A RESTRUCTURED CAPITAL MARKETS MODEL FOR DEVELOPING COUNTRIES- A NEW APPROACH TO FOREIGN AID AND ECONOMIC DEVELOPMENT
(By Dr. David T. Kleinman, Consulting International Economist and Finance Professor at Fordham University in New York City)
The failure of successive foreign aid programs has been due to fundamental errors in the basic development concept used. To criticize is easy; to propose viable alternatives is more difficult. This I have tried to do. Much of what I immodestly call the Kleinman Plan is now being adopted in Brazil. I am confident it will multiply the impact of our foreign aid at least fivefold and would greatly spur domestic investment. With modifications for local conditions, it could be adopted in other developing countries. Before examining the Kleinman Plan alternative, it might be useful to review the present model and its shortcomings. First, the rate of economic development in the less developed countries has been directly proportional to the amount of long term capital available. This long
Thus, instead of using scarce international and national public development funds to finance generally 100% of the cost of new projects, and for periods often lasting fifteen to twenty years, the same project could now be financed with only half of the public development funds that would have been required previously. It would also be possible now to re-use this half every three or four years instead of once every fifteen to twenty years. The use of this technique alone could multiply the development impact of a given amount of public development funds by a factor of up to ten.
MOBILIZING NEW SAVINGS
A growing variety of new investment instruments, that would now trade in a very liquid market, where long term debt instruments are fully corrected against inflation-should all create very sizable new savings that would flow into new investments. The sources of these new savings now available to finance development, would be:
(a) A diversion of savings now flowing to consumption (which has already begun to happen in Brazil). (b) A diversion of investment funds, away from socially unproductive land and real estate speculation, into more productive investments (this. also, has already begun to happen in Brazil). (e) Higher rates of return on industrial investments because funds would now tend to flow to the more productive economic sectors and enterprises (be- cause of the operation of market mechanisms), rather than to those enterprises which merely enjoy greater political support. (d) An increase in the number of savers and in amounts saved per capita (stimulated by (1) new opportunities to invest,
(2) a new liquid market, and
(3) the possibility of obtaining higher yields, because of monetary correction that would now be used for debt securities). (e) A reduction in capital outflows to developed countries because of a developing local liquid market. (f) Gradually developing net inflows of foreign-owned portfolio funds that would start as the capital markets develop.
for one day, two business days hence. There can be signific changes in this differential on a day-to-day basis.
The daily swaps will be based off the current spot rate. As the spot rate moves, there will be working capital adjustments that can affec the profitability of the position. This spot risk can, however, he hedged through the establishment of spot positions.
The distortions in cashflow due to the differing rates used on the daily spot-next swaps make it hard from a cashflow standpoint to determine if a profit or loss is being made on the position. As a result, daily mark-to-market profit and loss calculations must be done.
As previously mentioned, the forward dealer could roll the cash position by using longer-dated swaps, such as one week or one month. If a one-week swap was at 35 points discount, for instance, the numbers would suggest to go that route. Daily swaps would only generate a discount of 28 points (7 days x 4 points per day).
Dealing Offsetting Forward Contracts. The second way of managing the forward position is, of course, for the dealer to deal an offsetting forward immediately, and try to make money basis the bid-and-offer spread. With a swap in which the three months are bought at 310 points discount, the cash flows and profit are 1000 DEM, as shown in Exhibit 10.10.
The dealer originally sold the USD at 300 points discount and subsequently bought them at 310 discount. In this situation, the daily profit and loss statement will show that the dealer made 10 points, or 1000 DEM. The dealer, however, does not Exhibit 10.10. Deal Offsetting 90-Day Swap and Make Bid-and-Offer Spread Swap Value no. Swap side date Rate USD, DEM, bought/(sold) bought/(sold) 1-b Buy Spot
2-s Sell Spot
1.7950 1,000,000 (1,000,000) (1,800,000) 1,795,000 Net 0 (5,000) 1-s 35 Sell 3 months 1.7700 2-b (1,000,000) 1,770,000 Buy 3 months 1.7640 1,000,000 (1,764,000) Net 0 *6,000 Net Profit 0 1,000
How Price Makers Trade the Markets
Exhibit 10.8.
Rolling Cash Position One Day Using a Spot-Next Swap Swap No.
Spot +1 1.7996 1,000,000 (1,799,600) natively, it can be rolled forward for a week or even a month at a time, if the dealer so chooses. Using a daily roll, the swap would consist of a spot sale of USD (2-s) at 1.8000 DEM/USD and a spot-next purchase of USD (2-b) at 1.7996. The results are shown in Exhibit 10.8.
In doing this swap of selling spot and buying the day after spot, the dealer has rolled the 1 million long USD cash position from spot value to one day beyond spot.
However, the dealer is long USD at a lower rate of 1.7996, which amounts to a gain of 4 points (.0004). If this daily roll was done for the 90-day period until the maturity date was reached on the forward sale contract, the long USD position would have an effective rate of 1.7640.
Original rate Less: Gains on daily rolls (90 x .0004) Effective rate on long USD position 1.8000 .0360 1.7640As shown in Exhibit 10.9, when the final purchase ticket with an effective rate of 1.7640 that is generated with these daily swaps settles against the original three-month sale at 1.7700, a 6000 DEM profit will have been made.
