World Equity Market Performance Top 1 USD Adjusted Returns, 26 Percent Change, Year Ago 2 18 16 14 12 1 8 6 4 2 Venezuela Cyprus Botswana Morocco Russia Peru Vietnam China Yugoslavia Croatia Source: Bloomberg
$1 in the Dow in 1995 = $28 Today Jan. 1996=1 24 22 2 18 16 14 12 1 8 Source: Bloomberg Dow Jones Industrial Average FTSE MSCI World 1996 1997 1998 1999 2 21 22 23 24 25 26
Rising Middle East Stock Markets Index, January 22 = 1 14 12 1 8 6 4 2 Egypt Israel Jordan Kuwait Saudi Arabia U.A.E. 23 24 25 26 Source: Bloomberg
US$1 Invested in 2 Would Give You: $33 $23 $21 $19 $189 $179 $171 $12 Energy Gold Mid-Cap U.S. Emerging Markets Small-Cap U.S. Hedge Funds Commodities Large-Cap U.S. Stocks Stocks Stocks Source: Bloomberg
Alternative Investment Opportunities $1, invested in these asset classes five years ago would give you: $15,15 $17,537 $19,997 $21,4 $21,5 $11,58 Large-Cap U.S. Stocks Commodities Energy Small-Cap U.S. Stocks Gold Emerging Markets
Quickly Flattening Treasury Yield Curve Percent 6 5 4 Dec. 29, 26 Dec. 3, 25 3 2 Dec. 31, 24 1 1M 3M 6M 1Y 2Y 3Y 5Y 7Y 1Y 2Y Source: Federal Reserve
Converging Yield by Maturites Percent 7.5 3-year Treasury bonds 2-year Treasury bonds 6. 1-year Treasury bonds 3-month Treasury bills 4.5 3. 1.5. 21 22 23 24 25 26 Source: Federal Reserve
Net Direct Investment Developing Countries, 1997-26 US$ Billions 12 Africa 1 Middle East Developing Asia Western Hemisphere 8 6 4 2 Source: World Economic Outlook 1997 1998 1999 2 21 22 23 24 25 26
Global Futures Market Notional Amounts US$ Trillions 1.5 1.3 1..8.5.3 Equity index (R) Interest rate (L) Currency (R) 3 25 2 15 1 5. 94 95 96 97 98 99 1 2 3 4 5 6 Source: Bank for International Settlements
Global Options Market Notional Amounts US$ Billions 18 6 15 Currency (R) Interest rate (R) 5 12 4 9 3 6 2 3 Source: Bank for International Settlements Equity index (L) 94 95 96 97 98 99 1 2 3 4 5 6 1
$US 37 Trillions Notional Amount Global Over-the-Counter Derivative Market June 26 Foreign Exchange Interest Rate Equity-Linked Commodity Credit Default Swaps Others Total Notional Amounts US$ Billions 38,111 262,296 6,783 6,394 2,352 35,969 369,95 Market Value of Contracts US$ Billions 1,134 5,549 671 718 294 1,77 1,73 Source: International Monetary Fund
Interest Rate Derivatives By Counterparty and Maturity Percent of US$ 262 Trillions Notional Amount, June 26 5 44 44 4 35 39 3 27 2 1 12 With Other Dealers With Other Financial Inst. With Nonfinancial Customers Less than 1 year Between 1-5 years More than 5 years By Counterparty By Maturity Source: International Monetary Fund
Global Credit Derivatives Market US$ Trillions 35 33.1 3 25 2 2.2 15 1 5.2.3.4.6.9 1.2 2. 1996 1997 1998 1999 2 21 22 23 24 26 28 (est.) 3.5 5.
