Unifying Forces: Cross-Border AML Collaboration in Safeguarding Global Finances

Nithisha CHALLA

In this article, Nithisha CHALLA (ESSEC Business School, Grande Ecole Program – Master in Management (MiM), 2021-2024) presents the cross-border collaboration of national entities to prevent money laundering.

Introduction

In an era marked by unprecedented global connectivity, the fight against financial crimes, particularly money laundering, has transcended national boundaries. The escalating sophistication of financial crimes, coupled with the interconnectedness of the global economy, has underscored the need for collaborative approaches to tackle money laundering. Cross-border anti-money laundering (AML) collaboration involves the sharing of intelligence, resources, and best practices among nations, regulatory authorities, and financial institutions to effectively thwart illicit financial activities that transcend borders. Money laundering rarely respects national borders. Criminal organizations exploit gaps in regulatory frameworks, leveraging multiple jurisdictions to obscure the origins of illicit funds. Cross-border collaboration is essential to address this globalized nature of financial crimes. According to UNODC (United Nations Office on Drugs and Crime), the estimated amount of money laundered globally in one year is between 2 to 5% of global GDP, or between $800 billion to $2 trillion in current US dollars. Due to the clandestine nature of money-laundering, it is however difficult to estimate the total amount of money that goes through the laundering cycle.

Key Elements of Cross-Border AML Collaboration

Information Sharing

Collaborative platforms used by national entities enable countries to share vital information about suspicious transactions, emerging trends, and high-risk entities. Timely information exchange enhances the ability to detect and prevent money laundering activities.

Standardization of AML Practices

Establishing common standards for AML practices ensures consistency across borders. Harmonizing regulations and procedures facilitates smoother collaboration, reduces regulatory arbitrage, and creates a united front against money laundering. For example, in cryptocurrency, the Travel Rule mandates global sharing of customer information during transactions, aligning with guidelines of the Financial Action Task Force on Money Laundering (FATF) for standardized anti-money laundering practices. This ensures consistency and strengthens defences against illicit financial activities.

Mutual Legal Assistance Treaties

A Mutual Legal Assistance Treaty (MLAT) provides a legal framework for countries to request and provide assistance in legal matters, including the investigation and prosecution of money laundering. Strengthening and expanding these treaties contribute to more effective cross-border collaboration. For instance, if Country A is investigating financial crimes and requires bank records from Country B, both nations, bound by an MLAT, can exchange information, and collaborate on the investigation, enhancing the effectiveness of their legal systems in combating transnational crimes.

Technological Integration

Leveraging technology, such as advanced analytics and artificial intelligence, facilitates the identification of patterns indicative of money laundering. Shared technological solutions enhance the efficiency of AML efforts across borders.

Joint Investigations

Cross-border collaboration allows for joint investigations involving law enforcement agencies from multiple countries. This coordinated approach increases the chances of uncovering complex money laundering schemes and holding perpetrators accountable.

Role of FATF in Cross-Border AML Collaboration?

Established in 1989, the Financial Action Task Force on Money Laundering (FATF) is a professional association comprising member countries and jurisdictions committed to combating money laundering and terrorist financing. This intergovernmental organization sets international standards, develops policies, and conducts assessments to promote effective Anti-Money Laundering (AML) and Counter-Terrorist Financing (CTF) measures worldwide.

Key Contributions of FATF in Cross-Border AML:

  • Setting International Standards: FATF establishes and updates a set of AML and CTF standards, commonly known as the FATF Recommendations. These standards provide a unified foundation for countries to strengthen their legal, regulatory, and operational frameworks against money laundering and terrorist financing.
  • Mutual Evaluations: FATF conducts regular mutual evaluations, wherein member countries assess each other’s compliance with FATF Recommendations. This process fosters transparency and accountability, encouraging nations to enhance their AML and CTF efforts.
  • Issuing Public Statements: When a country is identified as having deficiencies in its AML/CTF framework, FATF issues public statements, creating international awareness. This mechanism encourages corrective actions and bolsters cross-border cooperation to address vulnerabilities.
  • International Cooperation and Information Sharing: This collective effort strengthens the ability to identify and combat transnational financial crimes.

Benefits and Challenges

As technology continues to advance, collaborative efforts are poised to become more sophisticated, providing an even greater advantage in the ongoing battle against money laundering. Cross-border AML collaboration offers numerous benefits, including enhanced detection capabilities, stronger deterrence against financial crimes, and the establishment of a more resilient global financial system. Though there are several benefits for the cross-border AML collaboration, it is also quite challenging to find good solutions.

Differing Legal Frameworks

Varied legal frameworks across countries pose challenges. Establishing common principles and encouraging mutual recognition of legal systems can help address disparities.

Cultural and Language Barriers

Cultural and language differences can impede effective collaboration. Training programs and cultural awareness initiatives foster better communication and understanding among collaborating entities.

Data Privacy Concerns

Data privacy regulations can hinder information sharing. Implementing robust data protection measures and ensuring compliance with privacy laws are crucial for overcoming this challenge.

Why should I be interested in this post?

If you decide to work in the realms of finance, international law, or even within a multinational corporation, understanding the intricacies of cross-border collaboration in Anti-Money Laundering (AML) becomes a must. This knowledge not only ensures regulatory compliance for businesses operating across borders but also provides professionals with insights into legal frameworks, treaties, and diplomatic efforts that underpin a secure and stable global financial landscape.

Related posts on the SimTrade blog

   ▶ Akshit GUPTA Market manipulation

   ▶ Louis DETALLE The 3 biggest corporate frauds of the 21st century

Useful resources

United Kingdom government Action plan for anti-money laundering and counter-terrorist finance IMF Combating the finance of terrorism Financial crimes enforcement network (US agency) History of anti-money laundering laws Financial Action Task Force on Money Laundering (FATF) Mutual Legal Assistance Treaties (with the US)

About the author

The article was written in March 2024 by Nithisha CHALLA (ESSEC Business School, Grande Ecole Program – Master in Management (MiM), 2021-2024).
Posted in Contributors | Leave a comment

Market Consensus Based on Financial Analysts’ Forecasts

Market Consensus Based on Financial Analysts’ Forecasts

Nithisha CHALLA

In this article, Nithisha CHALLA (ESSEC Business School, Grande Ecole Program – Master in Management (MiM), 2021-2024) explains what is the market consensus based on financial analysts’ forecasts.

Introduction

Market consensus represents the average derived from the individual predictions made by financial analysts who closely monitor and analyze corporate and market conditions. In the context of financial analysts’ forecasts, the consensus refers to the collective expectation or average prediction of a group of analysts regarding the future performance of a firm measured by sales and profits, of a financial asset such as a stock, commodity, or currency. Few examples of market consensus based on financial analysts forecast would be: Forecasts for economic indicators such as GDP growth, inflation rates, or unemployment levels. It is derived from the aggregated predictions of various analysts, providing a consensus viewpoint on the expected direction or magnitude of economic changes. Forecasts of the future exchange rates between currencies such as the euro/dollar rate. If multiple analysts predict the exchange rates for the Euro to U.S. Dollar, the market consensus would be an average or median of these forecasts, indicating the collective expectation for the currency pair. Forecasts of price targets for stocks based on the projections of future performance. If a market stock is covered by multiple analysts, the market consensus price target would be the average of those figures, giving investors a benchmark for assessing the stock’s anticipated value. Forecasts of the company’s earnings per share (EPS). The market consensus, in this case, would be the average or median of these individual EPS predictions, representing the collective expectation of analysts regarding Company’s earnings. Forecasts of commodity prices such as oil, gold, or agricultural products. The market consensus for a commodity’s future price is determined by averaging or considering the median of these individual forecasts, reflecting the consensus view on the commodity’s likely trajectory.

Key participants

Financial analysts

Talk about financial analysts: who are they?where do they work? To determine the market consensus for Apple Inc. (AAPL), one would typically aggregate and analyze the forecasts and estimates provided by sell-side financial analysts who cover the company. These analysts regularly publish their projections for key financial metrics such as revenue, earnings per share (EPS), and other performance indicators.

Market consensus firms

Market consensus firms specialize in producing market consensus based on financial analysts’ forecasts and opinions. These firms aggregate and analyze data from multiple analysts to provide a consensus view on various financial metrics such as earnings estimates, revenue projections, and target prices for individual stocks and broader market indices. Some prominent firms that offer market consensus based on financial analysts’ input include: FactSet: FactSet aggregates and standardizes data from various sources, including sell-side analysts, to provide consensus estimates for earnings, revenue, and other financial metrics. Their platform offers detailed consensus estimates for individual companies, sectors, and industries. Refinitiv (formerly Thomson Reuters): Refinitiv offers consensus estimates and forecasts compiled from sell-side analysts’ research reports. Their platform provides consensus data on earnings, revenue, and other key financial metrics for equities, fixed income, and commodities. IBES by Refinitiv: IBES (Institutional Brokers’ Estimate System) is a leading database of consensus estimates and analyst recommendations. It offers comprehensive coverage of earnings estimates, revenue projections, and other financial metrics for thousands of companies globally.

Data providers

Companies that provide financial data and analytics services play a crucial role. They compile and disseminate information about analysts’ forecasts, making it accessible to various participants in the financial ecosystem. Bloomberg is a prominent example here, its terminal, a widely used platform in the financial industry, aggregates and delivers a vast array of financial data, including analysts’ predictions and consensus estimates. It also exemplifies how data providers contribute to the transparency and accessibility of financial analysts’ forecasts.

Investors

Investors rely on the forecasts and predictions made by financial analysts to make informed investment decisions. The market consensus provides investors with a collective viewpoint, helping them assess potential risks and returns. Their role is pivotal in the financial markets, and they interact with market consensus in several ways like decision making, portfolio construction, risk assessment, performance evaluation, communication with shareholders, etc.

Traders

Traders are individuals or entities that actively buy and sell financial instruments, such as stocks, bonds, currencies, or commodities, with the aim of making short-term profits. Traders can be categorized into various types, including day traders, swing traders, and algorithmic traders, each with a different time horizon and approach to the market. There are various types of traders, each with different strategies, time horizons, and goals. Few examples of them would be day trader, swing trader, Algo trader, position trader, scalper, options trader, forex trader and commodity trader.

Process for building a market consensus

Building a market consensus involves aggregating the predictions and expectations of various financial analysts, experts, and stakeholders regarding the future performance of a financial instrument, economic indicator, or asset.

There are certain steps we typically follow in this process:

  • Data collection of forecasts: Financial analysts, often employed by brokerage firms, investment banks, or independent research firms, conduct in-depth analyses of specific assets, companies, or economic indicators. They generate individual forecasts based on factors such as earnings projections, economic data, and market trends.
  • Analyst Ratings and Recommendations: Analysts may assign ratings (e.g., buy, hold, sell) and provide recommendations for investors. These ratings and recommendations reflect their views on the expected performance of a particular asset. These assessments contribute to the overall market consensus.
  • Normalization: Before computing the consensus, the data may undergo normalization to ensure consistency across different analysts’ estimates. This step involves adjusting for any variations in reporting standards, accounting methods, or other factors that could affect the comparability of estimates.
  • Weighting: Some consensus providers may apply weighting to analysts’ estimates based on factors such as historical accuracy, reputation, or coverage universe. Weighting ensures that more accurate or influential analysts have a greater impact on the consensus.
  • Calculation: The market consensus is calculated by averaging the aggregated forecasts and estimates from all contributing analysts. This average represents the consensus view of analysts regarding the expected performance of the company or market index for the specified period.
  • Dissemination: The computed consensus estimates are then disseminated to clients through various channels, such as financial data platforms, research reports, and market data terminals. Clients use this information to assess market expectations, benchmark against their own forecasts, and make investment decisions.
  • Tracking and Updates: Market consensus providers continuously track and update the consensus estimates as new information becomes available. This includes incorporating revisions to analysts’ forecasts, earnings announcements, and other relevant developments that may impact the consensus view.

It’s important to note that while market consensus based on financial analysts’ estimates provides valuable insights into market expectations, it is not a guarantee of future performance. Investors should consider various factors, conduct their own analysis, and exercise judgment when making investment decisions. Additionally, consensus estimates are subject to revisions over time as new information emerges and analysts update their forecasts. The market consensus is key to understand how financial markets work, how stock market prices react to the announcements of profits by firms or economic indicators.