In looking at the example, a few points should be noted.
The daily rolls are not likely the 4 points every day. The interest differentials applicable to this spot text swap are the interest rates.
Exhibit 10.9.
Rolling Cash Position 90 Days Using a Spot-Next Swap USD, DEM, bought/(sold) bought/(sold)
Exhibit 10.5. Calculating Spot Profit and Loss Based on a Closing Rate of 2.0100 Day Transaction DEM amount Rate USD amount 1 Bought USD (2,000,000) 2.0000 Sold USD 1,990,000 1.9900
Net (5,000) (500,000) rates, and a profit and loss analysis is done on the basis of what would have resulted had the position been liquidated at the closing rates.
Assume the closing rate was 2.0100 DEM/USD. The profit and loss would be a loss of 5000 DEM, as outlined in Exhibit 10.5.
Given a closing rate of 2.0100 DEM/USD, the trader lost 5000 DEM. However, it must be recognized that the revaluation does not change the actual position of the trader, which is long 500,000 USD.
The revaluation simply serves to determine the trader’s profit and loss up to that point. Based on that revaluation rate, the trader lost money on the day.
The rate chosen for the revaluation is significant in that differing rates will generate different profit and loss results. For example, a closing rate of 2.0200 would show the trader breaking even. However, it must be remembered that the rate at which a position is revalued at the end of one day is also the rate at which the trader’s position is valued at the start of the next day’s trading.
A revaluation at 2.0100 is less favorable than a rate of 2.0200 for the trader from the standpoint of today’s profit and loss (P&L).
However, it is equally more favorable when the next day’s results are determined. To prevent games from being played, revaluation of daily P&Ls should be done using a consistent source of rates. While traders can have input into the revaluation rate, they should not be able to unilaterally set the rate.
One risk of allowing traders to set their own revaluation rates is that they could artificially hide losses for an extended period of time. In addition, if a trader in a major loss position tries to get out of it without anybody knowing, the losses usually seem to increase, instead of decrease. An objective and consistent revaluation system is thus warranted. Industry practice is usually to obtain the revaluation rates at the same time of day every day from the same sources, whether they be the closing rates from selected Reuters pages, selected broker(s), other banks, or the central bank.
A further dimension of the spot trader’s P&L concerns the overnight position. In the above case, the trader went home on day 1 long 500,000
Mexico Queen and at Classes with Rank.
Economics of Investing: A Comprehensive Introduction
Performance Evaluation: This involves the regular evaluation of the performance of assets in the portfolio and the development of strategies for improving performance.
Risk Management: This involves identifying, assessing, and managing risks associated with the assets in the portfolio.
Portfolio Monitoring and Management: Monitoring and managing the portfolio on an ongoing basis is necessary to make sure that the assets are performing as expected and following the organization’s investment strategy.
How much does Asset Management Cost
….. | ………………………………………………………………………………
Asset management costs are determined by several factors, including the size and complexity of the investment portfolio, the kind of assets that are to be managed, and the level of assistance required. Asset management has various types, each of which has a different pricing structure. Costs can range from a few basis points for passively managed index funds to several percentage points for actively managed funds with high levels of customization and service. The costs can vary widely depending on the type of assets being managed, such as real estate, infrastructure, or equipment. It’s also worth noting that many asset management companies offer different pricing models, such as a flat fee, a percentage of assets under management, or a combination of both. It’s important to carefully evaluate the costs and benefits of different asset management options and to choose the one that best meets the organization’s specific needs and budget.
In this subsection we undertake a positive comparative analysis of public investment scale-up in roads and schools. Two scenarios are examined: one in which the scale-up occurs entirely in roads; and the other in which it happens entirely in schools. This exercise is intended to shed light on how a rise of investment in roads or schools individually affects the macroeconomic dynamics. In order to make the two cases comparable, we keep the increase in total government expenditure (including both capital and current expenditures) the same across the two cases.
Given that the investment in schools has higher returns, it is expected to result in higher growth in the long run. At the same time, we show some serious trade-offs during the transition. Qualitatively, the trade-off is fairly intuitive: while investment in schools is more attractive and would result in higher output in the longer run, the increase occurs only gradually when compared to the alternative of investing in roads. This, in turn, forces the government to rely more on debt financing when investing in schools, exacerbating debt sustainability concerns. In Section 5 we show that the trade-off becomes
Claudia Sheinbaum Prado
Economics of Investing: A Comprehensive Introduction;
Performance Evaluation: This involves the regular evaluation of the performance of assets in the portfolio and the development of strategies for improving performance.
Risk Management: This involves identifying, assessing, and managing risks associated with the assets in the portfolio.
Portfolio Monitoring and Management: Monitoring and managing the portfolio on an ongoing basis is necessary to make sure that the assets are performing as expected and following the organization’s investment strategy.
How much does Asset Management Cost _____________.
Asset management costs are determined by several factors, including the size and complexity of the investment portfolio, the kind of assets that are to be managed, and the level of assistance required. Asset management has various types, each of which has a different pricing structure. Costs can range from a few basis points for passively managed index funds to several percentage points for actively managed funds with high levels of customization and service.