Global Derivative Markets: Rating of Underlying Assets 1% 9% 8% 7% 6% 5% 4% 3% 2% 1% % 99-1-2 3-4 5-6 7-8 (Est.) Below B BB B A BBB AAA AA Source: British Bankers Association
Sources of Foreign Inflows to Emerging Markets Percent 1 8 198-1984 199-1994 2-24 6 4 2 Foreign Direct Investment Source: International Monetary Fund Equity Debt
Foreign Investment Inflow to Emerging Markets US$ Billions 8 7 6 5 4 Direct investment Portfolio investment Other investment 3 2 1-1 -2 1995 1996 1997 1998 1999 2 21 22 23 24 25 Source: International Monetary Fund
Increasing Global Capital Mobility Sum of Foreign Assets and Liabilities as a Ratio to GDP Percent 14 12 1 8 6 4 2 Sources: Lane and Schmukler and Milken Institute staff estimates 1981 1982 1983 1984 1985 1986 1987 1988 1989 199 1991 1992 1993 1994 1995 1996 1997 1998 1999 2 21 22 23 24 25 26(e) Emerging Markets China India
Higher Degree of Integration Between NYSE and Shanghai Stock Exchange Index, Jan. 26 = 1 12 115 Correlation =.8773 January 26 March 27 Dow Jones Industrial Average 3 25 11 2 15 1 95 Shanghai Stock Exchange Composite 15 1 5 9 Source: Bloomberg 26Q1 26Q2 26Q3 26Q4 27Q1
Converging Sovereign Bond Yields Percent 16 14 Emerging Markets Sovereign Bonds 12 1 8 U.S. Treasury 6 4 2 1999 2 21 22 23 24 25 26 Source: Merrill Lynch
21 st Century Global Equity Market Convergence Correlation with Dow, 12-Month Rolling Returns 1.2 1..8.6.4.2. Source: Bloomberg S&P 5 COMPOSITE NASDAQ COMPOSITE FTSE 1 EURONEXT 1 DAX 3 MSCI WORLD 95 96 97 98 99 1 2 3 4 5 6 7
Corporate Bond Credit Spread Yield to Maturity Percent 1 8 6 ML Corp BBB 1-3 Yr (L) Percent 3.5 3. 2.5 2. 4 2 ML Corp AAA 1-3 Yr (L) 1996 1997 1998 1999 2 Spread (R) 21 22 23 24 25 26 1.5 1..5. Source: Bloomberg
Step by Step 17 Fed Fund Rate Hikes Since 24 Percent 6 5 4 3 2 1 24 25 26 Source: Federal Reserve
Increasing Market Volatility Standard Deviation of Weekly Returns Percent 6 5 4 S&P 5 EURONEXT 1 NIKKEI 225 SHANGHAI COMPOSITE MSCI WORLD 3 2 1 Source: Datastream 23 24 25 26 27YTD
Bond Issuance Global Growth of Bond Financing Doubled Since 2 Latin America 21% 2 US$ 166 Billions Middle East 3% Africa 1% Developed Countries 5% Latin America 9% 26 US$ 35 Billions Middle East 7% Africa 2% Developed Countries 5% Asia 16% Asia 14% Europe 11% Source: International Monetary Fund Europe 16%
Equity Issuance ICBC IPO Accounted for 8% of The 26 World s Issuance 2 US$ 92 Billions 26 US$ 24 Billions Latin America 6% Middle East 2% Africa.1% Developed Latin America 5% Middle East 1% Africa 1% Countries 5% Developed Countries 51% Asia 38% Asia 32% Europe Source: International Monetary Fund Europe 1%
Debt Relative To Equity Issuance Ratio Developed Countries Europe Asia Latin America Middle East Africa World 2 1.8 4.9.7 6.7 2.5 2.5 1.8 26 1.5 2.3.7 2.6 7.3 2.5 1.5
