 focus on oil and carbon,
while it can be argued shows concern on the long-term issues around oil
reserves and availability, seems to us more a short-term reaction.
Secondly, and this comes to the heart
of niche vs. mainstream. SRI, and SRI research, quite definitely continues
to grow. The numbers in the Survey demonstrates that clearly. Yet investors
are frustrated that analysts and brokers continue, by and large, to treat
SRI as a separate discipline. It is clear they want it more integrated
into all research and analysis, and to be an integral element of such
analysis. That is both to support SRI funds, and the decision process
the buyside take here, and to support the mainstream. We do see SRI becoming
mainstream, in part as the issues around SRI become mainstream themselves,
and the oil price would be an example of that. However it is still partial
and uncertain progress - on both sides of the investment community.
Very much part of this, and a reflection of the flux in the market, is
the question of what extra-financial research/SRI investing is. Does it
cover ESG, SEE, Intangibles, Value -Added, Corporate Governance, etc?
The lack of consensus on terminology hampers the mainstream uptake, and
in some regards is, we feel, an arid debate. However delineated, these
issues are financial, and of directrelevance in valuing stocks and managing
port folios."
There
is some evidence
that micro lending is not the panaceae that some hope it might be.
There is an issue about whether borrowers should be borrowing in the first
place. There are many successes, but as in any country it is possible
that some people make financially unhealthy decisions because of unawareness
or inexperience. This is reduced as general levels of education,
particularly literacy, rise.
Also, a report
by The Economist concludes that microlending has helped reveal that
moneylenders are not as bad as their reputation indicates because they
do serve a group on terms that are being legitimised in some respects
by microcredit. And by one measure moneylenders supply 30% of microcredit
business in one MFI.
Coca-Cola Enterprises, the world's largest beverage company, released
its first company-wide Corporate Responsibility and Sustainability Review
detailing the company's impacts on communities around the world. We are
sceptical of the company's authenticity, having seen the top executives
of Coke lecture audiences on the community benefits of the company against
the backdrop of photos of students playing sports and drinking a high
sugar, carbonated, branded drink. The report was released at a time
when the company is facing growing protests in India, where activists
say its products contain high levels of pesticides and its operations
are depleting limited water supplies, and in Colombia, where it has also
been targeted for labour practices.
These allegations against Coca-Cola not only harm the company's reputation
and brand image, but have a financial impact through reduced sales. The
Indian market, a key area for many global firms, has been threatened by
these developments, and negative sentiment can also transfer to primary
markets in North America and Europe. In Colombia, company efforts
to block the formation of a union led to abusive tactics that included
murder and employee intimidation, say human rights activists. Although
the company declares that an independent audit showed that the workplace
environment was not abusive, the allegations led to Coca-Cola products
being removed from many university campuses in the United States.
Coca-Cola's situation epitomises two aspects of global business that
are becoming increasingly important. Local communities are becoming more
aware of the impacts such corporations have on their lives, and companies
in turn are developing a better understanding of how to minimise those
impacts that are perceived as negative. The situations often are complex,
however, and obtaining the correct facts is difficult.
Greenpeace has launched a "Guide
to Greener Electronics" which ranks companies on their use of harmful
chemicals and electronic waste recycling. The environmental group says
it hopes the guide will be used "to create demand for toxic-free electronics
which can be safely recycled, by informing consumers about company performance
on these two issues." The scorecard ranks the 14 top computer producers
and currently all fail to get a green ranking. Nokia and Dell share the
top spot in the ranking. They believe that as producers they should bear
individual responsibility for taking back and reusing or recycling their
own-brand discarded products. Nokia leads the way on eliminating toxic
chemicals, since the end of 2005 all new models of mobiles are free of
polyvinyl chloride (PVC) and all new components to be free of brominated
flame retardants from the start of 2007. Dell has also set ambitious targets
for eliminating these harmful substances from their products.
Third place goes to HP, followed by Sony Ericsson (4th), Samsung (5th),
Sony (6th), LG Electronics (7th), Panasonic (8th), Toshiba (9th), Fujitsu
Siemens Computers (10th), Apple (11th), Acer (12th) and Motorola (13th).
Lenovo is in bottom position. It earns points for chemicals management
and providing some voluntary product take back programs, but it needs
to do better on all criteria.
The European Union this week unveiled a proposed "action plan" that would
boost sustainable chemistry, industrial biotechnology and chemical engineering
research, development, and innovation in Europe. The European Technology
Platform for Sustainable Chemistry (download here
- 17.4 MB), or SusChem, seeks to foster and focus European research in
these areas and "offers an unique opportunity to focus European spending
in chemical R&D towards the most promising areas in respect of their
impact on the overall goal of sustainability and a high level of competitiveness,”
says the report. The report emphasizes that "Sustainable chemistry is
a key driver for innovation in many technologies and disciplines, providing
the knowledge to improve the benefits of traditional technologies and
combine them with nano- and biotechnologies, leading to new and improved
products.”
