BizResearch

Global Private Equity Report 2012

Source: Bain & Company

As 2012 began, the outlook for private equity was shrouded in uncertainty: Buyers and sellers finding it hard to agree on value. Anemic exit markets. Ominous signs for fund-raising. An industry awash in commitments, with nearly $1 trillion in dry powder. Almost $2 trillion worth of assets still on general partners’ books, more than 75% of them valued below carry hurdle rates.

But as we show in Bain & Company’s Global Private Equity Report 2012, the contours of a new future for PE are finally coming into sharp focus. In this report, we explain the new realities and describe what PE firms that want to continue to produce top-tier returns will need to do to prepare.

This report provides a timely look at every major aspect of private equity, with fresh data and insights from surveys and interviews with leading industry insiders. We also bring to bear the experience and judgment that Bain & Company derives from its unparalleled position as the leading adviser to the private equity industry and its stakeholders

Click here to download the report (Pre-registration required)

Photo from Creative Commons: Flickr: Mytudut

Global Private Equity Report

Source: Bain & Company

Extract from report introduction

In the following pages, you will find several integrated topics that describe what is happening today in the world of private equity, with a particular focus on buyouts. We begin with a brief review of 2009—examining what happened and, equally important, explaining what didn’t. From there, we quickly shift to assess the environment the global private equity industry faces in 2010, and what opportunities and headwinds the industry will encounter during the next 12 months and beyond. We make no claims to be seers; our crystal ball is as cloudy as yours in many respects. We do bring the facts to the table in classic Bain fashion and integrate them with our decades of expertise working in the private equity space to characterize the environment all firms must navigate—not just to survive, but to thrive.

We conclude by offering some insights into what leading-edge private equity investors will be doing better and differently in 2010. It’s often said that where you stand depends upon where you sit. If nothing else, it is quite clear that almost all private equity firms sit in different places today than they did five years ago. The processes, organizations and rules of the past may no longer apply to building a successful investment business for the future.

Click here to read the full report

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Trends in UK financial and Professional services November 2011

Trends in UK financial and Professional services November 2011

Despite concerns about the future competitiveness of London as a global financial centre, it continues to rank strongly in survey evidence and market activity. London was first in the September 2011 GFCI survey of international financial centres, closely followed by New York, Hong Kong and
Singapore.

Click here to read the full report.

One of the 'Economic trends series' by TheCityUK - a professional services association working to build a better understanding of the importance of the UK financial and related professional services industry.

Value and Values: Perceptions of Ethics in the City Today

Source: St. Paul's Institute

Extract from Executive Summary

This research confirms and refutes numerous stereotypes about financial services professionals working in the City of London. In response to certain questions, the respondents play to type. For example, ‘salary and bonuses’ are the most important motivation for professionals working in the FS sector in London for 2 in 3 (64%) of participants. ‘Enjoyment of the work’ comes a distant second. However, in other areas, they confound the stereotype of ‘greed is good’ capitalists. Most notably, FS professionals in London tend to think that bankers, stock brokers, FTSE 100 chief executives, lawyers and city bond traders are being paid too much. Moreover, most

FS professionals in London think that deregulation of financial markets results in less ethical behaviour. FS professionals in London tend to be positive about Corporate Social Responsibility (CSR) in their companies, with the majority agreeing that CSR is discussed and incentivised in their workplace. They also tend to reject the notion that CSR has a negative effect on shareholder value. Most notably of all, 75% agree that there is too great a gap between rich and poor in this country, and 58% agree that companies should invest directly in deprived communities.

Levels of knowledge on the history of the FS in the UK varies considerably, with the most experienced professionals far more knowledgeable about the history of the City and the economy more broadly.

• Most do not know the London Stock Exchange’s (LSE) motto (just 14%).
• Most FS professionals are not aware of earlier recessions in the UK around 1980 and 1990/91.
• Many are not completely familiar with what happened after the financial ‘Big Bang’:
• – 2 in 5 think that the LSE crashed following the ‘Big Bang’.
• – 1 in 3 disagree that the financial markets were deregulated.
• – 2 in 5 are not sure whether firms were allowed to be owned by an international corporation, although 42% say that was the case.
• – The majority do not know that minimum scales of commission were abolished and whether individual members of the LSE ceased to have voting rights.
  – More than two-thirds (69%) did not know that the financial ‘Big Bang’ happened in 1986.

Click here to read the full report

Photo from Creative Commons: Flickr: Simon Goldenberg

Quid Pro Quo: Redressing the privileges of the banking industry

Source: nef

Extract from Executive Summary

A fair deal for taxpayers?

Banks occupy a unique position in our economy and enjoy privileges that other industries can never hope for. This is most obvious in the way that major banks – Northern Rock, Royal Bank of Scotland, and Lloyds TSB – were bailed out by the government during the financial crisis, moves that have prompted a great deal of public concern.

But these bail-outs were just the tip of the iceberg. All the large banks also benefit from an implicit subsidy from taxpayers; because they will be bailed out, if necessary, markets view lending to them as low risk. This report quantifies this ‘too big to fail’ (TBTF) subsidy using methodology developed by the Bank of England. We found that while the TBTF subsidy has fallen from its mid-2009 peak, the ‘big five’ UK banks still enjoyed a combined TBTF subsidy of £46 billion in 2010. The TBTF subsidy in the UK is 62 per cent higher than in Germany, despite the latter having a significantly larger economy.

Barclays, Lloyds, RBS, HSBC, and Nationwide enjoyed subsidies of £10 billion, £15 billion, £13 billion, £7 billion, and £1 billion respectively. Whilst the government does not transfer these funds directly to the banks, it does pay for the subsidy indirectly through its own borrowing costs, which increase to reflect the additional risk it is taking on board.

This is not all, banks benefit from further special treatment:

• No VAT. Banks and other financial services enjoy exemption from VAT which likely saves them billions of pounds each year.
• Subsidised deposit insurance. In addition to bailing out a number of banks, taxpayers bailed out the UK’s deposit guarantee scheme to the tune of £19 billion during the financial crisis. The government does not promise to pay the debts of non-financial companies when they fail.
• Access to the Bank of England as lender-of-last-resort. Banks can borrow from the central bank when other banks will not lend to them. There is no such lender of last resort for other industries.
• Privatised gains and socialised losses. Taxpayers are deeply out of pocket not just for the bank bail-out, but also £5 billion per year in ongoing financing charges for these schemes. This is not helped by corporation tax cuts, which are likely to cancel out revenue brought in by the recently introduced Bank Levy.

The ICB’s primary prescription for tackling the TBTF issue is to ring-fence retail banking from investment banking activities. Yet the Commission admits that ringfencing will only reduce and not eliminate the subsidy.

Click here to read the full report

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Euro Area Cross-Border Financial Flows & the Global Financial Crisis

Source: European Central Bank (ECB)

Authors: Katrin Forster, Melina Vasardani &Michele Ca’ Zorzi

NON-TECHNICAL SUMMARY

The global financial crisis that started in 2007 and intensified after the collapse of Lehman Brothers in September 2008 abruptly interrupted the more than two-decade-long process of increasing world financial integration. With the complex web of global interlinkages contributing to the spreading of the turmoil from the United States to the rest of the world, the crisis led to unprecedented declines, or even reversals,
in global cross-border capital flows. Although financial markets have bounced back from their lows, cross-border capital flows have generally remained well below their pre-crisis levels.

The advanced economies, which have traditionally dominated global capital flows and were considered immune from sudden capital withdrawals, were particularly affected. Prior to the crisis, the euro area current account was close to balance, with cross-border financial flows mostly cancelling out when all components are summed. In net terms this indicated that the euro area was neither receiving nor exporting large capital flows, although significant developments were occurring in gross terms. The financial crisis, however, affected not only those countries with large current account deficits but all countries with open capital accounts.

The aim of this paper is to highlight the unprecedented adjustments triggered by the financial crisis in euro area cross-border financial flows.

ECB Occasional paper series ; NO 125

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World Investment Report 2011

WIR2011: Non-Equity Modes of International Production and Development

Source: UNCTAD (United Nations Conference on Trade and Development)

Global foreign direct investment (FDI) has not yet bounced back to pre-crisis levels, though some regions show better recovery than others. The reason is not financing constraints, but perceived risks and regulatory uncertainty in a fragile world economy.

The World Investment Report 2011 forecasts that, barring any economic shocks, FDI flows will recover to pre-crisis levels over the next two years. The challenge for the development community is to make this anticipated investment have greater impact on our efforts to achieve the Millennium Development Goals.

In 2010 – for the first time – developing economies absorbed close to half of global FDI inflows. They also generated record levels of FDI outflows, much of it directed to other countries in the South. This further demonstrates the growing importance of developing economies to the world economy, and of South-South cooperation and investment for sustainable development.