The costs can vary widely depending on the type of assets being managed, such as real estate, infrastructure, or equipment. It’s also worth noting that many asset management companies offer different pricing models, such as a flat fee, a percentage of assets under management, or a combination of both. It’s important to carefully evaluate the costs and benefits of different asset management options and to choose the one that best meets the organization’s specific needs and budget.
well as sellers into an exclusivity arrangement should be considered, as this will usually have a deterrent effect. If the managers or their advisers have been playing one potential funder against another, it may be more reasonable for the successful party to seek formal exclusivity with some level of binding costs cover. The investment agreement
Background and parties
The investment agreement (occasionally in the more traditional style referred to as the ‘subscription and shareholders’ agreement’ or similar) is the principal contractual document regulating the terms and conditions upon which the private equity investors will invest in the ultimate parent New co in which the investors and managers will hold shares (and, where relevant, any other subsidiary companies in the group structure’), and sets out other relevant matters for the ongoing operation of the group as an investee company in the portfolio of the private equity investors
As a general rule, Newco itself and everybody who will become a shareholder of Newco as part of the initial completion process will be a party to the investment agreement, together with any subsidiary of Newco which is receiving a direct investment for loan notes. As explained in chapter 3,2 in certain cases private equity investors will expect their shares (and sometimes loan notes) to be issued to and held in the name of a custodian or nominee. However, it will be usual for the fund itself to be a party to the agreement, rather than that custodian or nominee (although the custodian or nominee will usually be mentioned in the relevant operative provision).
Where there will be many employee shareholders with relatively small equity stakes, it would be unusual for such shareholders to have to sign up to the investment agreement. In these situations, it is particularly key that any provisions which are needed to bind these minority shareholders are reflected in the articles, as the articles bind all shareholders automatically by virtue of their membership of New co.3
If anyone not already signed up to the investment agreement acquires shares at a later stage, whether as a result of a new allotment or by a transfer of shares, that person will be expected to join into the investment agreement (usually by way of a deed of adherence) as a condition to receiving those shares, unless the investors agree to the contrary. The deed of adherence is usually an agreed form document, often incorporated as a schedule to the investment agreement.
1 As explained in chapter 3, section 2.3, a buyout often requires a group structure with investors holding shares in the ultimate parent company, and investing by way of loan notes in a wholly owned subsidiary of that parent. 2 See chapter 3, section 3.3. 3 Section 33 of the Companies Act 2006.
be included within the equity documents as explained in more detail in this chapter, such as the yield on the loan notes, any liquidation or dividend preference on the investor shares, any ratchet, and drag and tag along rights. If the investors or the managers wish to see such matters resolved upfront, it may also go on to address other issues which often prove to be particularly sensitive in negotiation, such as the approach to cessation of employment and equity (i.e. good and bad leaver provisions and any vesting arrangement, as explained below), the nature of the investment warranties to be given by the managers and any key limitations that will apply, and the notice period and remuneration to be offered under each manager’s service agreement.
Traditionally, the equity offer letter tended to be a short document, often providing the key financial details only without going into the more detailed legal areas of negotiation. However, the more recent trend is for more of the key equity terms to be agreed in advance by way of a detailed offer letter or term sheet. There are two main drivers for this. First, many investors are keen to see such matters resolved early (and perhaps outside the more adversarial context of the legal negotiation of detailed documents) as this can help ensure that the relationship between management and the investors is not soured, and that the equity documentation is completed more efficiently. Secondly, a more competitive market for deals has led to management teams wanting to explore deal terms in more detail before a preferred bidder is selected – even where the management team are not sellers themselves and so do not decide who the preferred buyer is, their views will in any event be very influential as it will have a significant impact on the deliverability of the transaction. In the buoyant market during the period leading up to the summer of 2007, it was not uncommon for the managers or their advisers to issue their own pro forma term sheet with some of the sections pre completed, and others left blank, so that the key terms could be flushed out and the various bidders played off each other before exclusivity was granted.
Although equity offer letters are usually expressly stated to be non-binding and based on key assumptions (such as satisfactory due diligence, legal documentation being agreed, and so on), they will sometimes include a legally binding exclusivity clause (separate to the exclusivity arrangement agreed with the sellers) seeking to tie the management team to the relevant private equity house for a period of time. As explained in section 3.3 of chapter 2, such an agreement cannot impose a positive duty on the parties to negotiate but, in principle, it can bar them for a time from seeking funding elsewhere. How use- ful such a provision will be is debatable in the event of a breach. The measure of loss suffered could be construed to be the private equity investors’ abortive costs, but there will always be some doubt if a deal to buy the business could have been concluded in any event on acceptable terms, even if the management team had honoured the exclusivity arrangement. The question also arises of whether the management team are of sufficient financial means to provide an effective remedy in the event of a breach. Nevertheless, tying management as
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completion arrangements in each document come together to form a smooth and effective overall completion process. Even if everything is covered ‘on paper’, there can be both legal and practical consequences if the steps under each document are not completed in the correct order, for example. Investment agreement warranties Virtually all investment agreements will require that the managers give warranties directly to the private equity investors. Sometimes, Newco itself also gives the same warranties, or its own separate warranties, in the investment agreement. Typically, the warranties in an investment agreement relate to the personal history of the manager (for example, that he is contractually free to enter into the investment and his employment by Newco without breaching restrictive covenants, has a clean business history, and satisfies any particular regulatory requirements for the sector in which the business operates), the reasonableness of the preparation of the Business Plan and the projections and assumptions underlying it, and a confirmation from the managers that they are not aware of claims under the acquisition agreement or of any material inaccuracies or omissions in the commissioned due diligence reports.