Quality of the market consensus

Behavioral Influences

Beyond numbers and charts, market consensus is deeply influenced by human behavior. Emotions, biases, and psychological factors play a significant role in shaping consensus views. Behavioral finance studies, backed by statistical evidence, highlight how psychological biases such as herding, overreaction, and anchoring contribute to the formation and evolution of consensus views.

Talk about Dot bubble of the 2000s

The late 1990s saw the widespread adoption of the internet for both commercial and personal use. In 2000, the stock market experienced a significant downturn. Dot-com stocks, in particular, faced sharp declines, wiping out substantial market capitalization. The Dot-Com Bubble refers to the rapid rise, speculative frenzy, and subsequent collapse of stock prices of many internet-based companies in the late 1990s and early 2000s.

Example: market consensus for Apple

The prevailing market sentiment toward Apple Inc. (AAPL) is generally optimistic, according to analyst assessments. As reported by Stock Analysis, the consensus among 32 analysts places the average price target for Apple’s stock at $203.25. The range spans from a low estimate of $120 to a high estimate of $250. Based on this average target, a potential increase of approximately 11.48% is anticipated from the current stock price of $182.32. Notably, analysts collectively advocate a “Buy” rating for Apple.

source: Yahoo website – https://finance.yahoo.com/quote/AAPL/analysis/

Yahoo Finance offers in-depth projections for Apple’s financial performance, encompassing estimates for earnings and revenue across upcoming quarters and years. For the ongoing quarter concluding in March 2024, analysts predict an average earnings per share (EPS) of $1.51, accompanied by revenue estimates averaging $91.02 billion. These forecasts align with a broader outlook suggesting a growth trajectory for Apple, with both EPS and revenue anticipated to expand in the subsequent years. For those seeking more comprehensive analyses and real-time updates on Apple’s stock performance, as well as expert opinions from analysts, a direct visit to Yahoo Finance and Stock Analysis is recommended.

Why should I be interested in this post?

In essence, this article provides a perspective on market consensus based on financial analysts. For a student who would like to work in finance (either in the corporate world or the financial sector), it is important to know about the market consensus as it relates to both the corporate world and financial markets.

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Useful resources

Market consensus What is market consensus?

Faster Capital Navigating Markets: The Power of Market Analysis and Consensus Estimates

About the author

The article was written in March 2024 by Nithisha CHALLA (ESSEC Business School, Grande Ecole Program – Master in Management (MiM), 2021-2024).
Posted in Contributors | Leave a comment

Multiples valuation method for stocks

Multiples valuation method for stocks

Jorge Karam Dib

In this article, Jorge KARAM DIB (ESSEC Business School, Master in Strategy and Management of International Business (SMIB), 2024-2025) introduces the method to evaluate stocks called “multiples valuation”.

How much should a stock be worth?

Valuing stocks is a complex yet essential endeavor for investors seeking to make informed decisions in the financial markets. Knowing if you are paying a fair price or if you are over or under paying for a stock is every investors question. Of course, a decision on whether investing or not in a company comes after a long due diligence of valuating the financials of the company, following their reports, and many more actions to ensure you are buying something of value. Some investors call this method “value investing”, when the investor value a stock above the actual price, it is said that the type of investing is “value”, trying to take advantage of the differential between the actual price and the theoretical price. And when they buy a stock for a competitive advantage that is not expected in the near future to concede, it is usually called “growth investing”. Although some famous investors disagree in these definitions, they are used frequently in the financial language.

While there is no one-size-fits-all approach to valuing stocks, investors often turn to a range of methodologies, one of which is multiples analysis. By examining multiples such as price-to-earnings (P/E), price-to-book (P/B), and price-to-sales (P/S), and many more, investors gain insights into how the market values a company relative to its earnings, assets, or revenue. In this article we will try to shine a light on this valuating method and walk through the benefits and limitations the method has.

Multiples valuation method

Multiples valuation method involves analyzing one or more multiples, such as the price-to-earnings (P/E), price-to-book (P/B), and price-to-sales (P/S) ratios, among others. Each multiple provides a unique perspective on how the market values a company relative to its earnings, assets, or revenue.

The price-to-earnings (P/E) ratio, for instance, compares a company’s stock price to its earnings per share (EPS), indicating how much investors are willing to pay for each dollar of earnings generated by the company. A low P/E ratio may suggest that the stock is undervalued, while a high P/E ratio could indicate overvaluation.

One key aspect of this method is that it is usually compared against the ratios of companies within the same industry. It is from the investor’s criteria to decide which filters to apply for deciding against what companies the objective should be compared with, but usually it should be on the same market, region can also be an important factor, and also the size.

There are many sources of information to consult the information from, many of them free. This platform simplifies the valuation by providing not only the information, but in some cases, the ability to connect through an API and do the consulting automatically through a query. In the next image is shown an example from Capital IQ, one of the most prestigious information sources in the financial world, about Walmart and some recommendations from the platform of similar companies in the market to facilitate the calculation.

Walmart’s comparison.
Walmart
Source: Capital IQ.

Calculations

Calculating multiples involves straightforward mathematical formulas that utilize key financial metrics derived from a company’s financial statements. If we use the case for P/E, then we would need to divide the “Market price per share” with the “Earnings per share”. After getting the ratio, let’s say of Walmart, the next step is to get the median P/E for the “similar” companies that the investor decided to compare the company with. With these two values the investor can start seeing a trend on where the company is positioned versus their competitors. The next step is to calculate the price per share of Walmart using the P/E of the similar companies, and see the comparison between the price with the original P/E versus the “mean” of similar companies.

Example: Walmart

This section will be dedicated to illustrate the method explained earlier using Walmart as an example and Capital IQ as the source of information. The first step is to consult the key financials as shown in the next picture.

Walmart’s key financials.
Walmart financials
Source: Capital IQ.

Next, compute the information with the comparable companies suggested by Capital IQ. Important to note that the companies can be added or withdrawn according to everyone’s own criteria.

Comparable analysis.
Comparable companies
Source: Capital IQ.

After retrieving all the information, the next step is to do the calculations explained earlier in the document. The mean EV/EBITDA ratio for the comparable companies and then recalculate the price of Walmart’s stock using the mean EV/EBITDA ratio.

Mean EV/EBITDA ratio.
EV/EBITDA ratio
Source: Capital IQ.

Valuation of Walmart’s stock.
Valuation
Source: Capital IQ.

In this case, we see an underappreciation of Walmart’s stock, this doesn’t mean that anyone shouldn’t buy stocks of the company, is just the perspective of the valuation method, and also it is not an investing advice.

Conclusions

The multiples valuation method provides investors with a valuable framework for assessing the worth of a stock by comparing it to similar companies within the same industry. By using this method, investors gain insights into how the market values a company relative to its earnings, assets, or revenue.

However, it’s important to recognize the limitations of this approach. Multiples analysis relies heavily on historical financial data and may not fully capture future growth prospects or qualitative factors such as industry dynamics and competitive positioning. Additionally, multiples are subject to fluctuations in market sentiment and may not always reflect the intrinsic value of a company accurately.

Despite these limitations, multiples analysis remains a widely used and valuable tool in the arsenal of investors. When applied judiciously and supplemented with thorough research and analysis, multiples can provide valuable insights into a company’s valuation and help investors identify potential investment opportunities.

Why should I be interested in this post?

This post is with the only intention for educational purposes. Targeting people who are interested in knowing more about valuation methods for stocks. In any way this article pretends to be an investment advice and/or suggestion. Any decision should be taken under personal responsibility and with their respective due diligence previous to the decision.

Related posts on the SimTrade blog

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Useful resources

McKinsey & Company The right role for multiples in valuation

Chastenet E. and A. Marion (2015) Valuation Using Industry Multiples: How to Choose the Most Relevant Multiples, Business Valuation Review, 34(4): 173-183.

Schueler A. (2020) Valuation with Multiples: A Conceptual Analysis, Journal of Business Valuation and Economic Loss Analysis, 15(1) pp. 20190020.

About the author

The article was written in March 2024 by Jorge KARAM DIB (ESSEC Business School, Master in Strategy and Management of International Business (SMIB), 2024-2025).

Posted in Contributors, Financial techniques | Leave a comment

Explanations for the recent changes in the Mexican economic landscape

Explanations for the recent changes in the Mexican economic landscape

Jorge Karam Dib

In this article, Jorge KARAM DIB (ESSEC Business School, Master in Strategy and Management of International Business (SMIB), 2024-2025) shares his thoughts about the different financial instruments recently available in Mexico that have been changing the economic landscape for the country and their residents in the recent years. He especially explains the role of high interest rates, new digital banks, and nonbanking financial instruments in Mexico’s recent booming economy, sharp Mexican peso appreciation, and strong increase in its GDP.

Interest rates in Mexico

For the last couple of years, the world has lived an era of high interest rates, mainly derived from the high inflation we got out of the pandemic and the war in Ukraine. Since then, the priority of most of the central banks of the world has been to cool down the economy and bring down inflation. Mexico has not been the exception. Mexico’s interest rates have been between 10% and 11% in the past three years. Some economists may consider this level -dangerously- high, but the country has seen mostly benefits like increasing peso’s appreciation, and a strong growth in the national GDP, from this level of interest rates than negative outcomes, and most important, Mexico’s government has been able to maintain the interest rates under a “controlled” level.

Evolution of Mexico’s interest rates.
Interest Rates Mexico
Source: Trading Economics.

The strategy of Mexico’s Central Bank has been very clear: to stay above the interest rates of the U.S.A. The benefits of staying above the interest of the USA’s is to target the remittances (money, mainly US Dollars, sent to Mexico, by migrant workers to their families), an objective that due the geographical conditions become very relevant. According to Statista, remittances represent a 4% of their GDP, either if it’s from migrant workers sending money to their families, or foreign investors trying to take advantage of the high interest rates in the country. “CETES” (Certificados de la Tesorerís de la Federación) is one of the most attractive instruments for foreign investments, because of the security CETES represent by being an instrument issued by the Mexican government, in the form of bonds mainly, with a return rate oscillating between 10%-12%.

CETES.
CETES
Source: S&P Dow Jones indices.

Digital Banks

There’s a recent uptrend in Latin America, but specially in Mexico of digital banks. In the last couple of years, we’ve seen multiple companies trying to gain market share, derived from the massive success of the Brazilian “unicorn” start-up Nu bank. In Mexico, the number of digital banks is starting to get closer to the traditional banks. Just in the last years, digital banks like Klar, Ualá, Hey Banco, RappiPay, among many others have entered the Mexican market with the objective to compete for market share with Nu bank.

Apart from the many benefits and functionalities that digital banks provide, better than the traditional banks, they’ve tried to attract more customers by trying to take advantage by offering the customers the possibility of investing their money inside their organization by adding a tool to their services called a “SOFIPO”, which will be explained further in the article. The return offered by each SOFIPO will depend on each institution issuing the instrument, but it will be mainly linked to the interest rate in the country. As we mentioned before, we are in a high interest rate season, which has turned into a “bidding war” for digital banks to offer better returns. As of February 2024, Nu bank offers one of the highest with 15%, Klar 14%, Hey Banco 11%, Ualá 15%.

The Mexican peso appreciated against the dollar in 2023 by 14%, reaching an eight-year low. Important to note that all these attractive financial instruments joined with a strong benefit from the world’s leading trends like nearshoring, have made Mexico become one of the best performing countries in terms of economy in the past few years and also one of the most attractive to invest in.

Mexican peso.
MXN
Source: Yahoo finance.

¿What is a SOFIPO?

Acronym for “Sociedad Financiera Popular” (Popular Financial Society), are defined as financial institutions -nonbanking- regulated by the CNBV (Comisión Nacional Bancaria y de Valores en México). They offer a wide variety of financial instruments such as personal loans, credits, financing for small companies, and more. The intention of why this instruments (SOFIPO’s) were created is mainly to open the financial services to a broader public and/or have more inclusion when it comes about investing, credits, and more.