Increasingly, transnational corporations are engaging with developing and transition economies through a broadening array of production and investment models, such as contract manufacturing and farming, service outsourcing, franchising and licensing. These relatively new phenomena present opportunities for developing and transition economies to deepen their integration into the rapidly evolving global economy, to strengthen the potential of their home-grown productive capacity, and to improve their international competitiveness.
Unlocking the full potential of these new developments will depend on wise policymaking and institution building by governments and international organizations. Entrepreneurs and businesses in developing and transition economies need frameworks in which they can benefit fully from integrated international production and trade. I commend this report, with its wealth of research and analysis, to policymakers and businesses pursuing development success in a fast-changing world.

Photo from Creative Commons: Flickr: mag3737

Global Private Equity Report 2011

Source: Bain & Company

Authors: Hugh MacArthur, Graham Elton, Bill Halloran &Suvir Varma

This report provides a timely look at every major aspect of private equity. Building on the insights delivered in Bain & Company's 2010 report, we have worked hard to sift through the complicated forces that buffeted PE markets in 2010 and will continue to shape them in 2011.

Since the financial crisis, industry participants have had to wrestle with significant new realities. Although trading conditions for private equity have improved over the past year, PE firms need to reassess how they can continue to deliver superior returns when the traditional drivers they looked to in past years—GDP growth, multiple expansion, and friendly debt markets—no longer provide the lift they once did.

In the pages of this report, you will find Bain's in-depth analysis of the journey the PE industry travelled in 2010 and where we see it going in the years ahead. We buttress our thinking with fresh data and with insights from surveys and interviews with leading industry insiders. We also bring to bear the experience and judgment that Bain & Company derives from its unparalleled position as the leading consulting partner to the private equity industry and its stakeholders.

The full report is avaialble for download from the Bain & Co website (pre-registration required)

Photo from Creative Commons: Flickr:  Andreas-photography

Trends in UK Financial and Professional Services

TheCityUK have just published their semi-annual Trends in UK Financial and Professional Services.

Highlights from report

Financial markets in London and the UK have seen a recovery over the past 18 months. TheCityUK’s May 2011 City Indicators Bulletin found that 10 out of 11 indicators were higher in Q1 2011 compared with the same quarter in 2010.

The CBI/PwC survey indicated that the volume of financial services business rose in Q1 for the seventh survey in succession with a further increase expected for Q2. Overall the short term picture was mixed with five indicators rising, five falling in Q1 and one flat compared with the previous quarter. Indicators on the up in Q1 included trading in UK equities and financial derivatives, while City job vacancies were at their highest point for over two years. Bank lending to the non-bank private sector was marginally up, but generally has been relatively flat for the past two years.

Financial and professional services continue to make a substantial contribution to the UK economy. Key aspects include:

• Over 1 million people working across the UK in financial services, nearly 4% of total UK employment. About one third are employed in London and two thirds in the rest
  of the UK.
• The UK financial services trade surplus of £36bn in 2010 helping to offset the £98bn deficit in trade in goods.
• The UK’s financial services industry contributing £124bn to UK GDP in 2009, accounting for 10% of total economic output.
• UK financial services contributing £53bn in tax revenue in 2009/10, 11% of total UK tax receipts.

Photo from Creative Commons: Flickr: Simon Goldenberg

Good banking: why we need a bigger public debate on financial reform

Source: nef  (the new economics foundation)

This is a report of the Good Banking Summit, convened by nef and Compass on Wednesday 25th of May 2011.

The summit was organised in the light of an apparent return to business-as-usual in the financial sector, in response to growing public dissent about the conduct of the banks, and to address the too-narrow remit of the Independent Commission on Banking (ICB), also known as the Vickers’ Commission.

Three years on from the full outbreak of the banking crisis, a unique range of leading figures from academia, finance, politics, the law, consumer and civil society groups gathered in London, alarmed at the failure of banking reforms so far. Over 100 experts representing more than 60 organisations attended to address the question: ‘what would a good banking sector look like and how do we get there?’

The context for the summit was set by government inaction, and a range of other disturbing trends and factors including:

• The absence of proposals sufficient to change the culture of excessive remuneration, itself evidence of surplus profit generation and lack of competition
• A misunderstanding by the Commission of the implications of modern money creation which exposes the system to endemic instability, and which further leaves the public purse out-of-pocket
• The tolerance of continued risk taking for the disproportionate benefit of a few, underwritten by public guarantees
• Failure to resolve the issue of large financial institutions being ‘too big to fail’ and consequently presenting systemic risks. Failure to address the impact of ‘too big to fail’ public guarantees that generate substantial private profit for which the public finances are not compensated. The unfair competitive advantage this circumstance gives to large over small banks, which further entrenches barriers to market entry.
• Inadequate measures to ensure that businesses have access to adequate credit on appropriate terms
• No sufficient remedy to consolidation within banking since the onset of the crisis given the sector’s already high degree of concentration, and the perverse nature of this outcome considering the high degree of concentration existing prior to the crisis.
• A lack of consumer choice and universal service in high street banking, meaning that, as with utility companies, all citizens need a banking service and should be provided for even though some customers will be loss-making to the provider.

Click here to read the full report

Photo from Creative Commons: Flickr: Images of Money

Driving global wealth: mapping ultra high net worth individuals around the globe

Source: Forbes Insights

The balance of global wealth has begun to shift from traditional western economies to the emerging markets. The unprecedented growth of the Chinese economy, the expansion of India and the ongoing progress of markets in Russia, Brazil and other emerging nations, have led to this change in the nature of the world’s richest individuals and families. While the United States still has the greatest number of ultra high net worth individuals (UHNWIs), China, Russia and India have overtaken Western Europe in the number of billionaires they produce. This marks a fundamental shift in the social demographics of the world’s ultra-rich population.

Forbes Insights, in association with Societe Generale Private Banking, examined the unique characteristics of ultra high net worth individuals (UHNWIs) in a dozen countries. The analysis is based on exclusive data from Forbes Magazine’s database of the world’s wealthiest people. The minimum net worth of the individuals studied was US$1 billion, with three exceptions: India ($500 million minimum), China ($425 million minimum), and Singapore ($190 million minimum).

Selected key findings

There are extremely strong family links among the UHNWIs studied. This is a global phenomenon present in nearly all markets, with a few notable exceptions such as Russia. In many societies, keeping family close is a priority, as they have their children and other family members involved in their businesses. Still, as generations pass, some conflicts can arise, particularly when investments are managed by a family office.

Philanthropy and charity remain priorities for many UHNWIs as they look for ways to create a more lasting legacy and have a greater impact on society. In three quarters of the markets studied, more than 40% of the UHNWIs fund their own charitable foundation, or run a charitable foundation founded or started by other family members. Yet this is not yet universal. China remains a significant outlier, as only 7% of UHNWIs have foundations. But efforts are underway to encourage greater giving and philanthropy from the emerging Chinese billionaires.

Click here to read the full report

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Global Private Banking Wealth Management Survey 2011

The status quo in the private banking and wealth management industry is changing as the focus shifts to client service and value delivery, according to our 2011 Global Private Banking and Wealth Management survey -Anticipating a New Age in Wealth Management.

Those who can master change will be in a position to lead the industry and we believe that clear industry leaders and losers will emerge by the middle of this decade. Some highlights:

Today’s client is cautious, smart, less loyal and expects excellent service and clear value. Regulation has become the not-so-invisible hand, increasing the cost of operations. Greater operational efficiency and effectiveness are required, not just to compete but to survive. Standing still is no longer an option and institutions must now quickly adapt or face being left behind.

PwC's 2011 biennial report, surveyed a record 275 institutions from 67 countries, finding that wealth management continues to be a lucrative business with untapped potential for significant growth if institutions can be agile in adapting to meet changing demands

 To read the report go to the PWC website.

Volume 13 Risk and Rules: The Role of Control in Financial Decision Making

Source:  Barclays Wealth

Despite their net-worth, a third (33%) of wealthy individuals in the UK wish they had more self-control over their financial behaviour, says the latest report in the Barclays Wealth Insights series. Interestingly, of all global respondents, a need for increased financial discipline is likely to be felt most by those at the wealthiest end of the scale (£10m+), where 45% of respondents wish they had more self-control. This is despite the report showing that those who want self-control are less likely to be satisfied with their financial situation.

Researched by Ledbury Research and written in conjunction with Barclays Wealth, the report is based on a survey of 400 high net worth individuals in the UK and more than 2,000 across the globe, and provides an in-depth examination of wealthy investors from a behavioural finance perspective. It considers the different financial personality traits that exist amongst wealthy investors and the different self-imposed rules and strategies that they put in place to deal with these traits. It shows that "emotional" trading can cost investors nearly 20% in returns over a ten-year period*, and the report shows that those who employ high strategy usage have on average 12% more wealth than those who do not use rules.

When compared to respondents across the globe, those in the UK actually have a lower desire for financial discipline than most. Globally, 41% of high-net worth individuals wish they had more self control over financial behaviour, with the figure rising as high as 86% in Taiwan and 70% in Hong Kong.