It is quite common that the personal history warranty is dealt with by the managers completing and delivering a pro forma questionnaire (sometimes called a ‘manager’s declaration’) to the private equity investors, on or before execution of the investment agreement. Such questionnaire is then backed up by a short warranty in the investment agreement on the accuracy and completeness of the delivered questionnaire. This mirrors the practice often used for directors of publicly traded companies. The questionnaire can sometimes cause problems if any of the questions prove to be sensitive – the most common issue being that such questionnaires often ask the managers to confirm their net worth (for reasons explained below).
Warranties are a standard feature of the acquisition agreement when acquiring a private company. In that context, as explained in chapter 4,8 warranties are often said to have two objectives, namely, to allocate risk and to elicit disclosure. The warranties in an investment agreement are principally focused on eliciting disclosure ensuring that the managers share what they know with the private equity investors, whether or not the sellers mention it in the acquisition process (or, indeed, whether or not the sellers are even aware of it). Special situations arise where the managers are also sellers (or some of the sellers), as would be the case in a secondary buyout. The interaction of the acquisition and investment warranties in this situation is considered in chapter 12. Although the investment agreement warranties do allocate risk contractually, they usually provide a very limited remedy in this context, as there are a
out its conditionality. However, it does at least reduce the need for a seller to understand or review the funding documents.
Whenever there is genuine conditionality in the investment agreement, it is important to bear in mind the factors listed in section 2.6 of chapter 4, including consideration of whether any party should be under an obligation to procure that any conditions are satisfied, and whether failure to satisfy any conditions should have any particular implications in terms of transaction costs. In the context of the investment agreement, as a general rule it is usual to see an obligation on Newco and the managers to use reasonable endeavours to procure satisfaction of the conditions specified in the investment agreement. It would be unusual, however, to have an express obligation in relation to costs if, in fact, the investment agreement does not become unconditional.
This is because Newco itself is unlikely to be able to meet costs, and the managers will understandably be reluctant to do so out of their own funds. That is not to say the private equity investors would always bear their own costs if the deal does not complete. The question of abortive costs under the acquisition agreement (in the event of a breach of exclusivity, for example) is discussed in chapter 2.6 The related issue of an inducement or break fee in a public-to-private transaction is discussed in chapter 10.7 Completion The wording of the investment agreement completion clause is relatively mechanical in an investment agreement, so much so that the full detail is sometimes incorporated as a schedule. The equity investors and other subscribers (for example, the managers) will pay their subscription moneys, usually via the client account of the lawyers acting for Newco in the acquisition transaction. Newco (and, where relevant, other members of the group) will allot and issue shares and loan notes to the subscribers, enter their names in the relevant registers, and issue to them appropriate share or loan note certificates to evidence their holdings. As noted above, private equity investors (particularly where they are organised as a limited partnership, as is often the case) will often expect their shares (and sometimes also their loan notes) to be allotted into the name of, and held by, a custodian or nominee for the relevant investors.
The completion clause will also deal with the execution of other documents in the process, for example the execution of service agreements, banking and intercreditor documents, non-executive engagement letters (for a chairman, for example), and any other arrangements which the parties would expect to have in place at completion as part of the overall deal structure. Clearly, there will be a degree of overlap with the completion provisions under the facility documents and the acquisition agreement. It is important to ensure that the separate 6 Chapter 2, section 3.3. 7 Chapter 10, section 3.1.
“The stock of direct investment net assets be compiled in respect of the immediate host or investing country and in respect of the ultimate host or controlling country” (§45 OECD Benchmark Definition). “Inward and outward direct investment earnings be compiled in respect of the immediate host or investing country. Ideally, outward FDI earnings should also be recorded with respect to the ultimate host country. This would enable investing countries to see where their overseas earnings originate. However, in practice, recording earnings on the basis of the ultimate host country would appear more appropriate in the case of operating data of affiliates, for those countries that collect such data” (§47 OECD Benchmark Definition). (See also Chapter 3 of this Handbook.) Basic principles: Box 2.17. Geographic classification
The debtor/creditor principle allocates transactions resulting from changes in the financial claims of the compiling economy to the country or residence of the non- resident debtor, and transactions resulting in changes in the financial liabilities of the compiling economy to the country of residence of the non-resident creditor, even if the amounts are paid to or received from a different country.
The transactor principle allocates transactions resulting from changes in the financial claims and liabilities of the compiling economy to the country of residence of the non- resident party to the transaction (the transactor), even if this is not the country of residence of the direct investment enterprise or direct investor. International manuals do not specifically recommend the basis to be used for the geographic allocation of FDI transactions data. The BPM5 allows for transactions to be allocated using either the debtor/creditor principle or the transactor principle. However, it recommends that position data be allocated using the debtor/creditor principle. Country identification
“Total direct investment flows be compiled only in respect of the immediate host or investing country” (§46 OECD Benchmark Definition).
