Paul Wetterwald is the chief economist of Crédit Agricole Suisse, and was chief investment officer of Crédit Lyonnais Suisse from 1991 to 2005. Carine Hermon is head of private equity investor relations for Crédit Agricole Suisse. Executive sat with them to gain their perspective on developments in the global market.
E How can we make sense of the macroeconomic situation in the world today?
PW: I think that there are two points, one of which is that global growth is staying more or less at the same level, which is positive growth but at a lower level than before the big crisis of 2008. Now, we have various regional situations. Europe is back into positive territory in terms of growth but it’s lagging. We don’t have a figure but maybe we’ll have a weak figure. But what we expect is to still have low positive growth for next year with differences between Germany and southern countries.
In the United States we expect growth to stay slightly above 2 percent, which means slight acceleration. And in China we think that we have bottomed out. The new rule for China is very likely 7 percent growth which is in terms of new money, new wealth — as much as when they had 12 percent on a lower basis. Something we have to keep in mind is that China is so large right now that 7.5 is a lot and maybe enough to supply the rest of the world.
So positively, moderate growth and no inflation or risk in the mature economies, some inflation issues in the emerging markets. And in this context we have some central banks of mature economies that are maintaining very low interest rates. This is the main engine of growth for the financial markets and much more important than the rate of growth of gross domestic product (GDP) because when there is higher growth of the GDP we will have less accommodating central banks and this will be bad for the market. Next year, we still expect interest rates by the mature economies’ central banks to stay very close to 0 percent.
It’s true that in the US the market is sometimes worried about tapering. What I would say is that tapering does not mean a narrower balance sheet of the Federal Reserve. This just means that the rate of expansion of the balance sheet will be lower. So it’s still expanding the balance sheet, but at a lower rate. And when they do this the Japanese central bank will print a lot of money at the same time. The European Central Bank (ECB) will likely restart long-term refinancing operations — maybe next January; the balance sheet of the ECB has been shrinking, so they cannot keep it like this. Economic growth in Europe is not strong enough for this. In the coming year you will have the asset quality review for the European banks and the stress test. And you know the stress test will be the first one that will really be supervised by the ECB, but I don’t think they will be the nice guys. They will try to find some bad banks and to compensate for this they will give a lot of financing at the beginning of next year.
Globally, a lot of liquidity will still be flowing into the market. That’s the point. Then of course if you think that 0 percent is not enough for short-term deposits you have to find other assets. This is the global picture.
E In France, there’s a big question mark about President François Hollande’s policies. What can we say about this?
I think that the first point is that a lot of French companies are doing business outside of France. What is happening in France is not that important for the big companies.
The second point is that because of the structure of the involvement of the state in the French economy, consumption has always been very resilient. So it has given a cushion to European growth. Maybe you could say it’s not very healthy, but still it’s helping the consumers in France to stay afloat. And I don’t see that this can change very soon. So the short term in terms of the business cycle is not bad.
Longer term, in terms of public finance, it’s still an issue. But we don’t see politics taking care of this. They are trying, but you see that every time they try to raise taxes on someone somewhere the people say, ‘Not us, [tax] the others.’ I think people have to learn that you cannot spend more than what you earn. There has to be a balance.
Europe is making progress because if you remember 18 months ago with the collapse of the euro, we said Greece could go out, and still Europe is here, the euro is still here, and it’s actually strong. So I think we have to keep this in mind. There is a deficit of politics with respect to economics and this has to be filled out. It’s a slow process but we are not too pessimistic about this. What is true is that [the European economy] will remain low-growth rate — wealthy, but with low growth. Maybe [this will last] 2 to 3 years because of all the excess of debt that has been transferred to public finance. The only answer to the debt issue is you have to have time. You cannot expect debt to be resolved in two years.
E Switzerland has been under fire from the international community and is reassessing its own corporate culture. How is this affecting the banking and finance ecosystem?
Well I think it’s a new model that needs to be reinvented. You can compare it with the watch industry in the 70s when they missed the electronic watch and now the watch industry is doing well, but with way fewer people involved in the industry. So it could be the same for private banking in Switzerland. It’s very important for places like Geneva, but it’s much less important in other locations in Switzerland. It’s not like bankers are very popular people and everyone in Switzerland wants to save the banks. They saved the banks once in 2008 and now banks have to adapt. And specifically they will have higher costs in terms of legal and compliance work, so I guess the margins of the business will be lower. The Swiss economy globally is doing well despite the strength of the Swiss franc. Labor costs are high, but they are not getting higher. Whereas in other countries, the labor costs are increasing. In relative terms we are getting a bit more competitive.
E How careful should banks be around the frontier markets, especially when alternatives have become very few around the world?
We have invested a small part of the equities into frontier markets through funds in order to get good diversification. But it’s difficult, and you have to know that it’s less liquid. When you look at the performance of those kinds of investments it looks like it’s less volatile. But those markets actually lack liquidity. So you have to stay in it for a longer period of time than usual. So, yes, we have a part invested in it, but it can only be a small part of the investment world.