Conclusions

There is no doubt that Mexico has a good advantage when it comes to macroeconomic trends, mainly due its geographical position. But recently, they have been able to complement the attractiveness with financial instruments and rates extremely attractive to the foreign audience and the local one. The challenge lies in keeping under control the high interest rates, even though inflation is not in double digits anymore, the benefits that the actual rates have brought to the country have been substantial, besides as the original plan is to follow with a margin the decisions of the U.S.A., there is no decision yet to bring down the rates. Not everything is positive with this financial conditions, the cost of debt in the country is very high at the moment, which will slow down the sales of houses and cars.

Why should I be interested in this post?

This post is with the intention to shine a light on potential advantages and trends that are happening in one of the most attractive countries, financially and economically speaking in the world. In any way this article pretends to be an investment advice and/or suggestion. Any decision should be taken under personal responsibility and with their respective due diligence previous to the decision.

Related posts on the SimTrade blog

   ▶ Cynthia LIN Financial products marketing in neobanks

Useful resources

Trading Economics Mexico interest rate

Mexico Business News Nonbanking financial institutions face historic opportunity

Statista Remesas en Mexico

S&P Dow Jones IndicesS&P BMV Government CETES Bond Index

El Economista Nu Mexico busca combatir el ahorro pasivo lanza oficialmente cuenta de ahorro

El Universal Guerra de tasas, Nu ofrece rendimientos de 15 en cuenta de ahorro

Mexico Business News Mexican peso appreciation 2023 affects public revenues

About the author

The article was written in March 2024 by Jorge KARAM DIB (ESSEC Business School, Master in Strategy and Management of International Business (SMIB), 2024-2025).

Posted in Contributors, Financial news | Leave a comment

My experience as a Data analyst in CEMEX

My experience as a Data analyst in CEMEX

Jorge KARAM DIB

In this article, Jorge KARAM DIB (ESSEC Business School, Master in Strategy and Management of International Business (SMIB), 2024-2025) shares his professional experience as a Data Analyst and Data Management in CEMEX.

About the company

CEMEX is one of the leaders in building materials in the world. Their main products are cement, concrete, and aggregates (building materials in general). Based in Mexico, CEMEX reported a $15bn USD revenue in 2022, representing a 12% increase from the previous year. The company’s sales distribution, with cement, leading at 42%, followed by concrete at 33%, aggregates at 14%, and urban development at 11%, illustrates a balanced yet strategic emphasis on its core products and services.

Geographically, CEMEX’s influence spans major regions, with a substantial presence in Mexico, the USA, Europe, Asia, the Middle East, South America, and the Caribbean. Its operational footprint includes 64 cement plants, 1348 ready-mix concrete facilities, 246 quarries, 269 distribution centers, and 68 marine terminals, showcasing its capacity to serve a global clientele effectively.

At their beginnings, the company started with a single plant in Hidalgo, Mexico, called “Planta Hidalgo” under the direction of Mr. Lorenzo Zambrano, founder and CEO. Ever since then, the company adopted a philosophy of growing by acquisition. Great financial ratios, high volume of sales related to a big percentage of market share in Mexico, allowed CEMEX to do key strategic acquisitions throughout the next years that catapulted CEMEX into the international markets. Even with the financial crisis in 2008, they have been resilient and survived a big economic turmoil thanks to their high-quality products, service and cutting-edge advancements in digitalization, supply chain and data management.

Logo of the company
Logo of  CEMEX
Source: CEMEX.

At the beginning of my career in the company, I started inside a program called “Digital Professionals in Development” (DPiD) which aimed to train and prepare 100 recently graduates to help the company boost the digital transformation in a period where CEMEX was going through a major digital transition of the commercial customer experience. Inside the program, I started as a Data Scientist inside the Global Data Analytics department, which allowed me to understand the different schemes of work, the hierarchical processes, capabilities and scope of the company and the institutional tools.

After working for the Global Data Analytics, another area that I’ve had experience, and where I’ve spent most of my time with, is the Commercial Development Area. Here, the intention is to keep the company at the state of the art in the commercial practices and keeping up with the technological trends of the world. My main duties have been regarding Data Management, on the development and management of advanced data analytics projects and master data quality, everything under the commercial umbrella.

My expertise at Data Management

Advanced Analytics

The way Advanced Analytics topics are managed is in a scheme by projects and in a cross-functional mode with other areas of the company like data architecture, supply chain, and more. According to the needs, or trends that anyone in the company points out, we assess the feasibility and benefit of approaching a new idea.

Some of the topics that we’ve been approaching have to do with increasing sales, enhance customer experience, increase Net Promoter Score (NPS), and improve the digital experience. One of the main projects that we’ve been developing is aligned with the retention of customers by predicting with service variables, historic volume trends, and machine learning the probability of a customer leaving the company. This effort requires to align with sales people of the different regions to set thresholds for the service variables and come to an agreement, consume information from the correct architecture source, and do the development of the machine learning model. As a final product, we’ve got the model embedded in a dashboard that the sales people can consult at any time, joined by monthly alerts sent to their email and their Customer Relationship Management (CRM) account.

Data Quality

Within the area, we’re managing the quality of the commercial information by managing and implementing actions to improve their completeness and accuracy. We acknowledge the importance of a high-quality level of information. Understanding that high data quality is the base of a successful forecast, project improvements, and in general for a company to become data driven.

As expected with a company that has presence in many regions of the world, the amount of information and different types of it can be overwhelming, a prioritization and starting point had to be put in place in order to overcome the overwhelming amount of information. Naturally, the first step was to define the attributes, and fields to be measured. After doing so, we had a clear picture of pain points throughout the regions and we prioritize the remediation of them. Lastly, as we don’t want to be continuously doing the cleaning effort, we want to maintain as much as possible the incoming information clean, in order to do so, it is necessary to put entry point validations to only allow clean information to come into the systems.

Required skills and knowledge

It is necessary to have the “hard skills” to work with the institutional tools, in CEMEX’s case, it is needed to know SQL, Power Bi, and Python (and/or R). Apart from the “hard skills” just mentioned, it is also necessary for “soft skills” to be known and/or developed, which would be to coordinate different areas and teams to work together, frequent results report, presentations to stakeholders, agile methodology to follow the progress of the project, and more.

What I learned

My main takeaways that I’ve had working at these projects is the importance of coordination with other areas, the help and expertise that you can get from relying with people with more experience would be as a shortcut for a lot of problems that may arise. Always ask for help whenever you feel that you might be stuck with an issue and be open to receive new ideas.

Financial concepts related my internship

EBITDA/Debt ratio

As mentioned earlier, part of the company’s philosophy is to grow by acquisition, hence the EBITDA/Debt ratio is crucial in order to get debt with lower interest rates, as the ratio is part of the key financials that banks and rating entities take into account when analyzing a company.

Return on Assets (ROA)

This financial indicator measures a company’s efficiency in generating profits from its assets. It is calculated by dividing the company’s net income by its average total assets. In other words, ROA indicates how effectively a company is utilizing its assets to generate earnings.

Why should I be interested in this post?

This post is with the intention that any student or alumni can have a glimpse of the structure of my professional experience in a company that is based in a different continent and would probably help them compare and see the main differences and similitudes between what is being done in Europe against what is being done in Mexico.

Related posts on the SimTrade blog

   ▶ All posts about Professional experiences

   ▶ Nithisha CHALLA AML Policies: Safeguarding Financial Integrity

   ▶ Chloé ANIFRANI My experience as an Asset Management Sales Assistant for Amplegest

Useful resources

CEMEX Official webpage in France (ICD)

About the author

The article was written in March 2024 by Jorge KARAM DIB (ESSEC Business School, Master in Strategy and Management of International Business (SMIB), 2024-2025).

Posted in Contributors, Professional experiences | Leave a comment

Contracts for Difference

Contracts for Difference

Isaac ALLIALI

In this article, Isaac ALLIALI (ESSEC Business School, Global Bachelor in Business Administration (GBBA), 2019-2023) explains the Contracts for Difference (CFD).

Understanding CFDs

Although banned in the US and for US citizens, the Contract for Difference (CFD) is a relatively new contract, introduced in the 1990s in Great Britain, to allow operators without permission to sell shares short, to speculate on the market’s decline. CFDs were originally based on equity swaps, which allow the exchange of the performance of a stock or stock index for an interest rate. Initially reserved for institutional investors, CFDs were later made available to individual investors and recognized by a directive from the European Union in 2004. Soon after, they gained popularity and rapidly developed in the OTC market. In contrast to centralized exchanges, the “Over The Counter” market facilitates trades directly between participants, offering flexibility for unique financial instruments and fostering niche investment opportunities. While lacking the structure of exchanges, OTC markets play a crucial role in diverse financing needs.

The contract for difference (CFD) is a very popular derivative, which essentially establishes a bilateral agreement between an investor and a broker. This contract does not grant the investor ownership of the underlying asset, but rather the right to receive the difference between the contract’s opening and closing price. Unlike contracts with an expiry date, a CFD is effectively renewed at the closing of each trading day and can be extended forward if desired; you can keep your position open indefinitely as long as there is enough margin in your account to maintain it.

In essence, contracts for differences are very similar to futures with no expiration date. While the contract remains open, your account with the provider will be debited or credited to reflect the interest and dividend alterations. The broker may offer leverage of up to 400 which serves as a powerful tool for amplifying possible financial gains (and losses). Through leveraging, the investor can gain control over a larger position than their initial capital would allow. For instance, if you have €100 in your account and a leverage of 10, you take a position of €1,000 (10*100).CFDs offer great flexibility to investors, CFDs provide investors with great flexibility, offering the ability to:

  • Speculate on a wide range of assets, including stocks, indices, currencies, commodities, etc.
  • Take advantage of market movements, whether upwards or downwards: enabling both buying and selling positions
  • Hedge an investment portfolio, using CFDs, which serve as a safeguard against price declines.
  • Execute advanced trading strategies.

Mechanics of CFD Trading

Opening a CFD position involves several steps. Firstly, traders choose an asset they wish to trade, such as stocks, commodities, or currencies. Secondly, they decide whether to go long (buy) or short (sell) on the asset, basing their decision on their market analysis and expectations for future price movements. Traders also determine the quantity of the asset they want to trade, which can be specified in terms of contracts or units, depending on the CFD provider. CFDs are not standardized products and every CFD broker has their own terms and conditions. Once the initial decisions have been made, the CFD provider calculates the price at which the trade will be executed. This price is typically derived from the market value of the underlying asset, taking into consideration various factors such as supply and demand dynamics, economic data, and market sentiment. The CFD provider may also incorporate a spread into the market price, which represents their profit margin. Margin requirements play a crucial role in opening and maintaining a CFD position. Traders are required to deposit a percentage of the total trade value as collateral, referred to as a margin. This ensures that traders can cover potential losses stemming from adverse price fluctuations. Margin requirements vary depending on factors such as the volatility of the underlying asset and regulatory requirements. Upon opening a position, the value of the CFD fluctuates in accordance to the underlying asset’s price movements. When traders decide to close their position, they execute an opposing trade to offset their initial position. The profit or loss from the trade is calculated based on the price difference between the opening and closing trades, adjusted for any transaction costs.

CFD trading involves various costs and fees that traders should be aware of. Spreads, representing the difference between buy and sell prices, are the primary revenue source for CFD providers and affect trading costs. Narrower spreads typically mean lower costs. Additionally, traders may face overnight financing charges for holding positions, which are influenced by factors such as the asset class and prevailing interest rates. Furthermore, some providers charge commissions on trades, based on elements such as the trading volume. Taking these costs into consideration is crucial for assessing overall profitability and developing effective trading strategies.

Application in the energy industry

NEOEN and BNRG have finalized the financing of three solar power plants in the Republic of Ireland: Hilltown, Hortland, and Millvale, located respectively in the counties of Meath, Kildare, and Wicklow. These plants, with a total capacity of 58 MWc, are among the first large-scale solar projects in the country. As the winners of the first governmental tender for solar power plants in 2020, they benefit from financial support from the Irish government through a Contract for Difference (CFD) mechanism until 2037, ensuring a stable price for the electricity generated. The financing, estimated at 39 million euros excluding financing costs, is provided by NEOEN and BNRG’s equity, alongside non-recourse senior debt from Société Générale. Construction works, awarded to Omexom, are expected to be completed in the first half of 2022,with plant commissioning set/scheduled for the same period. Once operational, these plants will supply the equivalent of 12,700 Irish households with clean electricity, thereby contributing significantly to the country’s energy transition.

