Sovereign debt has once again become a key risk indicator for private
equity investors, but this time around Asia is good shape
Someone unable to make credit card payments tries to work out a plan
to pay it off. He can ask the card issuer for lower monthly payments,
sell things in the garage to get some quick cash, even declare
personal bankruptcy and walk away. Sovereign debt is the country-level
equivalent, and it has roared back as a key investment risk indicator.
"For more than a decade, sovereign debt didn't matter and it now
matters again:' says Mark Delaney chief investment officer of
Australian Super Fund. "Sovereign risk translates through to currency
risk and market pricing risk and can have a substantial impact on
Sovereign debt can have multiple effects that impact on
private equity as the European crisis demonstrates. Credit markets
have tightened and economic growth has been stifled. Unemployment
increases and people spend less. On the ground, banks are skittish
about lending, hampering private equity investments.
"There's a direct correlation between healthy sovereign debt and the
investment climate for private equity," says Frank-Jurgen Richter,
founder of research group Horasis and former director of the World
Economic Forum. "A good rating brings some security to long-term
investors like private equity."
In developing countries, governments tend to borrow to build
infrastructure and invest in technologies. But the debt can become
dangerous depending on multiple factors, including the size and
diversification of the economy, whether the debt is the result of
prudent investments that will bring returns, size of payments required
and the type of currency the debt is denominated in, according to
That said, concerns over default have moved away from Asia, which was
worrisome in 1997 during the Asian contagion, to the West, primarily
As of Q4 2011, no major Asian countries were in the top ten for
sovereign debt risk, according to data from CMA Datavision.
"On average, the debt ratios in Asia look much better than in North
America or Europe, the opposite of what it was 15 years ago," Delaney
On the opportunity side, sovereign debt issues can create interesting
situations for bargain hunters. States may sell off their assets at
discount prices to raise cash while companies facing slowing growth at
home may do likewise.
China has been discount shopping. Chinese company investments in
Europe last year were up about 250 percent to $10.4 billion, compared
to $4 billion in 2010, according to data from A Capital, a private
equity fund focused on outbound Chinese investments.
Richter says Chinese investors today are shrewd. They work with
leading investment banks, accounting firms and law firms and are well
advised on due diligence when they buy. Indian films at are also
acquiring European companies. Tata, he points out, is today the
largest industrial employer in the UK.
He sees a strong trend toward investment in mid-sized German machinery
equipment companies. "Many first generation entrepreneurs want to sell
their assets and it's quite a fashion to sell to the Chinese and
That was something unthinkable a few years ago, Richter says.
"At the time it was an insult even to consider selling it to them.
People thought those companies only buy the brand and, layoff workers
and move industrial assets back to China or India. But actually that's
not happening Usually when those companies invest in Germany's
industrial sector, they keep the manufacturing and employees and
further integrate the operation globally with assets back home."
Horasis is a global visions community committed to enact visions for a sustainable future. (http://www.horasis.org)
For more information, please contact:
|Communications and Public Affairs
|Horasis. The Global Visions Community
||+41 79 305 3110
||+41 44 214 6502