The full report can be downloaded from the Barclays Wealth website

Photo from Creative Commons: Flickr: FD (John Watson)

Inflation Report May 2011

Source: Bank of England 

Extract from overview:

CPI inflation remained well above the 2% target but the recent weakness in underlying output growth persisted. The recovery in the world economy was maintained and is expected to support growth in the United Kingdom, as should the considerable stimulus from monetary policy and the current level of sterling. But the continuing squeeze on households’ real incomes is likely to weigh on demand, especially over the next year or so. Further ahead, the chances of four-quarter GDP growth being either above or below its historical average rate are judged to be roughly balanced.

CPI inflation is likely to rise further this year and is more likely than not to remain above the target throughout 2012. The near-term profile is markedly higher than in February, largely reflecting renewed increases in energy prices. Inflation is likely to fall through 2012 into 2013 as the impact of external price pressures and the increase in VAT dissipates and some downward pressure from a margin of spare capacity persists. But the timing and extent of that decline in inflation are both highly uncertain.

Click here to read the full report

Photo from Creative Commons: Flickr: Ken Teegardin

Islamic Finance

Source: TheCityUK

The launch of TheCityUK’s new report on Islamic Finance provides a landmark for promotion of the industry internationally as the UK maintains its position as the leading Western provider of Islamic financial services.

The report estimates that the global market for Islamic financial services rose by 10% to reach $1,041bn by end-2009, taking global assets above the $1,000bn threshold for the first time: a respectable outcome in the context of the difficult economic environment.

TheCityUK estimates that the global market for Islamic finance grew at a similar rate in 2010, with the potential to continue growth at this rate over a number of years. This is dependent however on major markets in the Middle East such as Saudi Arabia, Iran, UAE and Kuwait not being affected by the spread of political upheaval in the region.

The sukuk market recovered strongly in 2010 with record issuance of $50bn. While there have been defaults, the impact on the broader market has not been as extensive as was feared a year ago. Quality issuers of sukuk continue to attract demand from investors.

Revenues of banks picked up in 2010, following downward pressure on revenue and profitability in two previous years. Fewer launches mean that growth in Islamic funds industry has slowed in the recent years with global assets totalling $52bn in 760 funds. 

Click here to read the full report

Photo from Creative Commons: Flickr: Steve & Jemma Copley

Global hedge funds' assets increased

Global hedge funds' assets increased by 13% in 2010 to $1.9 trillion, the second successive year of growth. Barring further economic turbulence, growth is set to continue in 2011, with funds under management likely to recover to pre-crisis levels by the end of the year. Growth in assets in 2010 was due both to a 10% performance return during the year and a $65bn net inflow of funds, as net asset flows turned positive for the first time in three years. Prior to this, hedge funds saw a surge in redemptions and fall in liquidity, particularly in the latter part of 2008 and first half of 2009. The number of hedge funds totalled over 9,500 at the end of 2010, with new hedge funds launches outpacing fund liquidations for the first time since 2007.

Taken from the webiste: thecityuk.

To read the full report  and earlier reports go to:
http://www.thecityuk.com/what-we-do/reports/articles/2011/april/hedge-funds-2011.aspx

 Picture: Flickr: Creative Commons licence: UGArdener

Subverting Safer Finance: How the UK Holds Back Global Financial Regulation

Executive Summary

In areas including potentially damaging commodity speculation, the Alternative Investment Market, naked short-selling and the operations of British tax havens, the UK is holding back urgently needed regulation. Subverting Safer Finance finds that:

• London is a major centre for commodity trading, yet instead of demonstrating leadership, the UK is lagging ever further behind the US. And while the EU is trying to support global regulation by raising standards towards those of US legislation, the UK’s response is to block any attempt at reform.


• A London exchange called the Alternative Investment Market (AIM), has pursued a strategy of winning new business by driving down standards of transparency, governance and investor protection.


• The US banned naked short-selling (a form of trading that many argue increases market volatility and instability) in 2008. The European Parliament is seeking to impose an EU-wide ban on naked short-selling. But, the UK government is trying to derail this initiative.


• While the UK claims it cannot influence tax havens, many of which territories are in fact UK Crown Dependencies or Overseas Territories, a past history of intervention suggests otherwise. An HM Treasury review confirms that the UK has reserve powers enshrined in the constitutions of the Overseas Territories to affect and block legislation. The UK also has the power to intervene to uphold ‘good governance’ in the Crown Dependencies. This means that in several cases the UK is actively choosing to not tackle tax havens.

In order for the UK to demonstrate that it wants a to deliver a safer financial system, we believe the minimum necessary actions include:

• Bring standards up to US levels by introducing position limits on speculators in commodity markets and creating a UK equivalent of the US Commodities Futures Trading Commission.
• Eliminate tax havens that are under UK control, and work with the US, the EU and other international authorities to co-ordinate regulation of global tax evasion and avoidance.
• Ban naked short-selling to bring the UK into line with the US, Japan, Hong Kong, India and Australia.

Source: nef  (the new economics foundation)

Photo from Creative Commons: Flickr: nimbu

Bain & Company Global Private Equity Report 2011

Bain & Company Global Private Equity Report 2011
Bain & Company report 03/03/11
by Hugh MacArthur, Graham Elton, Bill Halloran, Suvir Varma

 

Market indicators clearly point to stronger PE activity across the board in 2011: More deals consummated, more deals exited, higher returns and more funds committed by LPs for future transactions. However, stronger PE markets remain just one major geopolitical problem or sovereign-debt crisis away from being derailed. When assessing the world of PE over the next year, our watchwords of the day are "cautious optimism."

To read the report go to the Bain site. Here.

 

 

 

Accelerating the Transition towards Sustainable Investing

Source: World Economic Forum

Financial markets have great transformational power to accelerate the transition towards more sustainable business practices and value creation. Recognizing this pivotal role of financial markets, the World Economic Forum has embarked upon a cross-industry initiative to stimulate the integration of environmental, social, and governance (ESG) factors into mainstream investment analysis.

The report focuses on the role of asset owners and asset managers as well as of corporations, governments, accounting bodies, investment advisors and other key stakeholders. It explores the role of active corporate governance as a key factor in driving the transition. The report also looks beyond functional changes (such as adapting incentive structures across the investment value chain) to encompass also the necessary mindset changes (such as approaching sustainability issues not only from a risk and compliance perspective, but also from an opportunity and value creation perspective).

The full report can be downloaded from the World Economic Forum’s website

Feather-bedding Financial Services: Are British banks getting hidden subsidies?

Source: nef (New Economics Foundation)

Executive Summary

Increased scrutiny of the financial system in the wake of the banking crisis has shed light on a number of practices previously taken for granted, which now might be viewed in a different light. The sheer complexity of modern banking (itself one of the conditions that brought on the crisis) has worked to shield the sector from difficult questions. But, with the dust of public interventions now settling, a number of anomalies are emerging.

The ‘Too Big to Fail’ subsidy: Having concluded that our major banks are “too big to fail” the government provides a public guarantee, effectively insurance against going bust. In business terms, this gives the banks a huge commercial advantage over other firms in a market system. It reduces their risk. This means that they can borrow money much more cheaply than if they were not ultimately underwritten by the public. Exchanges with leading auditors in front of the Treasury Select Committee confirm this. The hidden subsidy saves the banks a large amount of money – we estimate, conservatively, that it could be worth £30 billion annually– and helps them make unearned profits. It also means that when the banks pay bonuses to senior staff for “performance” and dividends to institutional investors, the rewards of that “insurance” provided by the taxpayer are going elsewhere, and not back to the taxpayer.

The “quantitative easing windfall” subsidy: When it was decided that the economy needed more liquidity, the Bank of England pumped money in using the technique called “quantitative” easing. To meet various, and sometimes self-imposed, requirements, it did this using a trading mechanism with several of the banks. As merely passive conduits for this “risk free” arrangement, the banks made more money, taking a cut of every trade. Here we find that they enjoyed a significant windfall, simply by being there, but that the failure to disclose sufficient information keeps the likely amount hidden.

The ‘make the customer pay’ subsidy: Looked at very sympathetically, the banks have been put in a difficult position. At the same time as being required to rebuild their capital, they are also under pressure to lend. It's like being pulled in two directions at the same time. In response, the banks have tried to manage this by increasing the gap between what they have to pay to borrow money, and what they charge people to borrow from them. This is the so-called interest rate "spread". But they do have alternatives. They can also recapitalise through reducing or eliminating bonus and dividend payments until their capital base is rebuilt. As it is, the taxpayer is subsidising the banks twice over: once through taxpayer funded public support to the banks, and secondly through paying much higher interest to borrow than the banks do. It’s another hidden subsidy which in the retail and one part of the investment banking world amounts to at least another £2.5 billion per year.