“The stock of direct investment net assets be compiled in respect of the immediate host or investing country and in respect of the ultimate host or controlling country” (§45 OECD Benchmark Definition).
“Inward and outward direct investment earnings be compiled in respect of the immediate host or investing country” (§47 OECD Benchmark Definition). Note: (See IMF Balance of Payments Manual, 5th edition, and OECD Benchmark Definition of Foreign Direct Investment, 3rd edition.) vi) Industry classification of FDIClassifying cross-border financial transactions by economic activity is not a part of the general recommendations for balance of payments statistics. On the other hand, this is a recommendation of the OECD Benchmark Definition for FDI statistics as there is a wide interest in such analytical information provided both for direct investment enterprises and the direct investor.22
v) Geographic classification of FDI
The method used for determining the geographical classification of inward and outward FDI will play an important role, particularly in the bilateral comparison of the data. There are two methods whereby compilers may apply for the geographical allocation of FDI transactions to and from their economies:
The debtor/creditor principle allocates FDI transactions to the country of the direct investment enterprise or direct investor, even if the amounts are paid to or received from another country.
The transactor principle allocates FDI transactions to the country to which the funds are paid or the country from which the funds are received, even if this is not the country of the direct investment enterprise or of the direct investor. (See also §482 of IMF BPM5.)
“Any country analysis is complicated by holding companies where the ultimate parent enterprise’s 19 investment in Country C is held through another subsidiary in Country B. Further, long chains of subsequent direct investment enterprises could be analysed in different ways in function of the level considered as the direct investor. Therefore information is often required on two bases: a) By ultimate host country/ultimate investing country. b) By immediate host country/immediate investing country.
“The immediate host/investing country system looks, for outward FDI, only to the country of the directly owned subsidiaries, associates and branches. For inward FDI, it is the country directly owning the domestic enterprises that is of interest. In this approach, the consolidated earnings and consolidated net assets cover the directly owned enterprise and all its subsidiaries and associates in its country and any other country, all of them being allocated for outward FDI to the country of the directly owned enterprise, and in the case of inward FDI to the country directly owning the enterprise” ($41 OECD Benchmark Definition).
“For outward direct investment although it may be possible in some instances to compile earnings and the stock of net assets on either basis, it is often very difficult to obtain data on outward direct investment flows by the ultimate host country; funds received by the ultimate host country may bear no relationship to the outward direct investment flows by the ultimate parent company” (§42 OECD Benchmark Definition).
“For inward direct investment it is possible to estimate earnings and the stock of net assets due to the immediate investing country and to reanalyse this by country of ultimate control. The share of the earnings and net assets attributable to the ultimate parent company will not normally be known. This is because the host country does not know the percentage shareholdings in the various intermediary companies between it and the ultimate parent” (§43 OECD Benchmark Definition). Following the international standards:
“Total direct investment flows be compiled only in respect of the immediate host or investing country,20 Any figures in respect of the ultimate host or controlling country would be artificial.21 Changes in the stock of outward direct investment will, however, give some indication of investment flows to the ultimate host countries” (§46 OECD Benchmark Definition).
suitable change in management. Where relevant, they will look at the acquisition agreement warranties or other provisions in the acquisition documentation. This is not to say that the investment warranties do not really matter or should not be taken seriously they are particularly important in ensuring that any information known to the managers which may be relevant to the investment decision is flushed out. It is Newco that receives the investment. For this reason, as noted above, Newco will often give some or all of the warranties in addition to the managers. Generally, Newco would give the warranties relating to the due diligence, the Business Plan, and the ‘back-to-back’ warranty concerning breach of the acquisition agreement warranties. For obvious reasons, it would be less common for Newco to give or to be liable in respect of the personal warranties given by a manager as to his own history and circumstances.
The likelihood of Newco being asked to give warranties varies as between particular private equity houses, and can also vary, inversely, by reference to the percentage of the equity which the private equity investors will own in Newco. In other words, the greater their percentage stake in Newco, the less likely it is that investors would seek to have a warranty claim against Newco (as such a claim diminishes even further the value of their investment, which is substantially owned by those investors anyway). The bank funder to the transaction is also often concerned to see that there is the potential for a warranty claim by the private equity investors against Newco itself, as this could cause some leakage of value to the private equity investors ahead of the agreed priority as between the funders. If the agreement does provide for Newco to give warranties, it will be usual for the intercreditor agreement to regulate the payment by Newco of any liability arising from a warranty claim, or the hand- ling by the private equity investors of any monies received in respect of that warranty claim, in such a way as to preserve the relative priority of the bank in the overall funding structure. For these reasons, particularly in an institutionally led deal, it is quite common for the investors not to seek warranties from Newco at all. The bank would not expect direct warranties from the managers, so the bank does not generally have the same concern on warranties that the managers themselves give to the private equity investors. Indeed, the absence of such manager warranties would be regarded by a bank or its advisers as unusual.