Raising Price-to-Book Ratios Equity Valuation: Price-to-Book Ratio Ratio 3.5 3. World 2.5 2. 1.5 EM Latin America EM Asia Emerging Market 1. EM Europe & Middle East 2 21 22 23 24 25 26 Source: International Monetary Fund, MSCI Indices
Raising Price-to-Earning Ratios Equity Valuation: Price-to-Earning Ratio Ratio 28 26 24 World 22 2 18 16 14 12 1 Emerging Market EM Asia EM Europe & Middle East EM Latin America 2 21 22 23 24 25 26 Source: International Monetary Fund, MSCI Indices
Raising Dividend Yield Ratio 4. 3.5 3. 2.5 2. 1.5 World Emerging Market EM Latin America EM Asia EM Europe & Middle East 1. 2 21 22 23 24 25 26 Source: International Monetary Fund, MSCI Indices
S&P/Case-Shiller Home Price Composite 25 2 15 1 5 Jan-87 Jan-91 Jan-95 Jan-99 Jan-3 Jan-7 Source: Bloomberg
Housing Price Futures Contract 11/7 Future Contract on S&P Case-Shiller Housing Composite 218 216 215. 216. 215.2 214 212 21 28 21.2 211.4 26 Source: Bloomberg Nov-6 Dec-6 Jan-7 Feb-7 Mar-7
Private Equity is Taking A Larger Share in Global M&A Activity 25% 22.% 21.3% 2% 15% 12.8% 14.8% 12.6% 1% 1.1% 5% 5.4% 4.3% 5.1% 3.3% 3.8% 2.9% 4.8% % Source: Dealogic 1995 1997 1999 21 23 25 27*
U.S. LBO by Target Industry US$ Billions 7 $653 6 5 $56 Media and Ent. High Technology 4 3 $37 Real Estate Retail 2 1 Of which 37% were Consumer Stable Jan. 85 - Dec. 94 Of which 35% were Industrial Jan. 95 - Dec. 4 Jan. 5 - Mar. 7 Healthcare Energy and Power Other Source: SDC
Non-U.S. LBO by Target Industry US$ Billions 7 6 5 $451 $565 Media and Ent. Industrials 4 Retail 3 Telecommunication 2 1 $17 Jan. 85 - Dec. 94 Jan. 5 - Mar. 7 Jan. 95 - Dec. 4 Healthcare Real Estate Other Source: SDC
The Latest Boom in Merger Activity US$ Trillions 4.5 Private Equity 4. Corporate 3.5 3. 2.5 2. 1.5 1.5 1. 1..8.5 Value of announced M&A deals in 26 = 3.5 3.1 2.3 2. 1.8 1.3 1.4 2.9 $4. trillion. Source: Dealogic 1995 1996 1997 1998 1999 2 21 22 23 24 25 26
Private Equity Accounted for One-Fifth Global M&A Deals in 26 Percent of Total M&A Deals 25 2 Total amount at announcement in 26 = $827. bn 15 181.3 32.6 36.5 1 134. 5 45.2 45.3 76.6 76. 116.1 11.8 84.5 Source: Dealogic 1995 1996 1997 1998 1999 2 21 22 23 24 25 26
Top Private Equity M&A Deals Amount at Announcement, US$ Billions US$ Billions 2 4 6 TXU (Feb. 27) Equity Office Properties (Nov. 26) HCA (July 26) First Data Corp (April 27) Harrah's Entertainment (Oct. 26) Phelps Dodge Corp (Nov. 26) Clear Channel (Nov. 26) SallieMae (April 27) RJR Nabisco (Oct. 1988) BAA (March 26) Kinder Morgan (May 26) Alliance Boots (March 27) Freescale Semiconductor (Sept. 26) Vodafone (March 26) Albertson's (Jan. 26) Source: Dealogic $44 $39 $33 $28 $27 $26 $26 $26 $25 $24 $22 $19 $18 $17 $17
All-Time Top Ten Private Equity Funds KKR 26 Fund Blackstone Capital Partner V TPG Partners V Permira IV Apollo Investment Fund VI Bain Capital IX (including co-investment fund) Goldman Sachs Capital Partner V Fourth Cinven Fund Providence Equity Partners VI Warburg Pincus Private Equity IX 1 2 Amount raised, US$ billions Source: The Economist and Dow Jones Private Equity Analyst