Hilltown Solar farm
 Hilltown Solar Farm
Source: BNRG

Millwale Solar farm
Millwale Solar farm
Source: BNRG

Related posts on the SimTrade blog

   ▶ Akshit GUPTA Short selling

   ▶ Alexandre VERLET Understanding financial derivatives: swaps

Useful resources

AMF Les CFD (contracts for difference)

BNRG

Neoen

Neoen (12/08/2021) Neoen et BNRG clôturent le financement de trois centrales solaires (58 MWc) en République d’Irlande

Dupuy, P., Fontaine, P. & Hamet, J. (2018). Chapitre 6. Les marchés dérivés et la gestion du risque. Dans : , P. Dupuy, P. Fontaine & J. Hamet (Dir), Les marchés de capitaux français (pp. 153-204). Caen: EMS Editions.

About the author

The article was written in February 2024 by Isaac ALLIALI (ESSEC Business School, Global Bachelor in Business Administration (GBBA), 2019-2023).

Posted in Contributors, Financial techniques | Tagged | Leave a comment

The Magnificent Seven

The Magnificent Seven

Isaac ALLIALI In this article, Isaac ALLIALI (ESSEC Business School, Global Bachelor in Business Administration (GBBA), 2019-2023) presents the “magnificent seven”, the Nasdaq’s top seven performing companies.

The SEVEN

“These Seven Tech Stocks Are Driving the Market” is the headline of a New York Times issue on the 22nd of January 2024. The article spotlights the lasting growth of the “Magnificent Seven”, an expression coined by Bank of America analyst Michael Hartnett in 2023, directly referring to a group of very well-performing American companies such as Tesla, NVIDIA, Apple, Microsoft, Alphabet, Meta and Amazon. These companies have seen exponential growth since economists first witnessed their joint boom last year, and as of January 19th 2024, the magnificent seven represent 29% of the S&P 500’s market value. The objective of this post is to introduce these companies, diving into their organization and structure as well as comparing their performances to conjecture on what the future may hold.

Market Value of S&P 500 companies. The Magnificent 7
Source: The New York Times

The Nasdaq’s top 7 performing Companies

The “Magnificent Seven” have captivated investors with their meteoric rise, consistently eclipsing the broader market. But to decipher their future trajectory, we must delve deeper into their individual narratives:

Apple

This Cupertino-based company has mastered the art of premium hardware integration. Its sleek iPhones, Macs and wearables seamlessly interact with its robust software ecosystem (iOS, macOS), fostering a loyal customer base and enviable profit margins. Q4 2023 witnessed remarkable financial performance, with strong revenue and profit growth solidifying its leadership position. However, intensifying competition from Android players and regulatory scrutiny regarding App Store practices and data privacy threaten its dominance. While its valuation remains high, Apple’s brand strength, innovation pipeline, and loyal customer base suggest continued prosperity, provided it navigates these challenges deftly.

Microsoft

This software giant has transformed itself from a desktop pioneer into a cloud computing powerhouse. Its Azure platform has become a formidable competitor against Amazon Web Services, while its productivity suite (Office 365) remains a staple for businesses. Q3 2023 further emphasized its strong momentum with robust financial performance. While Google Cloud Platform and Amazon Web Services pose significant competition, Microsoft’s established enterprise partnerships and focus on digital transformation grant it a strategic advantage. Its valuation, though high, reflects its consistent growth trajectory and potential for further expansion in the cloud and enterprise spheres. However, regulatory scrutiny regarding anti-competitive practices remains a key risk factor.

Alphabet (Google)

The ubiquitous search engine and advertising giant monetizes vast user data through its search engine, YouTube platform, and Android operating system. Q3 2023 showcased impressive profits, fueled by continued dominance in online advertising. However, its data collection practices, and potential antitrust concerns create a cloud of uncertainty. While competition from Apple and Amazon in advertising and e-commerce intensifies, Google’s advancements in artificial intelligence and its foray into cloud computing offer promising prospects for the company’s future growth and innovation. Its valuation reflects its growth potential, but regulatory headwinds demand careful consideration before investing.

Meta (Facebook)

This social media titan connects billions of users through its Facebook, Instagram, and WhatsApp platforms. Recent financial performance showcases modest growth, with investments in the metaverse impacting its bottom line. While the potential of the metaverse remains captivating, its success is far from guaranteed. Additionally, competition from TikTok and regulatory pressure regarding data privacy and anti-competitive practices pose significant challenges. Indeed, the Senate Judiciary Committee held a hearing this past Wednesday 31st of January 2024, where, after being pressured by Senator Josh Hawley, Republican of Missouri, Mark Zuckerberg, the CEO of Meta, apologized for the harm caused by his group. Mr. Zuckerberg stood from his chair, turned around and addressed families of victims in the audience who had suffered abuse on Meta’s apps. Meta’s high valuation reflects the risk-reward equation associated with its ambitious metaverse gamble. Investors should carefully weigh the potential rewards against the inherent uncertainties before making any investment decisions.

Amazon

The undisputed king of e-commerce, Amazon, has expanded its empire to encompass cloud computing (AWS), logistics, and even healthcare. Q3 2023 demonstrated continued strong growth despite economic headwinds, highlighting its diversified revenue streams. However, competition from Walmart in e-commerce and antitrust scrutiny regarding its market dominance are critical factors to consider. Amazon’s focus on logistics innovation and potential expansion into the healthcare sector offers exciting future avenues. Its high valuation reflects its leadership position in its core segments, but investors should be wary of potential macroeconomic challenges and regulatory interventions.

Nvidia

This chipmaker has carved a niche in graphics processing units (GPUs) powering the gaming, AI, and data center industries. Q3 2023 saw explosive growth, fueled by surging chip demand and the adoption of AI in various sectors. However, competition from AMD and Intel in the semiconductor space is fierce. While Nvidia’s technological edge in AI-specific GPUs provides a temporary advantage, the cyclical nature of the semiconductor industry necessitates caution. Its high valuation reflects its growth potential, but investors should be mindful of potential downturns in the chip market. While Nvidia now holds a market share of approximately 83%, compared to AMD’s (17%), it faces strong competition. First, there is Apple (AAPL), which has quickly developed its own laptop CPUs with graphics capabilities that it claims can compete with Nvidia’s top products. Intel (INTC) is also preparing to unveil its own line of graphics chips, which could pose a significant challenge to Nvidia. Moreover, US restrictions on Nvidia’s sales of advanced AI chips in China create a strategic opportunity for competitors such as Huawei, potentially leading to Nvidia losing market share in this important region. Huawei’s entry into the AI chip market with its Ascend AI chip series, particularly the 910B, directly competes with Nvidia’s A100 processor, and the company recently received a big order from Baidu, a major leader in Chinese technology.

Tesla

This electric vehicle (EV) pioneer has disrupted the auto industry with its innovative EVs and clean energy solutions. Q3 2023 delivered impressive revenue and profit growth, showcasing the increasing public adoption of EVs. However, Tesla has seen its US market dominance shrink from 62% to just over 50% of the market in 2023. The company faces intensifying competition from traditional automakers and new EV startups like Rivian and Lucid as well as competitors from China like BYD who became the dominant automaker in China in 2021. And over the next few years, the growing global heft of Chinese manufacturers looks hard to beat. Chinese EV players such as BYD, Nio, Wuling, and Xpeng produced almost 60% of the world’s EVs in 2022 – and they have been doing so in a very affordable manner. In the first half of 2023, the average cost of an EV in China was US$33,000 (£26,040), more than half the US$70,700 (£55,800) people pay for EVs in Europe and the US$72,000 paid in the US. Additionally, challenges in scaling production and maintaining quality control raise concerns. Tesla’s high valuation reflects its future growth expectations, but potential macroeconomic headwinds and uncertainties surrounding battery technology advancements introduce significant risks.

Performance Comparison with indices and Competitive advantages of the “Magnificent Seven”

Magnificent Seven Performance Comparison. Magnificent Seven Performance Comparison
Source: Yahoo Finance

The “Magnificent Seven” companies are leaders in dynamic industries like cloud computing (Microsoft), e-commerce (Amazon), and AI (Meta), driving revenue and stock price growth. Being a leader in a dynamic industry offers several key benefits, as exemplified by these tech giants. At their core, these companies boast robust financials: high-profit margins, consistent cash flow, and efficient operations which translate to investor confidence. Indeed, according to the Capital Group, the Bloomberg “Magnificent 7” Total Return Index advanced 107% in 2023 versus the overall S&P 500 Index at 24%.

There are numerous other factors driving their financial outperformance. Apple, for example, revolutionized smartphones with the iPhone, granting them a loyal user base and brand identity. Similarly, Tesla’s dominance in electric vehicles gives them valuable data and expertise, making it harder for competitors to catch up. Dynamic industries are characterized by rapid expansion and constant innovation. Leaders are poised to capture a larger share of this growth, like Microsoft’s cloud computing dominance or Alphabet’s early investment in AI research. They can also diversify into related fields, as Meta is attempting with the metaverse. Moreover, top talent seeks employers at the forefront of their field. Being a leader attracts skilled employees, fostering a culture of innovation and further solidifying the company’s position. Nvidia’s reputation for cutting-edge graphics processing units attracts top engineers, fueling their continued success.

Investors often reward market leaders with higher valuations due to their perceived stability and future growth potential. This allows companies like Apple to raise capital for further expansion and acquisitions, creating a virtuous cycle. Additionally, the current market environment plays a part. Amidst volatility, investors seek stability and potential upside, making these large, established companies with proven track records attractive safe-havens. The fact that tech stocks are generally less sensitive to rising interest rates compared to other sectors further fuels their appeal in a tightening monetary environment.

As stated above, the “Magnificent Seven” have strong fundamentals, and their financial strength, profitability, as well as growth potential underpin their success. Each of the seven stocks has easily outperformed the S&P 500’s 163% return over the last ten years, and their involvement in high-growth technologies such as high-end software and hardware, cloud computing, and artificial intelligence positions them well to continue leading their respective markets in the future.

Among the “Magnificent Seven” companies, observe strong profitability: The “Seven” boast a significantly higher average net margin (25%) compared to the S&P 500 (12%). (Source: BlackRock) This translates to substantial cash flow generation, crucial for reinvestment and future growth. For example, Tesla’s Q3 2023 net margin surpassed 17%, fueling its rapid expansion. We must also acknowledge that their average annual revenue growth (22%) outpaces the S&P 500 (10%). (Source: Motley Fool) This translates to faster stock price appreciation. Nvidia’s 80% year-to-date stock surge, driven by booming chip demand for AI applications, exemplifies this.

Additionally, we recognize in the “Seven” some form of “Market Magic”; during the last market correction (January 2023), their average decline (10%) was smaller than the S&P 500’s (15%). (Source: Qontigo) This “safety premium” attracts risk-averse investors, thus boosting their performance. Moreover, their lower average Beta (0.85) indicates that they are 15% less volatile than the rest of the market. (Source: Qontigo) This makes them more appealing in fluctuating interest rate environments. Finally, the individualities shine brighter than the rest because of the sectors they are invested in, like Nvidia benefitting from the chip surge or Meta’s ambitious metaverse projects that attract investor interest, potentially impacting future performance.

Yet, investing in them still carries risks, as these factors have already been priced in. There are also the usual risks of market volatility, regulatory changes, technological disruptions, and global economic conditions that can influence their performance. Also, previous performance does not guarantee future returns, and some of the “Magnificent Seven” stocks are overvalued based on certain basic criteria like forecast earnings multiples and price-to-sales ratios.

Stock market performance of the Magnificent Seven in 2023  Stock market performance of the Magnificent Seven in 2023
Source: Bloomberg

What are the risks ahead of the “Magnificent Seven” progression?

Because of their size and reach, these companies all face regulatory risks. Regulation changes, especially in data privacy, antitrust laws, and international trade, can significantly influence their operations. Furthermore, most tech companies have faced attention for antitrust, data privacy, and tax issues. Many of them have been investigated for monopolistic tactics, and if they want to enhance their already large market shares, they will face even more scrutiny.