Interaction between investment agreement warranties and acquisition agreement warranties One issue which often arises in relation to investment agreement warranties is their interaction with the more historic and/or factual warranties about.
applying equity is mostly fixed on past events rather than future needs when called upon to allocate.5 My specific aim is to consider how this difference in approach as between statute and equity might be justified. To that end, I examine a proposition that I take to be widely accepted: the proposition that, whatever the position under statute, in equity courts are constrained doctrinally not to have regard to future needs in the allocation of property in family assets. A person who was minded to assert this proposition would require an account of doctrinal constraints in equity explaining why regard to future needs is ruled out when the question of property allocation arises in a family assets case. I consider two such accounts: one that confines equity to norms of corrective justice; and one that confines equity to a limited set of applicable norms, including norms of corrective justice, none of which refer to future needs as grounds for allocation of property in family assets. I argue that there are large obstacles to accepting either the corrective justice account or the limited set account in respect of family assets cases in equity. It follows that there are reasons not to accept the proposition about doctrinal constraints in equity, at least to the extent that the proposition depends on either the corrective justice account or the limited set account. However, I conclude that, even if the proposition about doctrinal constraints in equity is rejected, there remain reasons to think that a court applying equity should refrain from having regard to future needs in allocating property in family assets cases.
II. Doctrinal Constraints (1) —The Corrective Justice Account Norms of corrective justice are norms that require the reversal of transactions pursuant to which benefits have passed from one party to another.
The reversal of a transaction that is demanded by a norm of corrective justice entails taking a benefit from a party who received that benefit under an impugned transaction, and giving it back to a party who lost it in the same transaction.
Thus, as John Gardner has said, ‘allocation back’ is the distinctive form of norms of corrective justice. Understood as norms that take the form of ‘allocation back’, norms of corrective justice are necessarily past-regarding: they operate only in circumstances where a transaction that has occurred in the past now requires reversal by an allocation back, and they specify, as grounds for that reversal by an allocation back, events that took place in the past in light of which the transaction may be impugned.
In contrast to norms of corrective justice, norms of distributive justice require an allocation tout court, based on criteria other than the fact that a benefit has passed from one party to another under an impugned transaction. Unlike norms of corrective justice, norms of distributive justice are not necessarily past-regarding and may specify, as grounds for allocation, future events or states of affairs. If equity is confined to norms of corrective justice in family assets cases, courts applying equity should not look to future needs when
number of reasons why a private equity investor is likely to choose not to bring a warranty claim against a manager under the investment agreement, even if there is a valid potential claim. These include the following: (a) The reasons why private equity investments fail (or private equity investors suffer loss on an investment) rarely come from circumstances covered by the subject matter of the investment agreement warranties.
(b) The manager is unlikely to be good for a claim (i.e. able to pay it) if the loss is material. One of the principal reasons for private equity involvement in the transaction is to provide funding which the managers themselves cannot provide (as they do not have the personal resources). This particular aspect can be different in the context of a secondary buyout, where the managers have received cash out as part of the transaction.
(c) Reputational risk to the private equity investor. There can be adverse consequences for the investor if it becomes known that it is too readily prepared to bring a claim against managers (at least in the absence of fraud). Not only is there a risk that this would suggest that they had backed the wrong managers, but it may also make future management teams and their advisers more hesitant to deal with that particular private equity house (or, at least, to give warranties to it), and accordingly favour a less trigger-happy rival investor in negotiations on future deals. This would be the case, in particular, where there was a suspicion that the private equity investor was simply trying to recover its investment because the business had failed (as opposed to any fraud or similar gross impropriety surrounding the giving of the investment agreement warranties).
(d) The managers may still be valuable to the business. Unless the circumstances surrounding a warranty breach are so gross as to call into question the confidence which the private equity investors can place in the managers, the fact that there is a potential warranty claim against the managers does not, in itself, preclude the fact that the managers may still be of continuing value to the business. In an under performance situation, for example, a relevant manager may still be the best person (or part of the best team) to turn around the investment. In that situation, bringing or threatening to bring a warranty claim against that valuable manager or management team would be a material disincentive, and could have an adverse effect on the present and future prospects of the investment itself as a result. Accordingly, in the absence of fraud, private equity investors are unlikely to look to the investment agreement warranties as a principal remedy if something goes wrong in the investment. Instead, they will look first to the various mechanisms included in the documentation designed to assist them in an under performance situation and, where appropriate, will seek to bring about a
be included within the equity documents as explained in more detail in this chapter, such as the yield on the loan notes, any liquidation or dividend preference on the investor shares, any ratchet, and drag and tag along rights.
If the investors or the managers wish to see such matters resolved upfront, it may also go on to address other issues which often prove to be particularly sensitive in negotiation, such as the approach to cessation of employment and equity (i.e. good and bad leaver provisions and any vesting arrangement, as explained below), the nature of the investment warranties to be given by the managers and any key limitations that will apply, and the notice period and remuneration to be offered under each manager’s service agreement. Traditionally, the equity offer letter tended to be a short document, often providing the key financial details only without going into the more detailed legal areas of negotiation. However, the more recent trend is for more of the key equity terms to be agreed in advance by way of a detailed offer letter or term sheet. There are two main drivers for this.
First, many investors are keen to see such matters resolved early (and perhaps outside the more adversarial context of the legal negotiation of detailed documents) as this can help ensure that the relationship between management and the investors is not soured, and that the equity documentation is completed more efficiently.