Other technologies described in the report range from renewables (solar,
wind, biofuels), hydrogen fuel cells, “plants for the future,” nanomedicine,
photovoltaics, and zero emission fossil fuel power plants.
The current three-year hot streak of energy stocks places ethical investors
in a bit of a bind - most traditional energy technologies significantly
degrade the environment, while most clean energy technologies are still
nascent, and hence carry substantial risk and volatility. Investment research
analyst Rich Williams of Phaethon has teamed up with investment advisor
Bill Cunningham of Creative
Investment Research to make a case
for hydropower as a means of gaining exposure to the bullish energy
market through a clean energy technology that helps address climate change,
notwithstanding some negative environmental impact. From a universe
of ten US and Canadian companies with significant commitments to hydro,
the pair has created a model portfolio of six companies that are best
positioned to perform well financially. The portfolio includes Avista
( AVA),
Brookfield Asset Management (BAM),
Idacorp (IDA),
PG&E (PCG),
Portland General (PGB),
and TransCanada (TRP).
At World Water Week in Stockholm
at the end of August, businesses and governments were encouraged to
urgently recognise the essential economic value of water in their strategies
and policies, according to two new reports published by industry and environmentalists.
In the first, the World Business Council for Sustainable Development says
water shortages pose potentially as serious a challenge as climate change.It
explores
three future scenarios to understand how businesses can contribute
to sustainable water management, including an analysis of innovation in
water efficiency, security of water supply and water rights. The second
report, from WWF, echoes sentiments in the first. Its authors show
that water crises are no longer a problem restricted to the developing
world. James Cameron, vice-chairman of Climate Change Capital, a
UK bank focused on low-carbon projects, says: “Managing water will be
a premium business to be in.” These issues are elaborated in Risk
and Terror where the development of hydrological warfare is introduced
and in Holonics/Environment where the tensions
on the environment are discussed.
Venture Capital
Private equity returns improved in the short term and
showed continued stability in the long term for the period ending March
31st 2006, according to Thomson Financial and the National
Venture Capital Association. At the end of the first quarter, the
one, three and five year returns improved for both venture capital and
buyout funds compared to Q4 2005 and the same period one year ago. Long
term performance remained steady and continued to outperform both the
S&P 500 and NASDAQ for the ten and twenty year horizons. Short
term performance showed an increase with the one year venture capital
returns posting a 19.8% return for Q1 2006 up from 13.3% in Q4 2005. Five
year returns improved, but remained in negative territory at -4.4% up
from -6.7% in Q4 2005. This negative return continues to reflect the aftermath
of the tech bubble burst. Ten and twenty year returns remained steady
at 22.7% and 16.5% respectively. One year buyout returns saw a very slight
increase posting 25.5% for Q1 2006 compared to 25.3% for Q4 2005. Ten
and twenty year buyout returns were relatively steady at 8.9% and 13.3%
respectively.
We've had conversations and read views that suggest there is an emphasis
on large transactions in the major markets globally -
private equity is booming but venture capital is more difficult.
Data coming out in the coming quarters will confirm or deny this observation.
Global private equity investment in clean energy
has soared to more than $ 2 billion in the second quarter of 2006, according
to figures from New
Energy Finance. The London-based analysts said this was 3x the amount
of venture capital and equity investment in the first quarter of 2006,
and 2x the figure for the same period last year. In the first half
of 2006, $ 19.3 billion was invested in the sector, of which $3.8bn was
venture capital or private equity money. The number of deals also
increased to 88, against 66 in the first quarter and 78 in the second
quarter of 2005. The average deal size also grew, suggesting that
investors remain confident about the sector as it grows. NEF said the
surge in private investment in public equity (PIPE) was particularly noteworthy.
Traditionally, private investors have been a last resort for publicly-listed
companies raising funds, but this year they have taken centre stage in
the clean energy sector. PIPE investments reached $556 million in Q2,
compared to just $21 million in Q1 and $28 million in the same period
of 2005. NEF forecasts that total venture capital and private equity deal
value between 2006 and 2012 in the sector will be just over $100 billion.
BusinessWeek
published a special report on clean energy in mid-August Wall
Street's New Love Affair - Why
some of the world's smartest investors are betting billions on clean energy.
And the FT reckons that investors
have never had a greater range of opportunities to put money into clean
technology - from funding a couple of academics with nothing but a
lab and a good idea to buying into funds that invest in public companies.