More broadly, widespread economic changes affect them due to their broad reach, including interest rates, inflation, economic growth, consumer confidence, and investor sentiment. Moreover, global enterprises are vulnerable to currency swings, which can impact earnings and stock values. Companies operating internationally face geopolitical risks such as trade wars, tariffs, and shifting international relations, which can impact supply chains and market access.

The Magnificent Seven are also vulnerable to cyberattacks due to their technology-based nature, a large breach could result in huge financial losses and reputational damage. Moreover, companies facing market saturation and rivalry may struggle to discover new markets and maintain growth rates. Indeed, increased competition between established firms and new startups may potentially endanger their market share. In short, by dominating their marketplaces, they become targets for any competitors wanting to build a name for themselves in their respective sectors. Companies must innovate to keep up with rapid technological progress as failure to adapt to new technology or trends may result in a loss of market relevance. Additionally, the resignation or loss of a founder or CEO may negatively impact investor sentiment and the company’s future.

Therefore, while these stocks present exciting possibilities, they also require a nuanced understanding of the technology sector’s options and a strategic investment approach.

Conclusion

The Magnificent Seven stocks represent a cohort of high-performing companies that have garnered significant attention in the investment world for their market dominance, technological advances, and growth potential. These stocks, which include Microsoft, Tesla, and NVIDIA, along with some FAANG members, are known for their influence across various sectors, such as software, hardware, electric vehicles, and artificial intelligence. They have been pivotal in driving technological trends and shaping consumer behavior, making them attractive to investors seeking growth and market leadership. However, investors need to know the risks and challenges associated with these stocks. The dynamic nature of the technology sector, regulatory scrutiny, market saturation, and global economic factors like inflation and geopolitical tensions can affect their performance. Additionally, high market valuations bring lofty expectations, and any failure to meet these can lead to significant stock price corrections.

Thus, while the Magnificent Seven offer potential for substantial growth, they also require careful analysis and a balanced approach considering their strengths and the various external factors that could influence their future trajectory.

Related posts on the SimTrade blog

   ▶ Anant JAIN The World 10 Most Sustainable Companies in 2021

   ▶ Nithisha CHALLA Top 5 companies by market capitalization in the US

   ▶ Youssef LOURAOUI Alpha

Useful resources

Le Monde (26/05/2023) Nvidia entre dans le club très sélect des champions du monde de la cote

BlackRock (01/09/2023) Factors & the Magnificent Seven

Bloomberg (06/07/2023) Tesla and Chinese Rivals Signal Truce in Brutal EV Price War

Capital Group (09/01/2024) Magnificent Seven: What do you need to believe?

The New York Times Six takeaways from a contentious online child safety hearing

The New York Times (22/01/2024) The New York Times

Qontigo (03/10/2023) Ten charts that show how the ‘Magnificent Seven’ have held sway in the US market

Wall Street Journal (12/02/2024) Think the S&P 500 Looks Pricey? Check Out the Magnificent Seven

Motley Fool Nasdaq

Seeking Alpha (22/11/2023) Nvidia: Competition On The Horizon

About the author

The article was written in February 2024 by Isaac ALLIALI (ESSEC Business School, Global Bachelor in Business Administration (GBBA), 2019-2023).

Posted in Contributors, Financial news | Tagged | Leave a comment

AML Policies: Safeguarding Financial Integrity

Nithisha CHALLA

In this article, Nithisha CHALLA (ESSEC Business School, Grande Ecole – Master in Management (MiM), 2021-2024) explains the significance of Anti-Money Laundering (AML) policies.

Introduction

Firstly, what is AML? AML stands for Anti-Money Laundering. It refers to a set of national laws, regulations, and procedures designed to prevent the illegal generation of income through illicit activities and the subsequent integration of these funds into the legitimate financial system. 

Primary components of Anti-Money Laundering

Primary components of anti-money laundering include customer due diligence, transaction monitoring, reporting and record-keeping, training, Know Your Customer policy and risk assessment.

Customer Due Diligence (CDD)

  Financial institutions are required to perform due diligence on their customers to understand their identity, assess the nature of their financial activities, and identify any potential risks associated with money laundering.

Transaction Monitoring

  Regular monitoring of financial transactions is crucial to identify patterns that may indicate suspicious activities. Unusual or large transactions may trigger alerts for further investigation.

Reporting and Record-Keeping

  Financial institutions are obligated to maintain records of transactions and report any suspicious activities to relevant authorities. These reports contribute to the overall efforts to combat money laundering.

Training

  AML training helps in creating a vigilant workforce capable of identifying and reporting suspicious activities.

Know Your Customer (KYC)

  KYC procedures involve verifying the identity of customers to ensure they are who they claim to be. This is a fundamental aspect of preventing money laundering and other financial crimes.

Risk Assessment

  Financial institutions conduct risk assessments to evaluate the potential risk of money laundering associated with certain customers, transactions, or business relationships.

Significance of money laundering

Money laundering poses a significant threat to the stability and integrity of the global financial system, making it imperative for financial institutions to prioritize AML training and awareness. This article delves into the importance of AML training, strategies for building a culture of compliance, and the pivotal role technology plays in these efforts. Money laundering, the process of making illegally gained proceeds appear legitimate, is a global concern that affects economies, financial institutions, and societies at large. Anti-Money Laundering efforts are the first line of defense against such illicit activities. One key aspect of these efforts is AML training, a proactive measure aimed at equipping financial professionals with the knowledge and skills needed to detect and prevent money laundering. AML training programs are designed to empower employees at all levels, from frontline staff to senior executives, with the tools to recognize and report suspicious activities. Now that we know the components of AML, what would be the components of an effective AML training program? Without delving into more details here are a few things we could do to make it much more effective.

  • Building a Culture of Compliance
  • Leveraging Technology for AML Training
  • Integration with Onboarding Processes
  • Encouraging Reporting and Whistleblowing
  • Ongoing Awareness and Leadership Involvement

Common Examples of Money Laundering Techniques


Now that we know the significance of money laundering, we delve deeper into a few examples of money laundering in our day-to-day lives. 

Smurfing (Structuring)

 Smurfing, also known as structuring, is a money laundering technique whereby illegal funds are divided into smaller amounts and deposited into multiple bank accounts or financial institutions. This is done to circumvent financial regulations that require banks to report large transactions, typically exceeding a certain threshold.

Cash-Intensive Businesses

These are often exploited as a money laundering method, as they provide a convenient way to mix illicit funds with legitimate income. Criminals can use these businesses to deposit and process their illegal cash, making it difficult for authorities to trace the source. These businesses typically handle large volumes of cash through everyday operations, such as pubs, car washes, or retail shops.

Bulk Cash Smuggling

This is a prominent example of money laundering that involves the physical transportation of large quantities of illicit cash across borders. Criminals exploit this method to avoid the scrutiny of financial institutions and regulatory authorities, thereby circumventing anti-money laundering measures in place.

Shell Companies and Trusts

Shell companies and trusts are effective tools used in money laundering schemes, as they offer an intricate façade to disguise illicit funds. By establishing these entities, often in offshore jurisdictions, criminals can cleverly obscure the true origin of their wealth. Both shell companies and trusts exploit gaps in the financial system and international regulations to perpetuate money laundering activities.

Cyber Laundering

Cyber laundering, a burgeoning method of money laundering, takes advantage of the digital world to hide the origin of illegal funds. As technology progresses at breakneck speed, criminals discover new ways to cover their tracks, making it harder for traditional detection methods to catch them. 

Statistics

Notable statistics (Napier) on money laundering dated February 2022 are:

  • Global financial crime fines handed out in 2021 totaled $9.95bn, down from 2020’s record-breaking figure of $22.86bn, according to a report by AML Intelligence
  • Serious and organized crime costs the UK an estimated $50.4 billion a year
  • The median amount of money laundered in the US in 2020 was $301,606
  • Corruption, bribery, and fraud accounted for a whopping 69.6% of FinCrime fines handed out in 2021

Despite its association with the Silk Road and the dark net, only 1.1% of all cryptocurrency transactions are known to be illicit.

Why should I be interested in this post?

Understanding anti-money laundering principles is not only a regulatory imperative but a strategic necessity in navigating the complex legal environment. This post offers insights into risk management, ethical conduct, and the collaborative efforts required across organizational functions to deal with anti-money laundering. This is especially important for students who would like to work in the financial sector (asset management and wealth management). 

Related posts on the SimTrade blog

   ▶ Micha FISCHER Exchange-traded funds and Tracking Error

   ▶ Nithisha CHALLA  My experience as a Risk Advisory Analyst in Deloitte

   ▶ Wenxuan HU  My experience as an intern of the Wealth Management Department in Hwabao Securities

Useful resources

SAS software History of Anti-Money Laundering

IBM What is anti-money laundering?

Financial crimes enforcement network (US agency) History of anti-money laundering laws

Lexis Nexis Examples of Money Laundering Techniques

Napier 11 FinCrime facts for 2022

About the author

The article was written in February 2024 by Nithisha CHALLA (ESSEC Business School, Grande Ecole – Master in Management (MiM), 2021-2024).

Posted in Contributors | Leave a comment

Business models of exchanges

Nithisha CHALLA

In this article, Nithisha CHALLA (ESSEC Business School, Grande Ecole – Master in Management (MiM), 2021-2024) explains the business models of exchanges.

Introduction

Firstly, what is a business model? A business model refers to the framework that outlines how an exchange creates, delivers, and captures value from its various activities and operations. It essentially describes the way in which the exchange generates revenue, interacts with market participants, and sustains its competitive advantage within the financial ecosystem. The business model of exchanges revolves around creating a platform that facilitates the trading of financial instruments for buyers and sellers. Exchanges act as intermediaries, bringing together buyers and sellers in a regulated and transparent environment. The primary components of the business model for exchanges include marketplace facilitation, market data and technology services leading to revenues.

Delving a bit more into revenue generations and understanding the blend of volume and non-volume revenues is crucial for exchanges to ensure a diversified income stream and sustainable business growth. The primary difference between volume and non-volume revenues in the context of exchanges lies in their dependence on trading activity. Volume revenues (transaction fees for example) are directly linked to the volume of trading activity on the exchange whereas non-volume revenues are not (directly) tied to the volume of trading activity but derived from other sources (listing fees for companies). Successful exchanges strategically balance these revenue sources to adapt to changing market dynamics and evolving industry trends.

Volume revenues

Charging transaction fees

  One of the primary sources of volume-based revenue for exchanges is charging transaction fees for each trade executed on their platform. Exchanges typically charge fees to both buyers and sellers for facilitating the trading of financial instruments such as stocks, bonds, or derivatives. For example, the New York Stock Exchange (NYSE) charges transaction fees based on the number of shares traded.

Selling market data

Exchanges generate revenue by selling real-time market data feeds to financial institutions, traders, and data vendors. These fees are often based on the volume of data consumed. Nasdaq, for instance, charges fees for access to its proprietary market data, including bid-ask quotes and trade information.

Clearing and Settlement Fees

Exchanges may derive revenue from clearing and settlement services, especially in derivatives markets. Clearinghouses associated with exchanges ensure the fulfilment of trades by acting as intermediaries between buyers and sellers. They charge fees based on the volume of contracts cleared. The Chicago Mercantile Exchange (CME) is an example where clearing fees contribute to its revenue.

Non-volume revenues

Listing Fees

Exchanges often charge companies fees for listing their shares on the exchange. These fees are not directly tied to trading volumes but are based on factors like market capitalization or the number of listed securities. The London Stock Exchange (LSE), for instance, generates revenue through listing fees paid by companies listed on its markets.

Subscription and Software Services

Some exchanges offer subscription-based services and software solutions, catering to market participants’ needs for advanced analytics, trading tools, and connectivity. These services, which may include premium data feeds, trading platforms, or risk management tools, contribute non-volume-based revenue.

Technology and Licensing

Exchanges often license their technology to other financial institutions or exchanges globally. Licensing agreements for trading platforms, surveillance systems, or other proprietary technologies contribute to non-volume revenues. Euronext, for example, has a technology solutions business that provides services to other exchanges and financial institutions.

Educational Programs and Events

Some exchanges generate revenue by organizing educational programs, conferences, and events. These events may attract participants willing to pay fees for networking opportunities, industry insights, and educational sessions. Singapore Exchange (SGX) hosts events and training programs as part of its non-volume revenue initiatives.