Secondly, a more competitive market for deals has led to management teams wanting to explore deal terms in more detail before a preferred bidder is selected even where the management team are not sellers themselves and so do not decide who the preferred buyer is, their views will in any event be very influential as it will have a significant impact on the deliverability of the transaction. In the buoyant market during the period leading up to the summer of 2007, it was not uncommon for the managers or their advisers to issue their own pro forma term sheet with some of the sections precompleted, and others left blank, so that the key terms could be flushed out and the various bidders played off each other before exclusivity was granted. Although equity offer letters are usually expressly stated to be non-binding and based on key assumptions (such as satisfactory due diligence, legal documentation being agreed, and so on), they will sometimes include a legally binding exclusivity clause (separate to the exclusivity arrangement agreed with the sellers) seeking to tie the management team to the relevant private equity house for a period of time. As explained in section 3.3 of chapter 2, such an agreement cannot impose a positive duty on the parties to negotiate but, in principle, it can bar them for a time from seeking funding elsewhere. How useful such a provision will be is debatable in the event of a breach.
The measure of loss suffered could be construed to be the private equity investors’ abortive costs, but there will always be some doubt if a deal to buy the business could have been concluded in any event on acceptable terms, even if the management team had honoured the exclusivity arrangement. The question also arises of whether the management team are of sufficient financial means to provide an effective remedy in the event of a breach. Nevertheless, tying management as
Acceptance. An agreement by the drawee of a draft or bill of exchange to pay it according to its terms. This agreement is usually made by the drawee’s writing “Accepted” across the face of the draft or bill and signing his name. An Acceptance is also the draft or bill of exchange when accepted. Acceptance for Honor. An acceptance made for the honor of the drawer after the draft has been dishonored by the drawee. Accommodation Account. An account with certain charges, deductions, etc., such as expense, interest, and discount. Accommodation Paper. Notes and acceptances drawn for the purpose of being discounted, and not based upon an actual sale of goods. Notes and acceptances signed without consideration. Notes and acceptances exchanged by merchants for mutual accommodation. Account Current. An open account. A detailed statement of the transactions between two persons or firms. Account Sales. An itemized statement of the expenses and sales of goods sent to be sold on commission. The statement shows the prices for which the goods sent were sold, the commission and other charges, and the difference between the amount of sales and the amount of charges or the net proceeds. Account. A condensed record of one or more business trans- actions arranged under some appropriate title with the debits separated from the credits so that their difference may be easily ascertained. Advice. Due notice given concerning any monetary transaction. Notice of a draft drawn. Appraise. To set a value upon goods. Articles of Copartnership. The agreement between partners as to the conduct of the partnership. Assets (Resources). Available property belonging to a per- son and amounts owed him. Assignee. A person to whom the property of a bankrupt is transferred for the purpose of adjusting his affairs. Balance. The difference between two sides of an account. That which remains. Balance Sheet. A condensed statement of the condition of the business which contains the trial balance, statement of resources and liabilities, and losses and gains of a business. Bank. Primarily an institution for the safe keeping of money. A commercial bank is an institution organized for the purpose of receiving deposits of money, making loans of money, discounting commercial paper, making collections, and effecting the transmission of money from place to place. Bank Book. A pass book carried by the depositor in which are recorded by an officer of the bank the deposits made and also the checks paid by the bank. Bankrupt. One who fails in business as a result of being unable to pay his debts. Bill. A written statement containing a list of items bought or sold or a statement of services rendered. Another name for a promissory note or draft. Bill Book or Note Ledger. A specially ruled book in which the particulars of a note or draft are recorded. Bill Head. A printed form on which a bill or invoice is listed. Bill of Exchange. A written order for the payment of money usually drawn on a person living in a foreign country, the term draft being used to designate orders payable in the same country in which they are drawn. Bill of Lading. A freight receipt or a written account of goods shipped and the conditions of shipment, containing the signature of the carrier or his agent and given as a receipt to the shipper. Bills Payable (Notes Payable). Promissory notes given to others. Bills Receivable (Notes Receivable). Promissory notes received from others. Board of Trade. An association of business men joined together for the purpose of regulating and advancing business interests. Bond. A written obligation under seal to fulfil the conditions of a contract. Debit. Value received. Responsibility for value. Debtor. A person who receives value. Deed. An instrument under seal containing a transfer of real estate. Discount. To deduct from an account, debt, or charge. Deduction made for interest in advancing money upon a draft or note not due. Payment in advance of interest upon money. Dishonor. Non-payment of commercial paper by the person on whom it is drawn. Dividend. A sum of money to be divided and distributed. It is applied to profits apportioned among shareholders and to assets apportioned among creditors. Double Entry Bookkeeping. A method of recording business transactions in which personal, property, and accommodation accounts are employed. Express Money Order. A written order issued by an express company ordering another to pay a specified sum of money to a designated person. Face. The original amount of a note, check, or draft. Firm. A copartnership. F. O. B. Free on Board. The seller must pay all shipping charges when merchandise is sold on this condition. Folio. A page. Footing. The sum of a column of figures. Adding a column of figures. Gain (Profit). Excess of cost over proceeds. Good-will. The good opinion of customers concerning the business, and the probability that they will continue to patronize it. It is a valuable asset and may be sold with a business. Grace, Days of. Three additional days allowed after a debt becomes due. Most states have done away with