By Bilal Hafeez 23-10-2019
In: post, Newsletter

Macro Hive Deep Dives: Private Equity Barbarians? / New Uncertainty Index / Spending For Happiness


(total reading time: 3 mins)

Some see private equity as a positive agent of change – they buy inefficient companies, fix them up and prepare them for success. Others have a more cynical view. They see private equity as saddling target companies with debt, stripping them of assets and selling them for a quick buck. A new academic paper trawls through thousands of private equity deals to see whose right. We summarise the main findings in our first deep dive.

Policy uncertainty has shot up in recent years thanks to President Trump, Brexit and populism in general. There are some measures of economic policy uncertainty, but most are not that timely. Researchers at the Central Bank of Brazil have just developed a more-timely measure using FX options market data. Our second Deep Dive takes a look at this new index.

Finally, we get personal in our third Deep Dive. We look at the eight principles of spending your money for happiness. This is based on one of the most cited papers on the subject.

Enjoy!

Bilal


 

 

Do Leveraged Buyouts Work? (5 min read) The private equity industry has come a long way since ‘Barbarians at the Gate’, the narrative of the rise and fall of one of the biggest leveraged buyouts in history first hit the shelves in the 1980s. Since then, the nature of these buyouts and their sponsors has been scrutinised and regulated. But far from this diminishing interest in them, their popularity has surged – PE firms in the US alone now hold some $4tn of assets.

 

Debt Money Spending

The industry has benefited from an unprecedented wave of investor interest, supported by exuberant equity markets, low rates and steady GDP growth. Dry powder (the jargon for unutilised raised capital) is at record levels globally, just waiting to be ignited.

(23rd October, 2019 │Presiyana Karastoyanova)

 

 

A New Way of Measuring Policy Uncertainty: The Volatility Smile-Based Uncertainty (VSU) Index (3 min read) Policy uncertainty is everywhere. Trump’s trade policy, Brexit, and the rise of populism. All have played a significant part in its rise. The challenge for investors is how to measure this type of uncertainty. One popular approach has been to track media coverage deploying key phrases such as ‘economic uncertainty’. The Economic Policy Uncertainty (EPU) index uses this approach.

It covers a range of countries including several developing economies and is freely available. Generally speaking, the EPU is correlated with equity volatility and the business cycle as one would expect.

The trouble is that the EPU is only available monthly and may not necessarily use comparable news sources across countries. Enter new work from Central Bank of Brazil researchers, Jose Vicente and Jaqueline Marins. They have developed a new ‘Volatility Smile-Based Uncertainty’ index (or the VSU index for short). It uses market prices to determine uncertainty. That way, the index can be calculated in real-time and is more consistent when comparing across countries. But how effective is it?

(23rd October, 2019 │Bilal Hafeez)

 

8 Principles Of Spending Your Way To Happiness (3 min read) Most of us think more about how to earn money than how to spend it. Implicit within this is the assumption that ‘the more money I earn, the happier I’ll be’. But there has been extensive research that shows that the way you spend money can make as much, if not more, difference to your happiness than how much you earn. Perhaps the best academic paper on this is ‘If money doesn’t make you happy, then you probably aren’t spending it right’ by Dunn, Gilbert and Wilson. It highlights eight evidence-based approaches to spend your way to happiness.

 

 

(23rd October, 2019 │Bilal Hafeez)