Example:  Euronext

You will find below a screenshot of Euronext revenue which was generated in years 2021 and 2022 with the different components (listing, trading revenue, investor services, data services, post-trade, and technology solutions).

For Euronext, the main revenues come from trading revenue (36.2%), post-trade (25.7%), listing (15.4%) and data services (14.9%).

Revenue generation of Euronext in the years 2021 and 2022.

Source: Euronext

Now that we spoke about revenues we generate through the business model of exchanges, the next natural question that comes to us is what kind of costs occur in managing it, right?

Various types of costs involved in the model of exchanges:

The costs involved in the business model of exchanges encompass various expenses necessary for their operations, technology infrastructure, regulatory compliance, and strategic development. A few elements of the costs involved are:

Technology Infrastructure

Exchanges invest heavily in developing and maintaining robust technology infrastructure. This includes trading platforms, data centers, and systems for order matching and execution.

Personnel Costs

Employee salaries and benefits constitute a significant portion of the costs. This includes staff involved in technology development, regulatory compliance, customer support, and other operational functions.

Regulatory Compliance

Compliance costs are essential for implementing systems that ensure adherence to regulatory requirements, supporting surveillance, risk management, and reporting.

Operational Expenses

General operational expenses cover day-to-day costs such as rent, utilities, maintenance, and administrative infrastructure.

Security and Risk Management

Investments are made in security measures and risk management systems to protect against cyber threats, fraud, and operational risks, ensuring the stability and security of the exchange.

Example:  Euronext

You will find below a screenshot of Euronext expenditure in years 2021 and 2022 with the different costs involved in purchasing property, plant, equipment, and intangible assets. 

Capital Expenditure of Euronext in years 2020,2021 and 2022.

Source: Eeuronext

Why should I be interested in this post?

Learning about exchange business models equips management students with insights into strategic decision-making. They can analyze how exchanges diversify revenue streams, expand globally, and adapt to market trends. The diversification of offerings by exchanges and their role in risk management showcase practical applications of management principles. Understanding how exchanges manage risks associated with different financial instruments is relevant for students interested in risk management and strategic planning.

Related posts on the SimTrade blog

   ▶ Micha FISCHER Exchange-traded funds and Tracking Error

   ▶ Nithisha CHALLA  Securities and Exchange Board of India (SEBI)

Useful resources

Euronext

Euronext  Euronext business (revenue charts)

New York Stock Exchange (NYSE) The NYSE market model

London Stock Exchange (LSE) An overview of the London Stock Exchange

About the author

The article was written in February 2024 by Nithisha CHALLA (ESSEC Business School, Grande Ecole – Master in Management (MiM), 2021-2024).

Posted in Contributors | Leave a comment

Gautam Adani and Hedge fund Hindenburg

Nithisha CHALLA

In this article, Nithisha CHALLA (ESSEC Business School, Grande Ecole – Master in Management (MiM), 2021-2024) presents Gautam Adani’s journey of entrepreneurial success and controversies.

Introduction

Gautam Adani, a name that has become synonymous with entrepreneurial success and controversy, is one of India’s most prominent and influential business magnates. From his humble beginnings to his meteoric rise in various industries, Adani’s story is a testament to the power of determination, innovation, and risk-taking. Born on June 24, 1962, in a small town in Gujarat, India, Gautam Adani came from modest beginnings. His journey began with his family’s trading business of agricultural commodities. In the late 1970s, he moved to Mumbai to explore opportunities beyond his hometown. Adani’s first significant achievement came when he recognized the potential in the power and energy sector. He established Adani Exports Limited in 1988, which focused on the export of agricultural commodities. This marked the initial step in his entrepreneurial journey.

Early Ventures and Foundation of Adani Group

Adani Exports Limited initially focused on trading agricultural commodities, but Adani’s ambitions were much higher. He sensed the burgeoning demand for infrastructure development as India aimed to modernize and grow its economy. In 1998, Adani’s visionary move led to the creation of the Adani Ports and Special Economic Zone (APSEZ) in Mundra, Gujarat. This port became the cornerstone of his conglomerate, offering a gateway for imports and exports. The strategic location and world-class facilities propelled Adani Group to prominence in logistics and infrastructure.

Logo of Adani Group of Industries.

Source: The company.

Recognizing the importance of energy, Adani Group expanded into power generation. The acquisition of power plants, coal mines, and renewable energy projects further diversified the company’s portfolio. This diversification was crucial as Adani anticipated the global shift toward renewable energy sources and committed to substantial solar and wind energy investments.

By looking at the Adani group of industries, we observe that these companies mainly belong to the energy sector.

Evolution of Adani Group by its net worth from 2013 to 2023

The figure below shows the evolution of the net worth of the Adani Group of Industries for the period 2013-2023.

 Networth evolution of Adani Group of Industries

Source: Statista.

Stock chart

The figure below shows a stock chart of Adani Enterprises Limited started over 22 years from 2002 to 2024. 

 Stock chart of Adani Group of Industries from 2002 to 2023 consolidated

Source: Yahoo! Finance

Global Recognition and Investments

Gautam Adani’s leadership and Adani Group’s success have gained global recognition. The Group’s investments in Australia’s Carmichael coal mine project and its expansion into international markets have positioned Adani as a significant player on the global stage. These international ventures, however, have also exposed him to heightened scrutiny and controversy. In recent years, Adani’s wealth has surged, making him one of the richest individuals in the world. His conglomerate’s stock prices have seen significant growth, fueled by India’s infrastructure push and economic ambitions. This growth has not only enhanced his wealth but also contributed to job creation and economic development in various regions. Adani Green Energy Limited, a subsidiary of Adani Group, is one of India’s largest renewable energy companies. This move aligns with global sustainability trends and showcases Adani’s adaptability to changing market dynamics.

What is Hindenburg Research and its Controversies?

Hindenburg Research, a well-known financial analysis firm, has made a name for itself by conducting in-depth investigations into various companies and industries, often revealing hidden or controversial information. The firm is named after the famous Hindenburg disaster, which symbolizes its mission to uncover potential corporate misconduct and issues that could lead to significant losses for investors. Hindenburg Research was founded by Nathan Anderson in 2017. The firm operates as a short-selling research entity, meaning it identifies companies it believes are overvalued or engaging in questionable practices and then takes a short position in their stock, betting that the stock price will decrease. Hindenburg’s reports are comprehensive and detailed, often highlighting issues such as fraud, governance concerns, and misleading business practices. In recent years, Hindenburg Research gained significant attention for its investigations into various aspects of the Adani Group. The firm’s reports raised concerns about transparency, corporate governance, and environmental impacts associated with Adani’s businesses. Hindenburg’s reports have also had a notable impact on stock prices, causing steep declines in some cases as investors react to the information presented. By conducting thorough investigations and publishing detailed reports, Hindenburg has brought attention to potential risks and problems that could affect both investors and the broader public.

Conclusion

Gautam Adani’s journey epitomizes the entrepreneurial spirit that propels individuals from humble origins to extraordinary heights. His ventures across diverse sectors have reshaped India’s economic landscape, but they’ve also sparked debates about responsible business practices. Amid controversies and investigations by entities like Hindenburg Research, Adani’s legacy will stand as a complex tapestry of triumphs, challenges, and the ever-evolving dynamics of modern business.

Why should I be interested in this post?

Adani’s trajectory from humble beginnings to becoming a business magnate showcases the essence of entrepreneurship, offering inspiration for those aspiring to innovate and lead. His strategic diversification across industries exemplifies the power of adapting to changing market dynamics, a concept central to management education. Furthermore, Adani’s experience underscores the importance of sustainable business practices, corporate governance, and transparency – all critical topics for future business leaders. His global ventures illuminate the complexities of international business relationships. By studying his journey, master’s in management students can bridge theory with real-world application, preparing themselves to navigate the dynamic landscape of modern business with adaptability and resilience.

Related posts on the SimTrade blog

   ▶ Youssef LOURAOUI  EModeling of the crude oil price

   ▶ Henri VANDECASTEELE Approaches to investment

   ▶ Micha FISCHER Exchange-traded funds and Tracking Error

Useful resources

Adani Group of Industries Businesses of Adani group of industries

Yahoo financials Income statement of Adani group of industries

Statista Evolution of net worth of Adani group of industries

About the author

The article was written in February 2024 by Nithisha CHALLA (ESSEC Business School, Grande Ecole – Master in Management (MiM), 2021-2024).

Posted in Contributors | Leave a comment

Index fund manager: Unveiling the Dynamics of Passive Investing

Nithisha CHALLA

In this article, Nithisha CHALLA (ESSEC Business School, Grande Ecole – Master in management (MiM), 2021-2024) presents the job of index fund manager and their responsibilities in shaping the future of finance.

Introduction

Index funds have become a pillar of contemporary investment strategies in the dynamic world of finance. The function of an index fund manager, a specialist in charge of coordinating the smooth running of these funds, is essential to their success. A financial expert tasked with directing the management and administration of an index fund is known as an index fund manager. The performance of a particular market index, such as the S&P 500 or the FTSE 100, is replicated by index funds, commonly referred to as passive funds. Index funds strive to replicate the performance of the index they monitor, in contrast to actively managed funds, which try to beat the market (measured by the index performance). The index fund manager’s role involves closely mirroring the index’s composition and managing the fund’s investments accordingly. Index funds can take the forms of a mutual fund an exchange-traded fund (ETF) or a tacker quoted continuously.

Responsibilities of an Index Fund Manager

The index fund manager’s responsibilities encompass a range of critical tasks that contribute to the fund’s overall performance and alignment with its benchmark index.

These responsibilities include: replicating the index, rebalancing the portfolio, minimizing tracking errors, and managing dividends.

Replicating the Index

The index fund manager’s primary task is to ensure that the fund’s holdings mirror the index’s constituents and weightings accurately.

Rebalancing the portfolio

As market values fluctuate, the index fund manager must periodically rebalance the fund’s portfolio to maintain alignment with the index. This involves buying or selling securities to match the index’s changes.

Minimizing Tracking Error

The index fund manager aims to minimize tracking error, which measures the deviation of the fund’s performance from the index. Effective management ensures that the fund closely follows the index’s movements.

Managing dividends

Managing dividends and distributions in a manner consistent with the index is another crucial aspect of the index fund manager’s role.

Significance of Passive Investing

Index funds, which represent passive investment, have become very popular due to their cheap cost structure, benefits from diversification, and ease of use of ETFs. Index funds give investors exposure to a wide range of market segments, making them a desirable option for investors looking for reliable long-term returns without the hassles and expenses of active management. By following the index’s methodology and skillfully managing the fund’s portfolio, index fund managers play a crucial role in ensuring that these advantages are achieved.

Impact on the Financial Ecosystem

Index fund managers have a big impact on market dynamics and investor behavior, which helps to shape the financial ecosystem. Since they don’t engage in the regular buying and selling typical of active managers, their strategy of passive investment has a stabilizing influence on markets. This lessens market volatility and helps to create a more stable environment for making investments. As a result of these funds’ significant holdings in various businesses, the development of index funds has also boosted scrutiny of corporate governance and responsible investment (see the book “The Problem of 12” by John Coates).

Challenges and Opportunities

Despite the appeal of passive investing, index fund managers encounter several difficulties. It can be challenging to strike a compromise between tight index replication and performance optimization of the fund. Concerns regarding potential market distortions and ownership concentration in specific companies have also arisen because of the expansion of index funds. However, these difficulties also offer index fund managers chances to innovate, improve transparency, and respond to investor worries.

What do asset management firms do?

There are several functions of asset management firms but to brief about it, these firms are entrusted with the task of optimizing returns while managing risks, offering a diverse range of investment products and services. Functions of Asset Management Firms:

  • Wealth Management: Asset management firms specialize in managing and growing the wealth of their clients.
  • Investment Advisory: Offering investment advisory services, these firms provide insights, analysis, and recommendations on various asset classes, helping clients make informed investment decisions.
  • Portfolio Construction: Asset managers construct diversified portfolios tailored to meet specific financial goals and risk tolerance. They allocate assets across various classes such as stocks, bonds, real estate, and alternative investments.
  • Risk Management: Asset managers employ sophisticated risk management techniques to protect portfolios from market volatility and unforeseen events.
  • Research and Analysis: Firms conduct in-depth market research, economic analysis, and company evaluations to inform their investment decisions.

