PE Series – Private equity: Myth or reality?

AAEAAQAAAAAAAAKKAAAAJDJiZDFhMWJhLTk2ODItNDc5MC04ZWMwLTgwMDhlNTcwYjQwMgI am delighted to have the latest post from my PE Series published on MoveMeOn’s website. I have decided to tackle the often widespread idea that private equity only offers upsides compared with life in consulting. Although private equity can, in many respects, represent a better ‘package’, I believe there are a few ‘less positive’ aspects worth considering before making the jump.

The article can be found here. Thanks again to Rich and Bebe for including me in that wonderful venture.

Olympic Games – Small is not beautiful

Olympic-logoThe Olympic Games came to an end a little bit more than a week ago. Beyond the last-minute logistic annoyances, the United States showed the rest of the world that one more time they were dominant in the Olympic arena. Good surprise came from team GB, which benefited from years of investment and the partial ban of the Russian delegation to clinch the runner-up spot. On the other end of the rankings, almost 100 countries will fly back with no medal.

The question is what is the best predictor of a nation’s performance at the Olympics? First, we need to be clear about what we mean by ‘performance’. Limiting myself to countries which have managed to take a medal home, I have used the official medal table and I have allocated 5 points for a gold medal, 3 points for a silver medal and 1 point for a bronze medal – I could have used the gold medals only but this would have created an ‘edge effect’ as many countries have won no or very few gold medals. The official ranking (taking only gold medals into account) is largely preserved: only exceptions in the top 10 are France (with its famous ‘fear of winning’) and the Republic of Korea.

Points ranking according to our methodology.
Top 10 countries according to our methodology.

We can use a few macroeconomic indicators to assess whether they are correlated to the success of a given country. It is important to note here that a regression only enables us to conclude about the presence or absence of correlation and not about the presence of a causality effect. For instance, if we plot population on the X axis, we see that the bigger a country is, the more medals it tends to gather – with the notable exception of India, circled in red, whose poor performance has been largely documented throughout the event. So what we can conclude is that there is a correlation, but we cannot state that ‘a higher population leads to a higher number of medals’ (which is nonetheless probably true) or that ‘a higher number of medals leads to a higher population’ (if so we would have baby booms in the US every 4 years).

Regression log(population) (X) - log(points) (Y).
Regression log(population) (X) – log(points) (Y).

The Economist argues that the most significant driver is actually GDP. The correlation effect is also significant.

Sans titre
Regression log(GDP) (X) – log(points) (Y).

What it means, interestingly, is that GDP per capita correlates poorly with the ultimate country performance – contrary to what the same Economist article may assert. The nominal sizes of the economy and of the population thus prevail. This is understandable: more money overall tends to mean more investment in infrastructures, training etc. However, we would need to dig further as wealth created is not evenly allocated to the development of sports in each country.

Log(GDP per capita) (X) - log(points) (Y)
Regression log(GDP per capita) (X) – log(points) (Y).

Goldman Sachs performed a forecasting exercise using its proprietary Growth Environment Score (GES), which captures “important features of the economic, political and institutional environment that affect productivity performance and growth across countries”. Simply said, Goldman Sachs uses a multi-variable correlation instead of relying on one macroeconomic driver as we have done so far. The algorithm grants extra points for the last two hosts (i.e. Brazil and the UK) to acknowledge the important investment and support of the crowd. The accuracy obtained is remarkable.

Sans titre
Number of gold medals for top 10 countries: Goldman Sachs forecast vs. actual.

In its paper, Goldman Sachs states that “a country is more likely to produce world class athletes in a world class environment”. I took the statement seriously and checked for a correlation between the number of medals and the Human Development Index, which accounts for human well-being beyond economic considerations by including data on life expectancy and education, among other factors. A high correlation would be fantastic news: sports excellence would be a ‘by-product’ of the improvement in life standards. The result can be found below.

Regression HDI (X) - log(points) (Y)
Regression HDI (X) – log(points) (Y)

Although we could advocate for a slight correlation, the effect of human development remains limited compared with the one of money. This conclusion highlights a fact that is widely shared throughout the sporting world (including football, which we will deal with in a later post): human effort alone only returns sweat, but only with a wallet will it be worth its weight in gold.

Summer is off – what’s up?

Brittany is certainly the most beautiful place in the world. Credits: Tristan Toulemonde

The summer break caught me earlier than expected and my promise to feed this blog fell through the cracks.

Although August is typically the quietest month of the year from a business perspective, nonetheless a few themes have emerged over the last few weeks and will deserve a few lines on this blog in the near future.

  • First, we cannot not mention the software ‘hit’ of the summer aka Pokemon Go. The worldwide fever proved so intense right after the launch (including a record 15m downloads in the US alone in the first week) that investors granted Nintendo with a $18bn market cap. increase before retreating a few days later. Health benefits are already visible, with users walking an average of 43 minutes per day through the app according to the BBC. Are there other ways to leverage the Poke-hype?
On urban safari. Credits: Kuwait Times.
On urban safari. Credits: Kuwait Times.
  • The world had its eyes not only on Pikachu but also on Rio, where the Olympic Games came to an end yesterday. As usual the US topped the medal ranking and Team GB came second, rewarding efforts made over the last few years. Conversely India, despite a population in excess of 1bn, will fly back from Brazil with only 2 medals and no gold. We will look at econometric prediction models to (a) assess the accuracy of forecasts and (b) understand what drives success in Olympic Games beyond the sheer population.
  • Brexit is still a background noise although the British negotiation engine seems to be warming up. In the meantime we will discuss the first tangible impact on exchange rates, retail consumption, pension funding and obviously real estate. How troubled is the situation and how bad could it get?
Credits: Sunday Express
Credits: Sunday Express
  • We will exploit the ‘Retail’ vein to discuss R&D and have a look at the situation in the US, where Walmart reported an encouraging performance whilst Target, its higher-end competitor, struggled. The rise of ecommerce can be pointed out as a significant driver – coming back to the UK, how are Ocado and Amazon faring in the food delivery space?
  • FinTech is under scrutiny after LendingClub’s recent string of setbacks. Could the solution come from a more stringent regulatory framework?
  • More generally some investors in unicorns, including Rocket Internet, are starting to feel the pain after realising that some of their bets will struggle to ever make a profit. We will have a fresh (critical) look at the valuation methods and metrics.
  • Finally, and with no order of priority, we will look at the raging competition for talents between the Silicon Valley and Wall Street, the future of BlackBerry and the uberisation of the hedge fund industry.

No shortage of inspiration for the coming weeks. Stay tuned!

Young child holding stack of books and back to school written on chalk blackboard
Credit: Peach State FCU Blog.