E Now In 2013 it seems that private equity strategies are back. How did this image of private equity change and how did Crédit Agricole Suisse adapt to it?
CH: Now to create value you have to transform the company. To have good performance in a private equity fund, you have to choose the team that can transform the company. So that is very important for us. Currently, at Crédit Agricole, we have deep due diligence on around 200 different general partnerships (GPs) and funds every year. And we choose only 10 per year to advise to our clients. And so that’s the first thing. We are concentrated on the team. That is most important. Because you don’t know where, or in which company, they will invest. So you have to be sure that the team will be able to invest in the good company.
We are looking for different points. The first is the capacity to raise the target commitment. The second is the capacity to invest the raised money. After that what’s important is the capacity of the team to transform the company — sometimes change the management team, or sometimes the internal processes, and with external growth, so there are a lot of different possibilities to do that. At the end [of the process] it’s the capacity of the team to exit the company.
To do that it’s important that the team have a realistic projection for the company and to say, ‘In 4 to 5 years I see the company to be like this and that.’ At the beginning, when they buy the company they have to know what they want to do with it.
E What is your approach when it comes to identifying target investments in the Middle East?
It’s a shame but currently the Middle East is not a real area for private equity. Why? Because there is so much local capital that there is no opportunity for private equity. So currently there is no real opportunity in private equity. We can’t find any. There is no deal flow.
E So the Middle East is perceived as a market where you pull money out from as opposed to investing in?
It’s not because we don’t want to. It’s just that there are no opportunities. Some private equity firms have few opportunities to invest in Africa and the Middle East, a little bit, but not a lot. The amount here is very low. The biggest place to do private equity is in the US, of course, but there are a lot of opportunities in Europe. I’m sure that we can find current opportunities in Europe, even if the market is not [experiencing] very big growth, and there are also opportunities in Asia. But in the Middle East, maybe in a few years we can find some opportunities, but currently there are none.
E What are the expectations of your limited partnerships, and how have they changed in the past five years? Tell us more about your strategy.
CH: When you have inflation on a growth of 3 percent, if you have only 5 percent of return it’s not good. But if you have 5 percent of return when there is no growth, it’s quite good. This is the same for private equity but on a different level. Currently, our goal is to have a return for our investor of more than 12 percent per annum. That is our goal. We select around 10 private equity funds each year. To do that we decided to invest in different geographic regions to diversify the portfolio: in the US, Asia and Europe. There are still some opportunities in Europe.
PW: I think that the strategy is really an opportunistic one. I can name the companies I know, but Carine can give examples of companies in Northern Europe, Germany and Scandinavia. She can also give examples of companies in Thailand. So it’s more a case-by-case approach than telling you that they are focusing on you know, Italy. You have cases all over the world and it’s difficult to say we like this region more than that one.
E What’s the process? You have your offices all over the world, and they will recommend GPs that are promising, is there a pre-selection?
CH: In fact, private equity work is quite small. Everybody knows everybody. So currently at the end of each year you know which new funds you will have in the next year. So you can expect that…you say, ‘Okay, I need to choose 10 different funds,’ after which you have different sets of due diligence, and then you say, ‘I will need some private equity fund invested in the US, one invested in Asia, one in Europe, we want some private equity in private equity debt, in private equity in capital, in equity, on real estate also.’ You have different debt like that.
E For the Middle East, have you been successful in identifying GPs that satisfy your ambitions?
No. not yet.
E Although the private equity space is quite developed?
I know that, but for the moment at the beginning it’s critical to only focus on Europe because we are a French bank. After that we now have a team in Asia and so we will begin to invest there, and also we invest in the US because it is the biggest market now for private equity. We want to develop our investments worldwide, but for the moment we are more focused on these three areas. We have some GP who invest in emerging markets. And when I say emerging market it can be Asia or it can be Africa too. But we don’t select for the moment funds exclusively located in the Middle East or in Africa because it’s too selective. Maybe when we become bigger we will have more opportunities to propose to our clients and in that case we could have Middle East private equity funds. But for the moment it’s difficult to have something so specialized.
We have a lot of our clients who come from Middle East and they would like to diversify their portfolio. So it’s simple for us to invest in Europe or in the US. They don’t want to have another fund in Middle East because they know it.
E We know that sovereign money or government money is the biggest source in the Middle East. What about individuals? How much do you focus your strategies of raising funds from governments as per other type of sources?
PW: This is a private banking business. We are not looking for institutional money.
CH: Yes, they can invest by themselves so they don’t need our advice to do that. In fact we are more focused on private people so we are not really [working] on an institutional level. Maybe if they need some help we can help them. But this is very rare because they have the knowledge.
PW: What is true is that the largest clients are pretty close to institutional. If you work with a big family for example you will have requirements that are really close to the investment authority. But basically in principle we don’t chase money from institutions.