There are few notable asset management firms, to whose analysis a lot of index fund managers look up for various above-mentioned functionalities. A few examples of these Asset Management Firms are:

  • BlackRock: As one of the world’s largest asset managers, BlackRock manages trillions of dollars in assets. Known for its expertise in exchange-traded funds (ETFs), BlackRock offers a wide range of investment solutions for institutional and individual investors
  • JP Morgan Asset Management: JP Morgan Asset Management is a prominent player in the asset management industry, offering a spectrum of investment solutions, including mutual funds, institutional mandates, and alternative investments.
  • Fidelity Investments: Fidelity is a global asset manager providing a comprehensive suite of investment options, including mutual funds, retirement planning, and brokerage services. It is recognized for its research capabilities and investor education.
  • Vanguard Group: Vanguard is renowned for its low-cost index funds and a client-owned structure that aligns its interests with those of its investors. It pioneered index investing for the masses, emphasizing simplicity and cost-effectiveness.

Conclusion

An index fund manager is like a guide for passive investors, helping them navigate the financial landscape. Their job involves carefully mirroring the market, managing things effectively, and making sure the fund’s performance aligns with market indices. In a world where people want diverse investments, low costs, and steady returns, these managers look out for investors’ interests. For management students, understanding the role of an index fund manager holds valuable lessons in strategic investing and financial management. Studying the index fund manager’s role can enhance a management student’s grasp of investment strategies, financial markets, and the importance of aligning business practices with market trends.

Why should I be interested in this post?

For Master in Management students, exploring the activities of index fund managers offers practical insights into modern investment strategies relying more and more on index funds like ETFs. By understanding the role of index fund managers in passive investing, students bridge theory and practice, grasp the significance of low-cost diversification, and comprehend market trends. This knowledge enhances career prospects in finance.

Related posts on the SimTrade blog

   ▶ Micha FISCHER Exchange-traded funds and Tracking Error

   ▶ Youssef LOURAOUI Passive Investing

Useful resources

Forbes, What Are Index Funds? How Do They Work?

Vanguard Index funds vs. actively managed funds

Oxford Law blogs Giant Asset Managers, the Big Three, and Index Investing

John Coates (2023) The problem of 12 Columbia Global Reports.

About the author

The article was written in February 2024 by Nithisha CHALLA (ESSEC Business School, Grande Ecole – Master in Management (MiM), 2021-2024).

Posted in Contributors | Leave a comment

CumEx files

CumEx files

Matthieu MENAGER

In this article, Matthieu MENAGER (ESSEC Business School, Global Bachelor in Business Administration (GBBA), 2017-2021) we take a look at the CumEx files scandal. The total amount of the fraud, according to the 19 media that revealed the affair (including Le Monde, Die Zeit and La Repubblica) amounts €140 billion.

CumCum & CumEx : What is the difference

CumEx and CumCum are two tax avoidance schemes that came to public attention in 2018. CumCum is considered a legal form of tax optimization, while CumEx is illegal. CumCum involves artificially transferring ownership of dividend-paying shares or securities, when dividends are paid out, to avoid tax. Foreign investors sell their shares back to domestic banks for what is often a very short time before receiving their dividends. These investors thus escape any levy and then recover their dividends, in return for a commission paid to the bank that temporarily housed their financial securities. The operation is so quick that the tax authorities are unable to identify the true owner of the securities. CumEx, on the other hand, consists of obtaining a tax refund on dividends that have never been paid. This practice is illegal and has cost European countries billions of euros.

The damage done by CumEx Files

Dividend fraud, known as “CumEx”, is a form of tax plunder estimated at €140 billion, last amount dating from 2022 (€33.3 billion for France; €28.5 billion for Germany; €27 billion for the Netherlands; €18.8 billion for Spain), as reported by FranceInfo (2021). Revealed in Germany, this fraud affected 11 countries (Germany, France, Spain, Italy, the Netherlands, Denmark, Belgium, Austria, Finland, Norway and Switzerland). Hanno Berger, a renowned lawyer, has devised a manipulation that involves buying and selling shares around the time of the dividend payment, so quickly that the tax authorities can no longer identify the true owner. The manipulation, which requires the agreement of several investors, enables the same dividend tax refund to be claimed several times over, thereby prejudicing the tax authorities.

The scam can be illustrated as follows:

CumCum

Tim from Frankfurt transfers his shares in a French company to Hugo, who lives in Dubai, where dividends are taxed at 0% under an agreement between Paris and Dubai, a few days before the dividend payment (Figure 1). The dividends are then paid by the French company to Hugo (Figure 2) and therefore has no dividend taxes to pay to the French state (Figure 3). The shares are then returned to Tim, who didn’t have to pay any taxes (a tax saving of 15 to 30%). The tax system in France for dividends is a flat tax of 30% and consists of a single flat tax of 12.8% and 17.2% social tax. Tim and Hugo may agree to share the tax saving between them (Figure 4).

Figure1. CumCum mechanism – First step:
 CumCum mechanism - First step:
Source: The author.

Figure 2. CumCum mechanism – Second step:
 CumCum mechanism - Second step:
Source: The author.

Figure 3. CumCum mechanism – Third step:
 CumCum mechanism – Third step:
Source: The author.

Figure 4. CumCum mechanism – Fourth step:
 CumCum mechanism – Fourth step:
Source: The author.

CumEx

Tim, Lea and Hugo will trade hundreds of thousands of shares over a very short period around the dividend payment date. The tax authorities will have no way of knowing who the real owner of the shares is and they’ll pay back taxes they haven’t even collected.

Figure 5. CumEx mechanism
 Figure 5. CumEx mechanism
Source: The author.

Who is implicated?

BNP Paribas, Société Générale, Natixis and Crédit Agricole (Cacib) are suspected of helping their customers to avoid paying tax on dividends. The resale and repurchase of shares, even for a short period, is in fact legal. On the other hand, the industrialisation of this practice to evade tax can be punished. In 2018, BNP Paribas, Crédit Agricole and Société Générale were among the French banks singled out by the “CumEx Files” investigation group for this type of practice.

In Germany, dozens of people have been charged (traders, bankers, lawyers, advisers). The Warburg bank in Hamburg is one of the banks accused and should have reimbursed 47 million euros to the German port city. The municipality waived this obligation in 2016. The investigators are therefore looking into whether political leaders – including Olaf Scholz, the city’s mayor at the time – put pressure on the municipal tax authorities to waive recovery of these taxes. The decision to waive repayment of the sums owed by the Warburg bank was apparently taken shortly after a conversation between Olaf Scholz and Christian Olearius, then head of the bank. Investigators discovered more than €200,000 in cash in a safe at the home of another SPD member of parliament, who may have played a role in the bank’s repayment, fuelling suspicions of possible secret financial arrangements.

At the end of March 2023, the French Parquet national financier (PNF – a national prosecutor’s office specializing in major economic and financial crime) launched a wave of searches. On May 2, before the French Senate, Gabriel Attal, Minister Delegate for Public Accounts, made public the total amount of reassessments notified to date by the tax authorities: €2.5 billion, according to L’Express. This bill, which includes penalties in addition to the amounts reassessed, concerns in particular the five banks targeted by the PNF searches (Société Générale, BNP Paribas and its subsidiary Exane, Natixis and HSBC), but also Crédit Agricole (which managed to avoid the search).

Financial concepts

Shares

Shares are part of a company’s equity when it is incorporated as a public limited company. It is therefore a source of financing for the company, in the same way as debt securities, from which, however, it differs clearly. It has an unlimited lifespan (it can only be disposed of by selling the share, and there is no contractual repayment), and its holder bears the full risk of the company (he or she receives no income if the company goes badly, and in the event of liquidation the shareholder takes second place to the creditor in the distribution of the proceeds from the sale of assets – in other words, most of the time he or she can recover nothing). In return, the share gives the holder the right to share in the company’s profits and management via voting rights.

Dividends

By definition, the dividend is defined as the shareholder’s income. This is the amount that a shareholder (owner of shares in a company) receives as a result of the profits generated by the company over a given period. The choice of dividend payment is made at the general meeting. At that time, distributable profits and available reserves are recorded.

Shareholders receive a dividend in two cases:

  • When there is a distributable net profit
  • But also when the company does not make a profit but wishes to draw on its reserves of cash to remunerate its shareholders.

Why should I be interested in this post?

CumEx Files is also a very recent scandal. What I find most shocking is that some very well-known banking institutions are also implicated in the scandal. Politicians (including the German Chancellor) are even suspected of involvement. So it’s worth taking a closer look at these affairs to understand how they worked.

Related posts on the SimTrade blog

   ▶ Louis DETALLE Wirecard: At the heart of the biggest German financial scandal of the 21st century

   ▶ Louis DETALLE The incredible story of Nick Leeson & the Barings Bank

   ▶ Louis DETALLE The 3 biggest corporate frauds of the 21st century

Useful resources

Press articles

Le Parisien (21/10/2021) CumEx Files : la France a perdu 33 milliards d’euros de recettes fiscales en vingt ans

Le Monde (18/10/2018) « CumCum », « CumEx » : le scandale des dividendes expliqué simplement

Le Monde (15/05/2023) Scandale « CumCum » : le fisc réclame plus de 2,5 milliards d’arriérés fiscaux aux banques

L’Express (19/08/2022) Allemagne : tout comprendre au scandale “Cum-ex Files” qui éclabousse Olaf Scholz

France Info (21/10/2021) “CumEx Files” : ce que l’on sait du “pillage fiscal à 140 milliards d’euros” révélé par plusieurs médias

France 24 (21/10/2021) “CumEx Files” : Hanno Berger, le cerveau présumé du scandale aux 140 milliards d’euros

Le Monde (21/10/2021) « CumEx Files » : un pillage fiscal à 140 milliards d’euros, quatre banques françaises dans le viseur du fisc

Videos

Le Monde (18/10/2018) CumEx Files : comment arnaquer le fisc avec la Bourse

Zonebourse (31/03/2023) Comment les banques fraudent le fisc grâce aux dividendes (CumCum, CumEx)

The Dark Side of Money (15/02/2022) CumEx Files: Biggest TAX FRAUD in Europe

Explainitychannel (04/03/2020) Cum-ex deals explained

About the author

The article was written in February 2024 by Matthieu MENAGER (ESSEC Business School, Bachelor in Business Administration (BBA), 2017-2021).

Posted in Contributors, Financial techniques | Tagged | Leave a comment

Wirecard: the biggest financial scandal in Germany

Wirecard: the biggest financial scandal in Germany

Matthieu MENAGER

In this article, Matthieu MENAGER (ESSEC Business School, Global Bachelor in Business Administration (GBBA), 2017-2021) looks back at the Wirecard case, one of the biggest financial scandal in Germany.

Wirecard: what exactly is it?

The Wirecard affair is one of the biggest financial scandals in Germany. Wirecard is a financial start-up founded in 1999 by Markus Braun (an Austrian with a background in computer engineering). This fintech is a German payment and financial services platform. Its first customers were pornography and online betting sites. But little by little, and thanks to the expansion of online sales in the 2000s, Wirecard established itself with airlines, travel agencies, online pharmacies, etc. It was in 2008, unlike traditional banks (2007-2008: the sub-prime crisis) that the company experienced a major boom. In 2010, Jan Marsalek (a very important member of Wirecard) officially became Wirecard’s Chief Operating Officer (COO). His arrival will have a significant impact on the scandal (L’Express, 2022).