Private Equity Investment Returns for the United States By Strategies, 25 1 Year Return (%) 1 Year Return (%) 2 4 25 5 Buy-outs 32.5 Early stage 46.8 Balanced 27.2 All venture capital 26.5 All private equity 27 Balanced 2.8 All venture capital 19.7 Later stage 13 NASDAQ 13.4 All private equity 12.4 Later stage 13.1 Buy-outs 8.7 Early stage 1.4 S&P5 7.7 S&P5 1.2 NASDAQ 7.5 Mezzanine/ Generalist 8.8 Mezzanine/ Generalist 6.6 Source: KPMG and SAVCA
Private Equity Investment Returns for Europe By Strategies, 25 1 Year Return (%) 3 6 1 Year Return (%) -5 5 1 15 Mezzanine/ Generalist 51.2 Buy-outs 12.6 Balanced 32.7 All private equity 1.2 Later stage 25.4 Mezzanine/ Generalist 9.7 All private equity 24.1 Development 8.8 Buy-outs 2.9 S&P5 7.7 NASDAQ 13.4 Balanced 7.6 Development 12.2 NASDAQ 7.5 S&P5 1.2 Later stage 5.3 Early stage 4.9 Early stage -.1 Source: KPMG and SAVCA
Stock of Private Equity Investments Relative to Size of Economy 25 Stock of Private-Equity Investments as Percent of GDP 2 4 6 North America $493 bn Israel 4 South Africa 6 Britain 82 Europe 213 Asia 122 Latin America 15 Source: The Economist, Deloitte, and SAVCA
Investment Pool of U.S. College Endowment Funds Total asset under management: $34 billion in 26 Natural Resources 4% Venture Capital 3% Cash 1% Other 1% Private Equity 4% Real Estate 5% Equity 49% Fixed Income 15% Hedge Funds 18% Source: NACUBO
College Endowment Funds Outperform Hedge Funds and S&P 5 5 1 15 2 Endowments greater than $1bn Hedge funds Endowments $5m-$1bn Endowments $1m-$5m S&P5 1-year return (%) 1-year return (%) Source: NACUBO
All Single Manager Hedge Funds 23 26 Total industry assets $1.89 trillion at end of 26 US$ Trillions Net new assets increase over $243 billion 2. Annualized growth rate since Q4 23 of 28% 1.8 1.6 1.4 1.2 1..8.6.4.2..85 Sources: Hedgefund.net 1. 1.11 1.17 1.29 1.41 1.41 1.49 1.53 1.66 1.73 1.79 1.89 23Q4 24Q4 25Q4 26Q4
Emerging Market Hedge Fund Asset Growth 23-26 US$ Billions 2 16 12 8 4 4.1 Total assets $175 billion at end of 26 Net new assets increase $23 billion in 26 Annualized growth rate since Q4 23 of 57% 48.8 52.6 59.4 66.9 83. 92.2 123.4 11.6 158.3 146.1 157. 174.5 23Q4 24Q4 25Q4 26Q4 Sources: Hedgefund.net
European Hedge Fund Asset Growth 23 26 US$ Billions 32 28 24 2 16 12 8 4 83.8 Sources: Hedgefund.net 179.2 189.3 157.816.2 121.7 136.2 11.7 95.3 223.9 231.247.3 276.5 23Q4 24Q4 25Q4 26Q4
Energy Sector Hedge Fund Growth 23-26 US$ Billions 9 8 7 6 5 4 3 2 1 19.4 24.4 25.6 28.6 32.2 36.9 4.7 49.1 52.2 63.3 7.7 73.8 79.3 23Q4 24Q4 25Q4 26Q4 Sources: Hedgefund.net
$1 Invested in These Asset Classes in 2 Would Give You: $33 $23 $21 $19 $189 $179 $171 $12 Energy Gold Mid-Cap U.S. Stocks Emerging Markets Small-Cap U.S. Stocks Hedge Funds Commodities Large-Cap U.S. Stocks Sources: Bloomberg, Datastream, and Milken Institute staff calculation
