Debt and Economies.

From time to time, we get data, and news, on debt, and how it is affecting country economies, corporations and individuals. Sometimes, with so much going on in terms of the impact of debt on corporations and individuals, the value of looking at debt's impact on country economies may not be obvious. Or perhaps, the impact of news from Dubai made you go "Wha?".

While economists may not always (!) be successful in demonstrating the interconnections between country economies, corporations and individuals, through neatly tied in, accurate and precise models, we still have a sense of how these interconnections affect us.

Say, a country's debt troubles affect the medium to long term rates it offers on government debt. If an industrial sector company, say in the infrastructure sector, has limited financing options, this impacts the internal hurdle rate that the CFO would set for the company's internal projects. This, in turn, would impact a division's ability to innovate and price products to its customers, which, in turn, could impact the sector's ability to service its individual consumers. One of the many possible outcomes- you, as a utilities consumer, end up paying exorbitant electricity charges for power served off an outdated grid that wouldn't let you leverage advances in renewable energy within your home.

You may argue that economies are complex systems, and practically every outcome could be termed an "unintended outcome", but that does not mean we throw the baby out with the bathwater. It pays to "watch" the macroeconomic world around us.

Lets look at the impact of debt with country economies on returns on long term government bonds. Here's an article that should make you think:
http://www.economist.com/businessfinance/displaystory.cfm?story_id=15016142

This is a quick review of recent perspectives on debt's impact on country economies to provide background on :
Japan:
1. Deflation:
http://www.economist.com/opinion/displaystory.cfm?story_id=14966237
2. Managing Debt:
http://www.economist.com/businessfinance/displayStory.cfm?story_id=14972943

Dubai:
1. Sovereign debt and risk:
http://www.economist.com/opinion/displaystory.cfm?story_id=15017205
2. Potential lessons from market reaction:
http://www.economist.com/displaystory.cfm?story_id=15016168

Speculation about an EU country default:
http://www.economist.com/businessfinance/economicsfocus/displaystory.cfm?story_id=15016124

Are there any other economies you believe that need a closer look? Economies in Asia or LATAM, perhaps? Why? What could be the potential impact?

What do you think?

Turnarounds and Distressed Company Decision Making

I remember thinking about incentives during a restructuring course I took a couple of years ago:Consider a pre IPO company whose value has been falling, and it's liquidation value is now close to its debt value (we have all heard of a startup that burnt through its cash). The management has an option to make an investment that is 3x as risky as any they have considered so far.

Should the management optimize:
1. shareholder value?
2. company value?
3. creditor value?

At an interesting case study session recently- amidst turnaround professionals- an insight was that the legal "line in the sand" varies from state to state, besides varying from country to country.

What do you think?

Conference Panel: Trends in Private Equity and Venture Capital Sectors in India

Given a trio of PE, VC and IB players in India, the panel met high expectations. Some facets talked about:
1. Debt market in India
2. Constraints in structuring transactions
3. Regulatory environment and red tape
4. Nature of targets (family driven enterprises), time horizons and deal flow networks

Given these factors, I wondered how the firms managed risks- not just financial risks. I queried the panel about their experience with a deal that did not meet experience.

What do you think?

The VC investor, who had significant experience in investing in India provided an interesting insight, that emphasized the efficiencies that the PE/ VC firms can find across funds and investments/ deals.

The response also threw light on the "transaction costs" that mutual fund like SPAC aggregators would face that would make them replicas of publicly traded PE firms.

The panel echoed some of the points made by Alan Patricof, Managing Director, Greycroft, at a conference keynote, with respect to his experience in Venture Capital in Africa.

The Usual Disclaimer: This is purely a knowledge sharing resource. Ethically, context is everything, and I will gladly retract anything that affects the parties mentioned. Call this my mini OpenCourseWare, if you will, where Open signifies life experiences.