Click here to read the full report

Photo from Creative Commons: Flickr:Rogue Soul

CBI/PwC financial services survey

The 85th CBI/PwC Financial Services Survey shows a picture of continuing recovery in sentiment and volumes of business, even if activity remains below normal levels. Most sub-sectors of the industry report encouraging topline performance, and some are allowing costs to rise. There are mixed views over employment levels and investment is declining, although many firms are spending on regulatory compliance. The medium-term outlook remains tinged with caution.

The survey shows a further improvement in UK financial services sentiment, which has now been moving upwards for 18 months. Aggregate growth in volumes of business remains solid, very much in line with last quarter’s prediction. This suggests that activity is continuing to pick up after a very hesitant early recovery during the latter part of 2009 and the early months of 2010.

The majority of financial services sub-sectors have shared in this increasing activity, and predict further growth early next year. Two important exceptions are the banks and building societies, where weak retail demand is expected to lead to subdued activity. However, in the case of the banks this cautious view is partly offset by the outlook for commercial demand, which is expected to pick up in the coming quarter.
Overall, the slow but steady improvement in the industry’s survey responses is consistent with the improving outlook for the UK economy. Forecasts from independent economists and the Office for Budget Responsibility suggest that 2011 will see an improvement in GDP growth, although consumer spending is still expected to lag behind the wider economy. [Extract from executive summary]

Click here to read the full report

Photo from Creative Commons: Flickr: Simon Goldenberg

Commercial Dynamics in Financial Services

This Key Note Market Assessment report aims to provide a snapshot of the principal retail banks and insurers in the UK’s financial services industry in summer 2010, concentrating on the UK, but referring to the global context. Key Note also endeavours to evaluate the importance of customers to the leading organisations, and to suggest how the financial sector may develop.

The report defines commercial dynamics as those forces shaping companies’ business plans. They include political, economic, social and technological pressures and opportunities. By ‘financial services’, Key Note means cash management, savings, investments, loans, credit cards, mortgages, and long-term and short-term insurances. For the company profiles, Key Note focuses on retail banks and insurers based in the UK, i.e. those with whom the public is most likely to come into contact.

In 2010, the UK's domestic market was receding in international importance, but this created opportunities both for mutual societies, which had been struggling, and for new ventures. Consumers buying homes were benefiting from ultra-low interest rates on variable mortgages but new mortgages were hard to obtain and new personal loans were often 7.5% and more above base rate.

Financial groups in 2010 were slightly less important in the UK's top 20 companies than in 2002, but energy and mining groups were more significant. HSBC was the largest bank in both years. The same for-profit investors appear over and over again in the lists of major shareholders in financial groups, including BlackRock Inc, Legal & General Group, and AXA. In August 2010, four institutional shareholders, and the UK Treasury, controlled over 21% of the combined equity of the ten largest financial groups in the UK: a substantial degree of concentrated ownership.

The UK's mass retail market for financial services was less attractive to foreign companies in 2010 than in 2000. In 2000, foreign insurers had a bigger role than foreign banks in UK mass-market financial services, and in 2010 this situation continued, although Santander was increasing the foreign banking presence. Between 2000 and 2010, foreign insurers in the UK moved to focus more on direct sales of general insurance products, through their own operations or via partners, and on life, pensions and investments for corporate and affluent individual clients. (Extracts from Executive summary).

This Key Note report is available to current London Business staff, students and faculty from Key Note Online which can be found on the A-Z list of library databases within Portal.
 
Photo from Creative Commons: Flickr: By Howard Lake

Fallacies, Irrelevant Facts & Myths in the Discussion of Capital Regulation

Stanford Graduate School of Business Research Paper No. 2063

Abstract
We examine the pervasive view that "equity is expensive," which leads to claims that high capital requirements are costly and would affect credit markets adversely. We find that arguments made to support this view are either fallacious, irrelevant, or very weak. For example, the return on equity contains a risk premium that must go down if banks have more equity. It is thus incorrect to assume that the required return on equity remains fixed as capital requirements increase. It is also incorrect to translate higher taxes paid by banks to a social cost. Policies that subsidize debt and indirectly penalize equity through taxes and implicit guarantees are distortive. Any desirable public subsidies to banks’ activities should be given directly and not in ways that encourage leverage. Finally, suggestions that high leverage serves a necessary disciplining role are based on inadequate theory lacking empirical support.

We conclude that bank equity is not socially expensive, and that high leverage is not necessary for banks to perform all their socially valuable functions, including lending, taking deposits and issuing money-like securities. To the contrary, better capitalized banks suffer fewer distortions in lending decisions and would perform better. The fact that banks choose high leverage does not imply that this is socially optimal, and, except for government subsidies and viewed from an ex ante perspective, high leverage may not even be privately optimal for banks.

Setting equity requirements significantly higher than the levels currently proposed would entail large social benefits and minimal, if any, social costs. Approaches based on equity dominate alternatives, including contingent capital. To achieve better capitalization quickly and efficiently and prevent disruption to lending, regulators must actively control equity payouts and issuance. If remaining challenges are addressed, capital regulation can be a powerful tool for enhancing the role of banks in the economy.

 Click here to read the working paper

Kroll Global Fraud Report - Annual Edition 2010/2011

This year’s annual Global Fraud Survey, commissioned by Kroll and carried out by the Economist Intelligence Unit, polled more than 800 senior executives worldwide from a broad range of industries and functions in July and August 2010.

Selected findings from the survey:

88% of respondents reported that they had been hit by at least one type of fraud in the past year, a figure broadly similar in every region and consistent with those of previous years. Record-setting, headline-grabbing scams, such as the Madoff or Satyam frauds, can give a false impression of fraud’s financial impact on business. The most successful pathogens do not kill the host, but live off them. Of course, huge, company destroying losses do occur, but they are very rare. More typical are smaller losses over months or years.

In previous Global Fraud Surveys, the theft of physical assets or stock has always been the most widespread fraud by a considerable margin. This year, however, information theft, loss or attack has become, by a small margin, the most commonly reported fraud. It is not that fraudsters are switching away from other methods: the increases and decreases in other categories are of the sort that could be expected in this type of survey. Rather, information theft grew significantly. Such growth is never uniform across the economy. Information rich industries such as Financial Services, Professional Services, and Technology, Media and Telecoms itself are the most likely to be hit.

In the survey, 48% of respondents indicate that fraud has deterred them from engaging in business in at least one foreign country. Nearly two-fifths (39%) of respondents list at least one type of fraud that had dissuaded them from doing business in a foreign market, and 36% name a country or region where their experience or perception of fraud had deterred them from operating. The issue affects small and large companies alike. The breakdown of respondents by revenue for those companies which fraud had dissuaded from investing was the same as that for the survey as a whole.

The survey found that for those companies that have been affected by fraud in the last year and the culprits identified, the most common fraudsters are equally junior employees (22%) and senior ones (22%). When agents and intermediaries (11%) are added in, the proportion of fraud carried out by those who work for the company in one way or another goes well above half.  These findings are remarkably consistent across geographies.

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M&A: back to the new reality: a survey of European companies’ M&A plans for 2011

Three years after the start of the financial crises, the third annual survey of the M&A plans of European companies, conducted by the Boston Consulting Group and USB Investment Bank, reveals a nuanced picture for mergers and acquisitions in 2011.  Many of the findings indicate a positive outlook for corporate transactions over the [past 12 months, suggesting that next year should see a healthy level of M&A activity. Yet some survey results also show an element of cautiousness among executives with regard to the M&A outlook, which is likely to have an impact on deal-making in 2011.

On the positive side one in six companies is planning large-scale transaction in the next 12 months and among midsize and large companies, one in three have such plans. But last year’s expectations of a similar recovery in deal activity failed to materialize in 2010, amid fears of a double-dip recession and sovereign-debt crises. With lingering uncertainties over the M&A market; it is hardly surprising that optimism about the prospects for deal-making is tempered by caution.

So will M&A activity rebound to old heights, or is it entering a “new reality” – a low-growth, post crisis environment that will continue to dampen deal activity? This white paper tries to shed some light on this question, drawing on the 2011 plans of chief executive officers and senior managers from 179 of the largest publicly listed European companies. (Taken from introduction to report).

Click here to read the full report

Authors: André Kronimus, Alexander Roos

Photo from Creative Commons: Flickr: wilhei55

Bank of America Merrill Lynch Study of High Net Worth Philanthropy

The 2010 Study of High Net Worth Philanthropy, sponsored by Bank of America Merrill Lynch, offers new insights into the philanthropy of wealthy donors. Conducted by the Center on Philanthropy at Indiana University, this study reflects the attitudes and behaviours of more than 800 respondents throughout the United States with household income greater than $200,000 and/or net worth (excluding the value of their residence) of at least $1,000,000. The average wealth of respondents was $10.7 million. Half of those who responded had a net worth between $3 million and $20 million.