Narrowing Spread Between Hedge Fund Return and One-Year Treasury Yield Percent 16 14 12 1 8 6 4 2 Spread between average hedge funds return and 1-year Treasury yield 1981 1986 1991 1996 21 26 Sources: Hedgefund.net, Bloomberg and MI staff
Hedge Funds: Converging to S&P 5? Correlation between CSFB Hedge Fund Index and Equity, Commodity, and Bond Indices Five-Year Rolling Correlation on 12-Month Returns 1.5 CSFB Tremont & Goldman Sachs Commodity Index CSFB Tremont & S&P 5 Composite -.5 CSFB Tremont & Lehman Brothers Aggregate Global Bond Index -1 Source: Bloomberg Jan-98 Jul-98 Jan-99 Jul-99 Jan- Jul- Jan-1 Jul-1 Jan-2 Jul-2 Jan-3 Jul-3 Jan-4 Jul-4 Jan-5 Jul-5 Jan-6 Jul-6
Hedge Fund: Risk vs. Return by Strategy 25 1.2 y =.511x +.6344 R 2 =.871 Event -Driven Global Average Monthly Return (%) 1..8.6.4 Market-Neutral Other Fund of Funds - Multi Fund of Funds Multi-Stategy All Funds Sector Long/Short Equity Macro CTA Directional 1 1.5 2 2.5 3 3.5 4 4.5 5 Standard Deviation of Monthly Return (%) Source: Bloomberg
Hedge Fund: Risk vs. Return by Strategy January 21- December 25 3 y =.137x +.4373 Average Monthly Return (%) 2 2 1 1 R 2 =.129 Fund of Fundsmulti Fund of Funds Multi-Stategy Macro Other Market-Neutral Global Event-Driven Directional Long/Short Equity All Funds CTA Sector 1 2 3 4 5 6 Standard Deviation of Monthly Return (%) Source: Bloomberg
Hedge Funds vs. Mutual Funds Number by Domicile Location, 25 Hedge Funds Total = 6,445 Mutual Funds Total = 56,863 Off-shore Centers 8% Other Countries 5% Other Countries 12% United States 14% Asia 2% Europe 33% United States 52% Asia 21% Europe 53% Source: Hedgefund.net and MI staff calculation
Hedge Fund: Domicile and Asset Location Matrix Region of Domicile United States Europe Off Shore Asia Other Countries All regions of domicile Global 218,275 232,95 3,622 1,55 1,758 494,11 United States 262,315 24,426 14,742 283 1,764 33,529 Europe 9,78 83,39 8,179 1,429 12,354 Location of Assets Asia North America South America Africa Australia/Oceania Other/Unknown 1,655 938 257 25 22 847 29,754 45 59 11 316 3,382 55 759 5 1,789 12 3,816 2,39 2,554 787 679 58,396 3,833 3,641 963 71 1,163 All locations of fund assets (US$ Millions) 53,44 371,48 57,788 12,634 24,177 968,69 Source: Hedgefund.net and MI staff calculation
Hedge Funds Are Getting Larger In Size Number of Hedge Funds by Size, As % of Total 1998 Total: US$ 2. Trillion June 26 Total: US$ 6.5 Trillion >$1 million, <= $5 million 7% >$5 million, <= $1 billion 1% >$1 billion <1% <= $1 million 63% >$5 million, <= $1 billion 4% >$1 billion 3% <= $1 million 27% >$5 million, <=$1 million 7% >$1 million, <=$5 millions 22% Source: Hedgefund.net and MI staff calculation >$1 million, <= $5 million 25% >$5 million, <=$1 million >$1 million, <=$5 millions 28%
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