days of grace. Honor. To accept and pay when due. Indorse (Endorse). To write one’s name on the back of a negotiable paper in order to transfer it, or to secure the payment of a note, draft, etc. Indorsement. That which is written on the back of a negotiable paper, transferring it, etc. Indorser. One who writes his name on the back. Insolvent. (See Bankrupt.) Insurance. Indemnity against loss. Inventory. A list of unsold merchandise. Stock on hand. Invoice. A bill. Invoice Book. A book in which is kept a record of merchandise bought. Jobber. One who buys goods from importers and manufacturers and sells to retailers. A middleman. Journal. A book of debits and credits in which the original records of business transactions are prepared for posting. Journal Day Book. A book of original entry containing a record of each business transaction, at the time, under the date, and in the order of its occurrence, with the names of the accounts affected by the transactions, showing which accounts are debited and which are credited. Journalizing. Recording business transactions in the journal or journal day book. Lease. The renting of property. The contract for such renting. Ledger. A book of accounts in which debits and credits are arranged under their proper titles. Legal Tender. Such money as the Government declares shall be accepted in payment of debts. Letter of Credit. A draft, in the form of a circular letter, addressed to several persons or banks, as drawees, each one of whom is directed to pay a part or the whole amount of the draft, to the payee, when presented for payment, until the whole amount is paid. Liabilities. All kinds of debts and legal claims payable from the business. Loss. Excess of cost over proceeds. Maker. One who signs a check, note, or draft. Maturity. The day that a note or draft falls due. Merchandise. Such movable goods as are bought and sold for profit. Mortgage. Conveyance of property as security for the payment of a debt to become void upon payment or performance. Negotiable. Transferable by assignment or indorsement to another person. Negotiable Paper. Paper such as notes, drafts, checks, etc., that is transferred by indorsement or assignment. Net. The clear amount free from charges, deductions, etc. Net Proceeds. The amount or sum which goods produce after every charge is paid. Notary Public. An officer appointed to protest notes, and attest deeds and other instruments. Note. A written promise to pay a certain sum of money to a certain specified person at a certain specified time. Order. Another name for a draft. A request from one dealer to supply certain goods or money. Outstanding Accounts. Accounts uncollected and unpaid. Overcharge. To charge more than agreed upon or more than the usual price. Overdrawn. To make drafts upon or against one’s capital or credit beyond the limit. Par. The original price or full value of a security or money. Equal value. Partner. A member of a business firm. Partnership. The association of two or more individuals for carrying on business. Pass Book. See Bank Book. Payee. The person to whom a note or draft is made payable. Personal Accounts. An account with a person. Postal Money Order. An order drawn on one post-office by another for money to be paid to a designated payee. Posting. Transferring debits and credits from the auxiliary books to the ledger. Present Worth. The amount the proprietor is worth at the time the books are closed. The difference between the total investment, including gains, and the total withdrawals. Profit. Gain. Promissory Note. See note. Property Accounts. Accounts with certain kinds of property, such as cash, merchandise, real estate, etc. Protest. An official notice or remonstrance from a notary public.
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In this subsection we undertake a positive comparative analysis of public investment scale-up in roads and schools. Two scenarios are examined: one in which the scale-up occurs entirely in roads; and the other in which it happens entirely in schools. This exercise is intended to shed light on how a rise of investment in roads or schools individually affects the macroeconomic dynamics. In order to make the two cases comparable, we keep the increase in total government expenditure (including both capital and current expenditures) the same across the two cases.
Given that the investment in schools has higher returns, it is expected to result in higher growth in the long run. At the same time, we show some serious trade-offs during the transition.
Qualitatively, the trade-off is fairly intuitive: while investment in schools is more attractive and would result in higher output in the longer run, the increase occurs only gradually when compared to the alternative of investing in roads. This, in turn, forces the government to rely more on debt financing when investing in schools, exacerbating debt sustainability concerns.
In Section 5 we show that the trade-off become Economics of Investing: A Comprehensive Introduction.
Performance Evaluation: This involves the regular evaluation of the performance of assets in the portfolio and the development of strategies for improving performance.
Risk Management: This involves identifying, assessing, and managing risks associated with the assets in the portfolio.
Business men must write letters, but they should be careful what they put in them.
If you are losing money, be specially cautious and not tell of it, or you will lose your reputation.
Portfolio Monitoring and Management: Monitoring and managing the portfolio on an ongoing basis is necessary to make sure that the assets are performing as expected and following the organization’s investment strategy.
How much does Asset Management Cost_______ Varies and at times plus andor not given poor law theseof any at all uses from products that could charge and instead provides it burden access lite and normally typically not limited to thatof Online access.
Asset management costs are determined by several factors, including the size and complexity of the investment portfolio, the kind of assets that are to be managed, and the level of assistance required. Asset management has various types, each of which has a different pricing structure. Costs can range from a few basis points for passively managed index funds to several percentage points for actively managed funds with high levels of customization and service.
The costs can vary widely depending on the type of assets being managed, such as real estate, infrastructure, or equipment. It’s also worth noting that many asset management companies offer different pricing models, such as a flat fee, a percentage of assets under management, or a combination of both. It’s important to carefully evaluate the costs and benefits of different asset management options and to choose the one that best meets the organization’s specific needs and budget.
Donald Phoebe Agenfrida
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