Selected Findings from the Study:

Despite a strong commitment to nonprofits in 2009, average charitable giving by high net worth households decreased between 2007 and 2009. Average charitable giving dropped 34.9% from $83,034 in 2007 to $54,016 in 2009, after adjusting for inflation. This drop in giving had the largest impact on health organizations.

Largest Gifts: more than 55% of high net worth households gave their largest gift in 2009 to fund the general operations at nonprofit organizations. Significantly fewer households made their largest gift to support the growth of an organization (24%), for capital campaigns (14%) and for the long-term needs of the organization (11%) compared to 2007.

Disaster Relief:  giving to disaster relief, such as the earthquakes in Haiti and Chile, Hurricane Katrina, tsunamis, or other events, is an area in which wealthy households do not make trade-offs. The majority of wealthy households (83%) sometimes or usually make a donation in response to disasters. When households made a donation, more than 92% gave to disaster relief in addition to their regular charitable giving.

Why Wealthy Donors Donate: when asked about the motivation behind their charitable behaviour, high net worth households reported that they gave when they believed their gift would make a difference (72%), when they felt financially secure (71%), when they knew the organization was efficient in its use of donations (71&), and to support the same causes or organizations annually (66%).

Photo from Creative Commons: Flickr: Mindful One

Why Does the Economy Fall to Pieces after a Financial Crisis?

Journal of Economic Perspectives, Vol. 24, Issue 4, Fall 2010

Author: Robert E. Hall

Abstract
The worst financial crisis in the history of the United States and many other countries started in 1929. The Great Depression followed. The second-worst struck in the fall of 2008 and the Great Recession followed. Commentators have dwelt endlessly on the causes of these and other deep financial collapses. This article pursues modern answers to a different question: why does output and employment collapse after a financial crisis and remain at low levels for several or many years after the crisis. It focuses on events in the United States since 2008. Existing macroeconomic models account successfully for the immediate effects of a financial crisis on output and employment. I will lay out a simple macro model that captures the most important features of modern models and show that realistic increases in financial frictions that occurred in the crisis of late 2008 will generate declines in real GDP and employment of the magnitude that occurred. But this model cannot explain why GDP and employment failed to recover once the financial crisis subsided—the model implies a recovery as soon as financial frictions return to normal. At the end of the article, I will mention some ideas that are in play to explain the persistent adverse effects of temporary crises, but have yet to be incorporated into the mainstream model.

Online access to this article is available to London Business School staff, student and faculty via Article Finder, which can be found on the A-Z list of library databases via Portal.

How Did Increased Competition Affect Credit Ratings?

Authors: Bo Becker and Todd Milbourn
Publication Date: Oct 2008, revised July 2009, Sep 2010

Executive Summary:

When Fitch Ratings took on Standard & Poor's and Moody's as an alternative credit rating agency in the 1990s, there was a general assumption that the increased competition would lead to higher-quality corporate debt ratings from the incumbents. In fact, their ratings quality declined during the 10-year study period, according to Harvard Business School's Bo Becker and Washington University's Todd Milbourn. One possible cause: competition weakens reputational incentives that drive ratings quality. Key concepts include:

• The entry of a third major rating agency, Fitch, coincided with lower overall quality, as measured by both the levels and the informational content of incumbents' ratings.


• Prior to Fitch's growth into a serious competitor, S&P and Moody's faced limited competition for rating corporate bonds. A major concern for the raters was maintaining their reputation with investors as providers of honest, accurate ratings. Increasing competition may force raters to compete harder for issuers' business, reducing their focus on the long term and thereby undermining quality. This appears to have been the case with the additional competition from Fitch. Incumbents' ratings became higher and less informative in those industries where Fitch became more prominent as a rater of corporate bonds.


• For regulators and policymakers, it is worth considering that increasing competition in the ratings industry involves the risk of impairing the reputational mechanism that seemingly brings about the provision of good quality ratings.

Harvard Business School Working Paper Number: 09-051

Global Fraud Report 2010/11

Source: Kroll press release

Theft of information and electronic data at global companies has overtaken physical theft for the first time, according to the latest edition of the Kroll Annual Global Fraud Report. This year’s study, commissioned by Kroll and carried out by the Economist Intelligence Unit, shows that the amount lost by businesses to fraud rose from $1.4m to $1.7m per billion dollars of sales in the past 12 months – an increase of more than 20%. This year’s findings reveal that theft of information or assets was reported by 27.3% of companies over the past 12 months, up from 18% in 2009. In contrast, reported incidences of theft of physical assets or stock declined slightly from 28% in 2009 to 27.2% in 2010.

According to the 2010 survey, 88% of companies said they had been the victim of at least one type of fraud during the past year. Of the specific countries analyzed, China is the top market in which companies suffered fraud with 98% of businesses operating there affected. Colombia ranked second with a 94% incidence of fraud in 2010, followed by Brazil with 90%.

Information-based industries reported the highest incidence of theft of information and electronic data over the past 12 months. These include financial services (42% in 2010 versus 24% in 2009), professional services (40% in 2010 versus 27% in 2009) and technology, media and telecoms (37% in 2010 versus 29% in 2009).

The speed of technological developments poses new challenges in the fight against fraud. Nearly one-third (28%) of respondents cited information infrastructure complexity as the single most important factor in raising their exposure to fraud. However, despite the increased risks, only 48% of companies are planning to spend more on information security in the next 12 months, down from 51% last year.

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Financing Risk and Bubbles of Innovation

Harvard Business School Entrepreneurial Management Working Paper No. 11-013

Authors:  Ramana Nanda and Matthew Rhodes-Kropf

Executive Summary:

While start-up firms are key to any technological revolution, they also run a high risk of failure. To that end, investors often provide limited capital in several careful stages, gaining confidence in a firm before doling out another round of funding. However, these investors still face the possibility that other investors won't provide follow-on funding, even when the firm's prospects remain sound. That's a big risk for individual investors who can't afford to fund a new firm all by themselves, and whose investment will flounder if others don't invest, too. Research by HBS professors Ramana Nanda and Matthew Rhodes-Kropf explores why future investors may not fund the project at its next stage even if the fundamentals of the project have not changed. Key concepts include:

• The paper introduces the concept of financing risk--the risk that a project cannot garner the additional funding it needs to proceed, even if its fundamentals remain sound.
  
  
• When investors become worried, future investors will not support the project. Withdrawing support today leads to a self-fulfilling jump to a poor financing environment..
  
  
• Investors face a trade-off: either providing more capital to novel ideas to protect against financing risk, or providing less funding to maximize knowledge before providing more capital..
  
  
• The most innovative firms face the most acute trade-off situations, and thus, funding to these firms is the most unstable..
  
  
• The additional capital that enters the market during "hot" times goes not only to weaker projects, but also to more innovative projects that are a good investment only when financing risk is low. Thus, the most innovative projects may need a hot funding environment to get funding at all.

Impact of investment funds on restructuring practices and employment levels

One feature of the global economy in recent years has been the increasing number and importance of new investment funds (private equity (PE), hedge funds (HFs), and sovereign wealth funds (SWFs)), which are sometimes referred to as alternative investment funds (AIFs). This increase has paralleled fundamental changes in financial markets and has generated heated debates on the impact of these funds on restructuring practices, employment levels and industrial relations. Fund managers have claimed that they play a valuable role in rejuvenating underperforming companies, thereby contributing to long-term employment growth. By contrast, many employee representatives and those on the political left have argued that these new funds secure returns at the expense of labour.

However, the evidence base for assessing the effects of these AIFs on labour outcomes remains controversial. Therefore, in 2009 Eurofound included the issue of the impact of new forms of ownership and governance on employment in its new programme ‘Social Dialogue and the Employment Relationship: Evolution in European and National Industrial Relations Systems’. The programme states that ‘developments in financial markets, (more specifically private equity, hedge funds, and sovereign wealth funds, hereafter mainly referred to as investment funds) have given rise to new forms of corporate ownership. The mode of ownership can be expected to have a significant impact on the relationships between all stakeholders within and outside the firm. They almost certainly have consequences for a wide range of employment and social outcomes. These employment and social outcomes include working conditions, social dialogue, human resource practices, restructuring practices, and the overall level of employment. The impact of investment funds is likely to vary between Member States, depending upon both the regulation of the funds themselves and the particular labour market and industrial relations context in the States in which they operate

The impact of investment funds on restructuring practices and employment levels presents the results of a project that brought together researchers from several European countries to assess the effects of investment funds on labour outcomes.

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Financial services: Challenges and prospects

The recent financial crisis has brought to light the serious challenges that the European financial services sector is facing. What are the prospects that a viable, more resilient financial industry will emerge from the crisis? This report reviews the economic trends in the banking and insurance industries and the debate on the regulation of financial markets. It looks in detail at the business models that are applied in the different segments of the financial sector as a response to the crisis. Finally, it develops scenarios for the potential adaptation process of the European financial services sector. The research was conducted by means of case studies of a range of companies in the sector, an online survey and interviews with experts from companies, social partners, research institutions and public authorities and a detailed analysis of company statements and financial data.