Returns can be good too. Merrill Lynch New Energy Technology is up 202%
over three years while Impax Environmental Markets is up 138% over three
years. The sector is strengthened by a number of powerful factors,
including: growing acceptance of the realities of climate change and the
need to do something about it; regulatory pressures resulting from that
knowledge; the high oil price and fears over energy security.
Its not just clean energy that is a focus of interest, private equity
players are also interested in China and India.
There, the ongoing war for the hearts, minds and money of private equity
and venture capital investors is turning into a rout. Trends in Asia for
the first seven months of the year show that India is raising 4x the funds
that are being raised in China. The reasons revolve around an industry
reorganisation in China and a large welcome mat in India. In China,
which is preparing to enact stricter regulations for private equity and
venture capital activity, the government is in the early stages of completely
re-organizing its approach and control over foreign private equity investments
in this country. China's State Administration for Industry and Commerce,
Ministry of Commerce, General Administration of Customs and the State
Administration of Foreign Exchange have issued their joint opinions for
China's latest venture capital regulations. (See the announcement on the
MOFCOM website.) In
the long-term, having a single policy created and enforced by a half dozen
regulatory agencies is no doubt good for the industry and China alike,
in the short scheme of things, the introduction of another series of regulations
and approvals means more delays.
China's reorganisation of the financial sector is necessary
but painful. Yet another Chinese private equity buyout deal, completed
months ago, has disappeared into the black hole of bureaucracy, otherwise
known as China's regulatory approval process. CVC Asia Pacific´s deal
to buy a portion Shandong Chenming Paper for $623 million is now being
declared dead. This is the latest buyout effort to fail after Chinese
government regulators and officials announced a policy change in which
foreign investors are no longer allowed to acquire majority control of
companies in designated Chinese industries. The paper or pulp industry
was not specifically included in earlier statements. Private equity
in China may come back on track, once the government has reset the investment
landscape more to their advantage. Meanwhile, everyone agrees that
PE activity in India continues to build momentum.
In India, on the other hand, the government has put
out the “open for business” sign in large print.
For example, the government approved KKR’s half-billion dollar acquisition
of Flextronics’ software development arm in India. It was a resounding
affirmation that India welcomes the investments of overseas private equity
and venture firms. Meanwhile, a flurry of new VC and PE funds have been
announced for India, including vehicles from Sequoia, Matrix, NEA and
Helion, among others. More importantly there are deals galore as
the investment pace in India is on the increase. New funds
include a $700 million Henderson India Fund and a $300 million Apax India
Fund. The CDC announced three new fund investments in India, bringing
the total number of its commitments there to seven funds. Evolvence has
acknowledged it has committed to six new funds in India. But of note in
India are not just the new funds and ventures deals. There are an increasing
number of spinouts in India by corporate and family groups seeking pre-IPO
capital. Tata, for instance, was one of three group’s announcing plans
to “unlock value” in captive operations through spinouts. Overall, a dozen
or so such pre-IPO financings have appeared in the last three months.
When all is said and done, India is set to fulfill predictions of overtaking
China this year.
Waste Remedies, a St. Louis-based
corporate consulting firm focused on waste management, has raised $8.5
million in VC funding from Advantage Capital Partners, Southwest Bank
of St. Louis and company management.
Chrysalix Energy, a Vancouver-based
VC firm focused on clean-tech, closed its second fund with C$ 70 million
in capital commitments. Limited partners include Robeco, Saristar Enterprises,
Citigroup Venture Capital International, Teachers’ Private Capital, West
LB Mellon Asset Management, Delta Lloyd, Kuwait Petroleum Corp, Essent,
Mitsubishi Corp., BASF Venture Capital and Shell Hydrogen.
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Interest Rates and Currencies
Interest rates in Europe rose in early August while
those in the US paused. The ECB put rates up to 3% and the UK put
rates at 4.75%. All economies are acutely sensitive to inflationary
pressure.
Although the US economy has shown signs of slowing, especially the housing
sector, prices and wages have not slowed. The Fed's rate decisions
remain tough, though pragmatism suggests it will rise before year end.
If the housing market crashes, it will be very difficult to raise rates,
in fact there will be strong incentive to lower rates. But this
will reduce incentives to save, which Americans need to do more of, and
be dangerous if inflation continues. It is time to save the old
fashioned way - by spending less.
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Trade and FDI
"World Investment Prospects to 2010: Boom or Backlash?"
was released by EIU and Columbia Business School. It principally discusses
FDI with forecasts to 2010 and useful for economists,
global investors and business planners/developers. A Special
Edition of the report is here or the full report can be purchased
at http://store.eiu.com.