Throughout 2009 and 2010 the health of the financial system has improved. With the global economy growing, risks to financial stability have diminished. The capital ratio of the Euro area’s banking system rose by one percentage point from autumn 2008 to 7.5% in December 2009, the highest level ever recorded. Continued deleveraging in the banking sector (paying off of debts) has helped to reduce the predisposition to shocks, so normalising markets. With the rise in asset prices, large parts of the banking sector have returned to profitability.

No clear trend of company restructuring in European banking services is visible. Much depends on new regulation, which is still being formulated. Some changes can, however, be discerned. Firstly, trading books will not regain their pre-crisis importance. This can be attributed to the significant reduction of proprietary trading, which was associated with a strong decline in jobs for traders. Secondly, deglobalisation of markets may happen to some degree as national markets become more important. Foreign activities do not always fit the prevailing business model and appear to be risky. Finally, national governments have supported many banks directly or indirectly. This is going to create a strong commitment to the country of residence and may lead to a retreat from international investment banking and trading. [taken from press release]

The full report can be downloaded from the Eurofound website

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Executive Compensation and Financial Accounting

Foundations and Trends in Accounting Vol 4(2)

David Aboody & Ron Kasznik

Abstract: In this paper we provide research perspectives on the relation between executive compensation and firms’ financial reporting and disclosure policies. In particular, we examine the two primary contexts in which this relation has been examined in the extant literature. The first issue we examine is the extent to which the structure of executive compensation plans, particularly the use of earnings- and stock-based compensation, induces certain financial reporting and disclosure choices. The second issue we examine is the extent to which accounting regulation related to financial reporting and income taxation creates incentives for firms to design certain compensation plans for their executives. We highlight the key inferences from these areas of research and offer some suggestions for the development of a more integrated research agenda.

Foundations and Trends can be found on the A-Z list of library databases in the library area of the Portal. It is available to available to current staff, students and faculty of the London Business School.

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UK FUNDS UNDER MANAGEMENT UP 12% IN 2009 TO £4.1 TRILLION

 

UK FUNDS UNDER MANAGEMENT UP 12% IN 2009 TO £4.1 TRILLION - CLOSE TO PRE-CRISIS PEAK

UK funds under management end 2009 just 1% short of record high from two years earlier.
Recovery continues into 2010 as inflow of new funds is sustained.
Global conventional investment management assets increase by 14% in 2009 to $71 trillion.

Assets under management of fund managers in the UK increased by 12% in 2009 to £4.1 trillion according to the annual Fund Management report by the TheCityUK: the new independent membership body promoting the UK financial and related professional services industry. The 2009 recovery resulted in assets under management closing in on highs reached at the outset of the credit crisis.

Strong investment performance and an inflow of new funds during the year, particularly from retail clients, contributed to the increase in funds in 2009. Early indicators for 2010 show that the industry has continued to recover, with a 6% gain in assets of UK domiciled retail funds in the first seven months of this year.

According to TheCityUK’s report, institutional funds make up two-thirds of UK funds under management. A further 17% comes from retail funds, 8% alternative funds and the remainder from private clients. Over a third of funds managed in the UK are from overseas clients.

 For this and more go to the website:

http://www.thecityuk.com/

 

 

 

Trends in Lending

This publication presents the Bank of England’s assessment of the latest trends in lending to the UK economy. The data set covers the major UK lenders: Banco Santander, Barclays, HSBC, Lloyds Banking Group, Nationwide and Royal Bank of Scotland. Together they accounted for around 65% of the stock of lending to businesses, 45% of the stock of consumer credit, and 75% of the stock of mortgage lending at the end of 2009.

Executive summary from report

The flow of net lending to UK businesses remained negative in June. The stock of lending to all the main sectors of the economy contracted in 2010 Q2. Some major UK lenders reported that spreads on lending to larger corporates continued to fall, but by a diminishing amount. Spreads on lending to small and medium-sized enterprises were little changed. Contacts of the Bank’s network of Agents noted that credit conditions for smaller businesses remained tighter than for larger corporates, with demand for bank finance generally remaining weak.

The flow of net mortgage lending by all UK-resident mortgage lenders was little changed in June. Gross lending for house purchase in July was similar to that in June, though approvals for house purchase edged down according to data from the major UK lenders. Some major UK lenders reported that recent higher longer-term funding costs had contributed to a rise in spreads on longer-term fixed-rate mortgage products. The overall effective rate on new mortgages was little changed in June.

The flow of net consumer credit decreased in June, though the annual growth rate of the stock of lending remained broadly unchanged and close to zero. Effective interest rates on credit cards increased slightly in June, while rates on personal loans edged lower. Most major UK lenders reported no significant changes in credit availability or demand in July.

Click here for full report

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Reinventing Venture Capital

Read the latest research report from Demos

Summary from report

The UK faces a very serious 'triple challenge'. Economically it is emerging with an extremely fragile recovery from the worst recession in living memory. Environmental necessity will require a large-scale transition to a low carbon economy. Socially the UK will need to respond to unprecedented levels of inequality in incomes and wealth, and find a long-term solution to the problems of social exclusion, social immobility and poverty.

This report asks to what extent the venture capital industry can help the UK meet these challenges, whether it needs to adapt its current investment approaches to do so, and what the most elective government policies are to encourage the industry to meet them. Start-up firms of the type backed by venture capital are usually by nature highly innovative"—"they have a total focus on developing successful new products. Their innovative activity is also likely to create social returns and positive spillovers, which will be conferred on the wider economy. In this sense, venture-capital-funded start-ups will have a key role to play in developing new technologies for the low carbon economy to the stage where they can be adopted for large scale roll-out.

Indeed, based on previous simulation work of the impact of increases in innovation on economic growth undertaken for the European Commission, we estimate that national income could be increased by around £3 billion per year by 2020, if the new government ensures that £2bn of commitments already made to support the development of a low carbon economy are specifically directed to venture capital, and we assume — as seems reasonable — that 40 per cent of this is spend on R&D.

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Bond Markets 2010

The nominal value of bonds outstanding of UK-based issuers totalled a record £3,353bn at the end of 2009, up 5% on the previous year. The figures are revealed in the latest Bond Markets report issued by TheCityUK, a new independent membership body, promoting the UK financial and related professional services industry.

The UK Government net debt issuance, which was below £50bn in the years prior to the economic crisis, increased to £211bn in the financial year 2009/10 and is likely to range between £100bn and £150bn over the next three years. The outstanding volume of international bonds in the UK, which account for 70% of the UK bond market, increased marginally in 2009 to £2,373bn, after nearly doubling in value in the two previous years. London remains the leading centre for international bond trading with an estimated 70% of secondary market turnover.

The report also reveals that overall amounts outstanding on the global bond market increased by 10% in 2009 to a record $91 trillion. Most of this was in domestic bonds with the US as the largest market accounting for 34% of the value outstanding, followed by Japan 13%. The UK's share was 6%. Concerns about the ability of some countries to continue to finance and service their debt have come to the forefront since late 2009.

Click here for the full report

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The 11th Global Fraud Survey

The 11th Global Fraud Survey from Ernst & Young looks at how businesses have coped with increasing fraud and corruption risk during the financial crisis, and examines the growing pressures on the CFO, internal audit, legal and compliance functions. It reviews the risks and challenges that businesses will face as they navigate clear of the financial crisis and begin to focus on growth.  This year’s survey reflects the views of over 1,400 senior decision-makers in major companies in 36 countries across the world.

Key findings specific to the UK include:

Increased enforcement against fraud, bribery and corruption is a priority in many major markets. The passage of the UK’s Bribery Act is the latest example of a more robust approach to punishing the unethical conduct of individuals and corporates. Individual executives and directors will not be immune from prosecution. 76% of UK respondents say their directors are concerned about personal liability for actions carried out by their company.

Despite this concern, organisations are not behaving in a way that would increase their own protection. Alarmingly, 18% of UK companies have not performed a fraud risk assessment over the last 12 months, and 1 in 10 (8%) have never completed one. Performing such an assessment will help prioritise actions to deal with the most significant fraud risks and is therefore fundamental when budgets and resources are scarce.

Having coped through the downturn, many companies are now looking for new growth opportunities, which may come through entering new markets or making acquisitions. These efforts can expose companies to numerous new risks, potentially including corruption issues. To minimise such risks, businesses should undertake thorough, focused pre-acquisition due diligence. However, 34% of UK respondents rarely or never perform fraud or corruption related pre-acquisition due diligence, while 47% rarely or never perform a similarly focused post-acquisition review.

When growth returns, Ernst & Young expect more challenges, more potential for fraud, more exposure to corruption and more interest from regulators. In the coming months, if they haven't done so already, companies will need to review or improve their procedures to achieve long-term sustainable and ethical growth.

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Bankers’ Pay and Extreme Wage Inequality in the UK

CEP special report (CEPSP21) Brian Bella & John Van Reenenb.
Abstract:  It is well known that the distribution of income in the United Kingdom has widened considerably in the last three decades. This rise has been a result of a widening at both the top and bottom of the wage distribution. More recently, most of the action appears to have occurred at the top of the distribution with lower wage workers keeping pace with the median. This paper explores this increased dispersion at the very top of the wage distribution. We show that the growth has occurred primarily within the top few percentiles and that the rise in inequality in recent years is much more pronounced when we focus on annual earnings as opposed to weekly wages (where most work has concentrated). This is because annual wages include bonuses. By the end of the decade to 2008, the top tenth of earners received £20bn more purely due to the increase in their share (it would have been only £173bn had their share of the pie remained the same as 1998), and £12bn of this went to workers in the financial sector (almost all of which was bonus payments). We consider various reasons why the bankers have managed to capture an increasing share of the wage bill over the last decade.

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The 2009 Corporate Contributions Report

This report is based on The Conference Board 2009 Corporate Contributions Survey, which gathers and analyzes data on charitable contributions made by US-based companies in 2008. The survey was conducted between May and July 2009; 166 companies responded. The respondent companies are among the largest corporate donors in the United States, with total U.S. and international contributions of $9.47 billion in 2008. Contributions data contained in this report were collected directly from each company. Pre-tax income, sales, and employee data for this report are primarily based on data as reported by Standard & Poor’s Research Insight database.

Survey highlights:

Pharmaceutical companies remain the top donor industry in the United States. Although lower than in 2007, their US contributions outpaced all other industry groups with respect to actual cash and product contributions.

Health and human services organizations received the largest share of corporate support, both in the United States and internationally; however, US contributions to health and human services organizations decreased in 2008.

When examined by industrial sector, manufacturing companies made 66.17% of their US contributions as non-cash (close to last year’s 68.6%), compared to the services sector at 10.22% (up from last year’s 6.09%).

The banking industry was the largest cash giver (direct and foundation) at $584.78 million, followed by pharmaceuticals ($407.85 million); retail and wholesale trade ($356.56 million); insurance ($295.60); and food, beverage, and tobacco ($262 million) US Contributions

Environmental organizations received the smallest share of US corporate giving at $146.43 million, which is just 2.54%.  Transportation companies made the largest contribution to environmental organizations, both in terms of dollars ($38.29 million) and as a percent of the industry total (37.80%). Telecommunications companies contributed the least to the environment (less than 0.01%), followed by pharmaceutical companies and precision instruments (both 0.06%)

The full report is available to London Business School staff, students, faculty and alumni from the Conference Board Research database, which can be found on the A-Z list of library databases via Portal.

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The 2009 Top Executive Compensation Report

It has been 3 years since the Securities and Exchange Commission (SEC) released new rules for the disclosure of executive and director compensation. These rules were intended to provide shareholders and other readers of proxy statements with clearer and more consistent executive compensation data. They were also designed to provide companies with more direction regarding form and content for the presentation of executive and director compensation information. Companies reporting on executive compensation now must account for all individuals who held the positions of principal executive officer and principal financial officer, as well as the next three most highly paid executives—regardless of their start date during the calendar year. In addition to the new Compensation Discussion and Analysis (CD&A), the SEC requires more extensive executive compensation disclosures covering three broad categories: current compensation, equity related holdings that can be the source of future gains, and retirement plans and other post-employment compensation.

The recent financial crisis which resulted in the Government bailout of banks has once again placed executive compensation in the spotlight. There has been public outrage as CEOs and other executives deemed responsible for the financial crisis pocketed millions from bonuses and golden parachutes. CEO perks alone in 2008 amounted to an average of $364,041, nearly 10 times the median salary of a full-time worker. Not surprising then that CEO’s salaries have been under public scrutiny.

This annual study from the Conference Board examines salary, total cash compensation, total compensation, and the mix of compensation elements for the CEO and the five highest-paid executives for specific revenue and industry groups of US listed companies. In addition to descriptive details about the cash elements of compensation, this report provides information about stock and stock option compensation and the relationships between some key compensation elements.

The full report is available to current London Business School students, faculty, staff and alumni from the Conference Board Research database which can be found on the A-Z list of library databases in Portal.

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International Private Wealth Management

The December 2009 edition of IFSL’s International Private Wealth Management report estimated that the global market for wealthy individuals with over $1m of investable assets fell by 19% in 2008 to $32.8 trillion.Assets of wealthy investors contracted by 22% in Europe, the Middle East and Asia Pacific, but 8% in the Middle East and 6% in Latin America.

Read the report in full and see the full range of other reports on insurance, private equity, fund management and more on the highly useful IFSL website:

http://www.ifsl.org.uk/

If you are interested in Wealth Management you may also find the CapGemini World Wealth Report of interest:

http://www.us.capgemini.com/worldwealthreport09/

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Walker Review of Corporate Governance of UK Banking Industry

The final report on UK corporate governance in banks and financial institutions by Sir David Walker, former chairman of Morgan Stanley was released at the end of November.  The review was commissioned by Gordon Brown to examine corporate governance in the UK banking industry.  Recommendations from the review:

The main recommendation in the area of shareholder engagement is the creation of the Stewardship Code. The code, put together by the Institutional Shareholders Committee (IRC) sets out a series of best practices for engagement.  The report also recommends that the ISC stewardship code should be ‘ratified’ by the independent Financial Reporting Council (FRC) so that it’s status should be akin to that of the Combined Code that governs corporate best practice, with observance on a similar “comply or explain” basis.

The report also recommends overhauling the boards of banks and other big financial institutions by strengthening the role of non-executives and giving them new responsibilities to monitor risk and remuneration. It also recommends a stewardship duty on institutional shareholders to play a more active role as owners of businesses.

Regarding pay, the Review recommends extending the role of the remuneration committee to cover firm-wide remuneration policy as well as giving the committee direct responsibility for the pay of all highly-paid employees. At least half of variable pay or bonuses should be paid in the form of a long-term incentive scheme with half vesting after three years and the rest after five years. Two-thirds of cash bonuses should also be deferred.  There should also be greater pay transparency in the big banks by requiring public disclosure of the number of employees earning more than £1m, broken down by bands of pay.

Other specific recommendations in the report include:

• Chairman of board to face annual re-election
• Chairman of remuneration committee to face re-election if report gets less than 75% approval
• Most non-executives to spend substantially more time on the job
• Induction process for all non-executives and regular training
• Non-executives to face tougher scrutiny under FSA authorisation process
• Banks should have board level risk committees chaired by non-executive
• Risk committees to scrutinise and if necessary block big transactions
• Chief Risk Officer to have reporting line to risk committee
• Chief Risk Officer can only be sacked with agreement of board
• Remuneration committees should disclose right of high-paid employees to receive enhanced benefits

Click here to read the report

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The 2009 Institutional Investment Report

The Conference Board’s annual Institutional Investment Report provides analysis of the asset growth and portfolio composition of institutional investors operating in the United States.  The 2009 edition is structured as follows: Part I examines historical trends regarding the investment in US financial markets by institutional investors as a group and by individual types of institutions, including pension funds, investment companies, insurance companies, savings institutions, and foundations.  The section features information on overall asset growth as well as asset allocations across institutions.  Parts II through V expand on the general analysis of Part I by providing a closer snapshot of institutional investments in single asset classes, such as equity (Part II: US Equity Markets), debt securities (Part III: US Bond Markets), alternative instruments including hedge funds (Part IV: Hedge Funds and Alternative Instruments), and foreign securities (Part V: Foreign Financial Markets).  This edition focuses on the wide-ranging implications of the most recent economic recession and stock market declines on institutional asset value and investment decisions.

Selected findings from the report include:

Losses in 2008 alone erase years of steady growth: At the end of 2008, when measured as a percentage of outstanding U.S. financial assets, institutional assets had reached their lowest level since 1980: 15.8%. The investment industry reported substantial losses across virtually all asset classes, with total institutional assets plunging 21.3% to $22,251.7 billion, a level similar to what was recorded in 2004

The recession did not alter the institutional landscape: Declines in capitalization occurred fairly evenly across the institutional investor spectrum, without significant changes to the share of total institutional assets held by type of institution. At the end of 2008, pension funds were still the leading category, holding 38.6% of total institutional assets.

This report is available to London Business School students, faculty, staff and alumni from  Conference Board Online which can be found on the A-Z list of library databases via Portal.

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Latest Payment Indusry Fraud Figures

Financial Fraud Action UK, (previously known as APACS3) has just published the latest payment industry fraud losses for the first half of 2009, in conjunction with The UK Cards Association and the Cheque & Credit Clearing Company.