WTO Doha round talks remain stymied. Although
a number of well meaning attempts to reinvigorate them have been made
the biggest players are not setting a good example. US Federal Reserve
chief Ben Bernanke warned of the threat posed to world economic growth
by protectionism. Speaking at an economic conference, Mr Bernanke
said "economic growth should not be taken for granted" and that protectionism,
while a "natural reaction" to globalisation, was not desirable.
This is a more positive stance than the protection of agricultural commodity
markets and policies that contributed to the stalling of WTO Doha talks
last
month.
Japan has suspended US long-grain rice imports after
supplies were found to contain a genetically engineered
variety that is unapproved for sale. The European Commission is
also moving to block imports of US rice to avoid further contamination.
"Trace amounts" of the experimental rice variety were detected in US commercial
supplies by the German company Bayer CropScience. Bayer then notified
US officials about the positive test. The genetically engineered
rice variety, LLRICE 601, possesses bacterial DNA that makes the rice
plants resistant to a weedkiller. The strain is not approved for sale
in the US, but two other strains of rice with the same genetically engineered
protein are. This sad situation is made more ironic by the US's
WTO actions aimed at forcing Europe to open markets to GMO. The
contamination could damage the U.S. $1 billion rice export market.
( More in Holonics/Environment.) Last year,
Japan and the EU banned US corn imports as a result of yet another GM
contamination scandal.
The government of the Indian state of Kerala banned
the sale and production of Coke, Pepsi, Sprite and
other drinks. Four other states have already banned the drinks
from schools, colleges and government offices. The action has been sparked
by a research group in New Delhi that last week claimed the drinks contained
pesticide residue. Pepsi coincidentally has just named Indra Nooyi,
an American with Indian roots, as new CEO to replace Steve Reinemund.
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Activities and Media
Harvest season is in full swing so we are racing to crop, share and preserve
the garden output. Courgette, tomatoes, beetroots, lettuce, carrots and
more are ready. It is a wonderful bounty. But it is also fragile - inclement
weather can cause quick damage and we are reminded of the fragility of
nature as well as its bounty. We are looking forward to Autumn in the
northern hemisphere after a hot summer.
The World Future Society
annual gathering which took place in July has put papers
online here. There are always thought provoking and educational
views expressed by this society, particularly useful for business owners,
strategists, long term investors and asset managers.
There has been heightened discussion of the role of philanthropy in our
world since Buffett gave billions to Gates to manage. We raised
concerns about this laissez-faire approach, notwithstanding that the high
profile gift needs to be emulated. The irony is that private giving
in the US is greater than anywhere else in the world, but public aid is
so limited that the combination of the two leaves the US lagging far behind
its peers. Scandinavian countries top the list of giving per person.
For those of you in a position to consider significant giving we strongly
recommend the conference Executive
Philanthropy in London on 10 October. This interactive
one day London conference will examine cutting edge practice for mutually
beneficial relationships that corporates and charities can form. The conference
looks at philanthropy from many perspectives, focusing particularly on
innovative ways organisations have achieved corporate value through philanthropic
activities, as well as the best practice gleaned from inspiring entrepreneurial
pace setters. Charles Handy, the leading business guru, who has
recently released The Philanthropists, will play a key role in the conference.
We also recommend a new blog launched by The Asymetric Threats
Contingency Alliance and Deepak Chopra's Intent Blog.
ATCA is populated by 5,000 invited leaders of business and government
and offers insightful views on topical issues by leaders in fields of
government, research and industry. The blog is launched with a
series of 11 Open ATCA Socratic Dialogues at IntentBlog
on The Hydrogen Economy, Climate Chaos, Einstein-Russell, New Orleans,
Buddha, Blended Value, Iran, Advaita, Social Entrepreneurship, Unity and
Non-Violence. ATCA conducts collective Socratic dialogue on global
opportunities and threats and is worth a browse.
I took another Pratchett detour reading The Carpet People - his first
novel but the rewritten, published version. This might also be suitable
for younger readers, though his invigorating satire remains.
I also enjoyed One
World
by Peter Singer. Singer is one of my favourite authors because
of his deeply reasoned and well balanced thought. He uses illustrations
that hit home and raises issues that are often hidden. One World
discusses the necessity of rapidly improving global governance because
many of the issues that impact our communities are without national boundaries.
It is strongly recommended for strategists, international lawyers, government
related groups and long term investors.
Peace One Day is a website
which promotes a film on peace and celebrates World Peace Day on September
21.
Please forward this publication to family and friends, place it on websites,
print it, duplicate it and post it freely. Knowledge is power!
This is a publication of: Astraea, Ireland + 353 59 9155037 Subscribe
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