Main findings:

Losses from online banking fraud totalled £39.0 million during the six months to June 2009 a 55% rise on the 2008 figure. The increase is largely due to the use of more sophisticated methods such as malware scams specifically targeted to online banking customers rather than the banks’ own systems. There were also more than 26,000 phishing incidents during January to June 2009 – a 26% increase on the amount seen in the same period last year.

Cheque fraud losses during January to June 2009 decreased from £21.2 million to £15.6 million. The overwhelming majority of fraudulent cheque payments get stopped before the cheque is paid, and the industry’s ongoing work to prevent cheque fraud coupled with the continuing decline in cheque usage is likely to have played a major part in the 26% fall.

Card fraud losses fell 23% to £232.8m in first half of 2009 and for the first time ever there was a fall in card-not-present fraud.  The Dedicated Cheque and Plastic Crime Unit (DCPCU) have certainly played an important part in this decrease.  Another important factor contributing to the fall in card fraud figures has been the introduction of Chip and PIN.  Since its introduction losses at UK retailers have gone down by 26% from the same period last year.  Mail non-receipt fraud fell by 33% and lost and stolen card fraud is down by 6% to its lowest level since the industry collation of fraud losses began in 1991. Additionally, the banking industry continues to work closely with the retail community to raise awareness of the ways in which retailers can protect their chip and PIN terminals from criminal attack.

Losses from phone, internet and mail order shopping fraud have fallen for the first time ever and now stand at £134 million. Reasons behind this decrease include the increasing use of sophisticated fraud screening detection tools by retailers and banks, as well as the continuing growth in the use of MasterCard SecureCode and Verified by Visa (online payment systems that make cards more secure when shopping on the internet), by both online retailers and cardholders.

There has also been a significant decrease in fraud abroad. One of the factors causing this is the fraud detection systems used by the banks and card companies, which monitor for unusual spending - meaning that potential fraud is stopped before it happens.

Click here to download the Q2 Statistical Release

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Financial Services Inquiry report

This report from the Equality and Human Rights Commission focuses specifically on gender pay gaps within the Finance Sector. Its scope extends from regional high-street banks to investment houses in and around the City of London, and in terms of jobs, from high-street bank cashiers to investment bankers. The Inquiry was initiated in early 2009, largely because it was already known that the financial services sector has a bigger overall pay gap than any other part of the economy. The Commission found that women working full-time in the finance sector earn 55% less per year than men working full-time. The gap between male and female full-time earnings is twice as large as the average gap across the economy as a whole.

The inquiry took a detailed look into the pay, policies and practices of 44 organisations employing the equivalent to 22.6% of the workforce in the sector. This has revealed that bonuses are a significant factor behind the gender pay gap within the organisations with men receiving five times the performance pay of women, an average of £14,554 in annual performance related pay compared to the female average of £2,875 (based on full-time equivalent earnings).  Significantly, the Inquiry found that no improvements appear to have been made. Responses to the questionnaire showed that women in new jobs were still on average receiving lower salaries than men. The high proportion of workers in the 25-39 age group - the age at which employees tend to have children - also makes it harder for women to have a viable career in the sector that balances family life.

The report sheds light on some of the reasons why the financial sector has such a wide pay gap:

• In many firms, employees do not know how much their colleagues are paid, and this lack of transparency allows inequalities to grow.
• In some roles, bonuses often form a significant element of take-home pay, and sometimes appear to be based more on an individual’s readiness to ask for more than rewards based just on their performance.
• Stereotyping and unwritten assumptions about ‘whose face fits’ distort recruitment processes.
• The sector’s unusually young age profile makes balancing work and family a particularly acute issue.
• In some parts of the sector, a long hours’ culture can be tough on those with caring responsibilities.
• For some, the move away from local branches to separate centralised head offices and call centres has closed the path from the shop floor to management to the boardroom.
• Some senior leaders are unwilling to acknowledge that there is a problem, or to do anything about it.
• Even where there are good equality policies on paper, they do not always translate into good practice.

The full report can be downloaded from the Commission’s website

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Paying Taxes 2009: The Global Picture

Paying Taxes provides a comparison of the world’s tax systems from the point of view of a case study company. The study from PricewaterhouseCoopers and the World Bank provides individual rankings on the ease of paying taxes globally and also highlights how businesses are affected not only by corporate income taxes, but also by many other taxes. In addition, it shows how the procedural burden of tax compliance impacts companies. 

Data from the study, produced as part of the World Bank – IFC’s Doing Business project includes a measure of the ease of paying taxes for small to medium sized domestic companies in 181 economies around the world.  The indicators used by the project are based on a case study company and assesses taxes from this company’s perspective using three indicators: the total tax rate (the cost of all taxes borne by the company); the time taken to comply with the major taxes; The number of tax payments for the major taxes. 

Key findings of the study

Economies that rank highly on the ease of paying taxes tend to have lower and less complex taxes with simple administrative processes for paying taxes and filing tax returns.

As in previous years, the study confirms that corporate income tax is only one of many taxes that business has to bear. It accounts for only 13% of payments, 26% of compliance time and 37% of the Total Tax Rate (TTR) so any reform agenda needs to look beyond corporate income tax.

Thirty-six economies made it easier to pay taxes in 2007/08. As in previous years, the most popular reform feature was reducing the profit tax rate, which happened in no fewer than 21 economies. The second most popular was introducing and improving electronic filing and payment systems. This reform, carried out in 12 economies, reduced the frequency of payments and the time spent paying taxes and filing returns. Eight economies reduced the number of taxes paid by businesses by eliminating smaller taxes such as stamp duties. The top 10 reformers for paying taxes this year reduced the number of payments by almost half. Bosnia and Herzegovina, Bulgaria, Morocco, Mozambique and Zambia revised their tax codes.

The full report and data can be downloaded from the PwC website

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Private Equity 2009

According to the latest research bulletin from the IFSL (International Financial Services London) the UK private equity market is the most developed outside the US, managing 17% of global investments and 15% of funds raised in 2008.
 
Selected highlights:
 
Last year private equity investments fell 40% to $189bn, with buyout activity dropping as private equity firms struggled to obtain debt finance from banks to complete deals. The report also states that private equity investments hit a 12 year low in the first half of 2009, dropping to $24bn, 80% down on the same period in 2008. Private-equity backed deals generated only 7% of global merger & acquisition volume in 2008, the lowest level since 2001 and down from the record high of 21% in 2006. This figure fell even further to 3.5%in the first half of 2009.
 
Despite the financial crisis fund-raising levels were only down 8% in 2008 to $450bn, a figure influenced heavily by the relatively strong start to the year. The slowdown in fund-raising accelerated in 2009, with under $100bn being raised between January and June, equivalent to a two-thirds drop on the same period in 2008. The secondary market for private equity, where existing stakes in private equity holdings are bought and sold, has seen a record $15.6bn raised in the first half of 2009, already setting a new annual record with six months left in the year.
 
Meanwhile, global private equity funds under management totalled $2.5 trillion at the end of 2008. The 15% increase during the year was due to strong fund raising activity and an increase in unrealised portfolio investments as firms were reluctant to exit their stakes in market conditions of falling valuations.
 
Worldwide investments of UK private equity firms mirrored falls on global markets, declining by 38 per cent in 2008 to £19.5bn, while the aggregate value of funds raised fell by a fifth to £23.1bn. The UK private equity market, which remains the most developed outside the US, managed 17% of global investments and 14% of funds raised in 2008. London has successfully held its position as the largest European private equity centre, second only to New York globally.
 
The full report can be downloaded from the IFSL website

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Guide to Sources of Statistics 2009

The IFSL has accessed a wide range of sources in the process of researching many aspects of the financial sector and related professional services. This Guide, which is updated every year, lists sources of financial services statistics mostly found on the internet. Where possible a direct website link to the source has been included.  Each section in this Guide also refers to a separate IFSL report which can be downloaded free of charge from their website. The guide is divided into three main sections: sources of statistics for UK and international financial markets; Sources of statistics for professional and support services; Sources of statistics for international trade in services

Key areas of IFSL research include:

• 16 sector reports in the City Business Series
• 9 reports highlighting IFSL’s role in international promotion
• 6 research reports related to IFSL's role in international trade policy and liberalisation
• 9 regular reports featuring trends in financial sector exports, economic contribution of financial services, comparison of development of financial markets in Europe and the US .

Click here to access the guide

Shariah-compliant funds: A whole new world of investment

The concept of Shariah-compliant investing goes back four decades and yet the sector has only really taken off in the last five years.

A number of structural and behavioural changes in Islamic countries have produced this take-off and the probability is that the sector will now go from strength to strength.

Many asset management firms are currently sizing up the opportunities and this paper aims to help them deepen their knowledge of the sector, understand current developments and navigate through the main challenges of creating a Shariah-compliant fund range.

Written by PricewaterhouseCoopers’ professionals from around the world, this is the third paper in a series aimed at briefing mainstream financial services companies about opportunities in Islamic finance

  Download Shariah-compliant funds (92kb)

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