The decline

In 2018, Wirecard joined the DAX 30 index (the German equivalent of the CAC 40 index), knocking Commerzbank off the ranking (the second-largest bank in Germany). Between 2016 and 2018, Wirecard’s turnover doubled from €1 billion to €2 billion. At the beginning of 2019, the company had a market capitalisation of €17 billion, comparable to that of Deutsche Bank (Germany’s leading bank), but with fifteen times fewer employees and less turnover. Markus Braun, who held 7% of the shares, was a billionaire at the time. In January 2019, an investigation by the Financial Times (the British financial daily) revealed a number of abuses by Wirecard. According to the newspaper, its managers in Asia had written false contracts and worked on financial manipulations. In November 2019, Ernst & Young (one of the world’s top 4 audit firms) refused to certify the 2017 accounts. In the meantime, it had seen nothing but fire. This crisis has even reached the supervisory authority, which lacks the resources and has not done its job. As a result, supervision has been withdrawn from it in favour of another organisation, the BaFin (the Federal Financial Supervisory Authority, better known by its abbreviation BaFin, is Germany’s financial regulatory authority). In June 2020 everything accelerates:

  • Mid-June: Wirecard repeatedly postpones the publication of its annual results (an investigation has been launched into suspicions of stock price manipulation)
  • 19 June: Markus Braun resigns
  • 21 June: the company confirms that the €1.9 billion mentioned in its balance sheet (i.e. a quarter of the size of the balance sheet) “most probably does not exist”.
  • 23 June: Markus Braun is arrested by the authorities, then released on €5 million bail.
  • 25 June: The company lost 98% of its value on the stock market, declared itself bankrupt and filed for bankruptcy (Its bank creditors expect to lose 80% of the money lent to Wirecard, according to an estimate by the Wall Street Journal).

Figure 1. The Wirecard’s Share Price.
Wirecard share price
Source: Boursorama

Figure 1 shows Wirecard’s share price with its entry on the DAX 30 in September 2018. In June 2020, we see the complete decline and the loss of around 98% of its value.

The investigation eventually revealed that Wirecard’s accounts for the years 2015 to 2018 had embellished the situation, in order to make the company attractive to investors. Some of the commissions based on payments did not come from Wirecard but from so-called third parties in Asia and the Gulf region who had a licence to operate. However, “there were in reality no resellers connected by these partners” and therefore no tangible turnover, according to the indictment. The business lawyer Mark Tolentino, presented by the German press as the person who operated as a fiduciary agent on behalf of Wirecard, is a key figure in the case. He claimed to be the victim of identity theft (the sums deposited in the accounts he opened were “just enough to buy an iPhone”).

January 2024, the trial is still ongoing and continues to raise questions about the truth (Euromaidan, 2023). It will probably take a few more months to reach a definitive conclusion. Markus Braun is still in prison and awaiting the end of his trial. Jan Marsalek is still missing. The day after the revelations, he left on a private jet from a small Austrian airport for Belarus. He faces a much longer sentence than the others. The investigators discovered that Jan Marsalek was part crook, part spy for Russia. He was apparently very close to the Kremlin (which also helped him to escape). He had a number of interactions with important figures, including Nicolas Sarkozy (they had lunch together). Neither the German authorities nor Interpol have managed to arrest him. He is now believed to be in Moscow under a false identity, protected by the Federal Security Service of the Russian Federation (FSB). He remains Europe’s most wanted man.

The impact of the scandal on Germany

Wirecard had taken on considerable importance in the lives of German citizens. Its companies manage payments via mobile applications or marketplaces, speed up the granting of credit, facilitate the sending of currency between countries and help companies manage their spending. It is a veritable economic infrastructure, in the same way as energy, water or transport networks. It involves the most delicate thing of all: money. All stakeholders must draw conclusions from the Wirecard scandal, including companies, shareholders, regulators and even customers:

  • Start-ups now have two options for operating their services: obtain a payment institution licence, which is time-consuming and costly, or go through intermediaries who offer turnkey payment services.
  • Shareholders and financial regulators will be stepping up their supervision.
  • Customers will pay more attention to the products they use.

The government also has its share of responsibility in the affair. The German financial market supervisor (BaFin) is under the authority of the Ministry of Finance (formerly headed by Olaf Scholz, who is currently Germany’s Chancellor). Since the affair, Olaf Scholz has announced a reform of the BaFin to give it more power. However, the minister himself was implicated in the scandal: a document from his own ministry states that Olaf Scholz knew that “BaFin was investigating in all directions” Wirecard as early as February 2019. The radical left-wing party Die Linke was outraged: “Negligence in the control of companies worth billions is totally unimaginable”. Chancellor Angela Merkel herself promoted the company during a trip to China in 2019, even though her services (but not herself, according to her circle) were already aware of the existence of an investigation, reports (Le Monde, 2020).

Why should I be interested in this post?

This case is very interesting in terms of the impact it has had on the development of the various authorities in Germany, Europe and the world. Just like the subprime crisis in 2008, the Kerviel affair in 2008, the carbon tax scam between 2008 and 2009, or the CumEx files in 2018, the Wirecard scandal has seen its share of fraud and manipulation. These various scandals show that today’s financial system is still not perfect, and that it must constantly be improved and made more secure to avoid a crash in the national or even global economy. These frauds are also causing a huge chasm in the national economy, which cumulatively is proving to be very significant. Although we cannot yet quantify precisely the impact of the Wirecard scandal on German GDP, we can see that the crises mentioned above (among others) are more than alarming: The CO2 emission allowance scam deprived the French tax authorities of a total of €1.6 billion in revenue, according to the Cour des Comptes. Losses estimated at €5 billion, according to Europol. The fraud perpetrated by the former Société Générale dealing room trader Jérome Kerviel resulted in a loss of €4.9 billion between 2005 and early 2008. The level of losses following the subprime crisis is close to $400 billion or even $500 billion. So, it’s important to be aware of the various mistakes we may have made and to avoid repeating them. I’d also like to take this opportunity to make a transition to the next case I’m going to look at: CumEx files.

N.B.: To find out more about the Wirecard case, you can watch the documentary “Skandal!” or the scripted series “King of Stonks” on Netflix.

Related posts on the SimTrade blog

   ▶ Louis DETALLE Wirecard: At the heart of the biggest German financial scandal of the 21st century

   ▶ Nithisha CHALLA The DAX 30 index

Useful resources

Wirecard

France 24 (08/12/2022) Wirecard : le scandale financier qui a secoué l’Allemagne arrive devant la justice

Forbes (17/07/2020) Le Scandale Wirecard Ou La Fintech Au Révélateur

RTL (30/06/2020) Wirecard : tout comprendre au scandale financier qui ébranle l’Allemagne

La Tribune (25/07/2020) Scandale Wirecard : la gigantesque fraude de la fintech expliquée en 5 points

Le Monde (31/08/2022) Comprendre l’affaire Wirecard, le scandale financier qui secoue l’Allemagne depuis juin

20 Minutes (19/06/2020) Allemagne : Le scandale Wirecard coûte sa place au patron fondateur Markus Braun

Euromaidan (16/12/2023) WSJ : Wirecard fraudster CEO was Russian agent for nearly a decade

L’Express (08/12/2022) Fraude Wirecard : comment le sulfureux Jan Marsalek est devenu l’homme le plus recherché d’Europe

About the author

The article was written in February 2024 by Matthieu MENAGER (ESSEC Business School, Global Bachelor in Business Administration (GBBA), 2017-2021)

Posted in Contributors, Financial news | Tagged , | Leave a comment

Creating a portfolio of Conviction

Creating a portfolio of Conviction

Chloé ANIFRANI

In this article, Chloé ANIFRANI (ESSEC Business School, Global Bachelor in Business Administration (GBBA), 2019-2024) explains what it means to create a portfolio of conviction.

Conviction as a filter for your investment universe

In their article on Asset Allocation, Akshit GUPTA, an ESSEC student, defines the basics criteria considered by investors when building a portfolio. He defines them as the profile of the investor (risk profile, objective, time horizon), characteristics of the chosen assets (expected returns, risk, correlation), and chosen strategy of investing (strategic or tactical allocation).

Although those characteristics are what any good investor should consider in the first place, some other criteria might come into account. This is the case for portfolio used in thematic and conviction funds, which use particular quality filters to reduce their investment universe before taking a closer look at other characteristics in the highlighted assets.

In this article, we will only talk about equity assets (no bonds, structured products…).

For example, these filters might be geographic (global, European, American…), by capitalization (small, mid and large caps) or sector (technology, luxury, energy…).

Another type of filter seen in stock picking might be a conviction: after analyzing a company, the investor strongly believes that it shows a particular quality that makes it eligible for their portfolio.

The filter we will talk about today is one of those: Pricing Power.

Pricing Power is defined as the ability of a company to raise their prices without affecting the demand for their products, mostly thanks to specific technological invocation or patent, brand image and/or high barriers to entry for competitors.

This quality is often observed in sectors like luxury (LVMH, Hermès, Ferrari, Mercedes-Benz…), health (Cooper, Zoetis, medication for rare disease…) or aeronautics (Airbus Dassault…), for example. On the contrary, it is harder to find in sectors like energy, insurance or telecom, where many actors offer the same type of products and services.

Pricing Power in asset allocation: how can an analyst recognize Pricing Power in companies

Although Pricing Power is greatly influenced by sectors, as explained above, it also is company specific. Firms might possess technologies and innovations that allow them to showcase Pricing Power in a sector that isn’t known for it, while others may not be able to utilize their sector’s strength in a way that would lead to gaining Pricing Power.

Therefore, here are some characteristics that help recognize Pricing Power in companies (Louis Vuitton, Ferrari, Hermès, Atoss Software, Capgemini, Airbus, ASML, Safran, EssilorLuxottica, Disney, Netflix, L’oréal):

Brand strength

Companies with strong and well-established brands often have better Pricing Power. Consumers may be willing to pay a premium for products associated with a trusted and recognized brand.

Examples: Louis Vuitton, Ferrari, Hermès

Unique products or services, technological innovation

If a company offers unique or differentiated products or services that are not easily replicated by competitors, it may have greater control over pricing. This uniqueness can create a competitive advantage.

Examples: Atoss Software, Capgemini

High barriers to entry

If a company is established in a sector with high barriers to entry, like high cost of development or strict regulatory environment, it may showcase Pricing Power, as switching from this company to competitors might be difficult for customers in case of price increase.

Examples: Airbus, ASML, Safran

Market position

A leading market position or a dominant market share can provide Pricing Power. Market leaders often have more control over pricing, since customers may view their products as industry standards.

Examples: LVMH, EssilorLuxottica

Customer loyalty

High customer loyalty can enable a company to maintain Pricing Power. However, since customer loyalty derives from a feeling of trust between the client and brand, it shouldn’t be considered as a primary element to examine for investors, as too many raises in prices might negatively impact the relationship.

Examples: Disney, Netflix

Track record of price increases

Examining a company’s historical ability to implement price increases successfully can provide insights into its Pricing Power. Consistent or periodic price increases without significant negative effects on sales would be a positive indicator.

Examples: L’oréal, Louis Vuitton, Hermès

It is important to note that elements like cost advantages (economies of scale, economies of scope, relationship with manufacturers…) do not lead to pricing power, but to margin control, which would be another type of filter.

The case of luxury: intangibles in Pricing Power

To better understand how Pricing Power evolves for brands, let’s talk about the case of luxury today.

In 2022 and 2023, the market has been shaken by the new hawkish monetary policy declared by central banks, with interest rates raising at a rapid pace and to a level that had not been seen for many years.

This new reality led to difficulties for firms which relied heavily on debt to finance their activities.

In the case of the luxury sector, our new situation of “Higher for longer” rates lead to a strengthening of the already existing barriers to entries. Firms that have been major actors in this field for decades (LVMH, Kering, Hemes, Richemont…) should see fewer young brands emerging to their levels for the years to come.

It is interesting to note that those actors’ Pricing Power comes primarily from their brand image. This component helps them to sustain an “asset light” growth, which doesn’t require much investment in new technologies or patents on their parts.

However, an investor might worry that the current inflation and reduction of houses’ purchasing power might affect demand on luxury products, that are often not primary necessities.

Indeed, if 2022 was a particularly good year for the sector (9-11% annual growth), its trajectory has slowed down in 2023, coming back to average historical levels (7-8%). The major actors, who raised their prices significantly in 2022 and 2023, already plan more moderate raises for the years to come.

Those elements should be considered by an investor interested in Pricing Power. However, they do not invalidate it for the sector. We notice two elements that are in its favor for the upcoming years: the consumption of luxury goods is becoming more and more concentrated on the most “iconic” brands (Hermès, Chanel, Louis Vuitton…) and the number of clients is increasing steadily every year. In 2023, there were 400 million of luxury consumers. 50 million of them where millionaires, which is interesting to note, knowing how polarized this sector consumption is: 1% of the customers equals 20% of the total sales. This means that the main luxury consumers are the least affected by the current drop in purchasing power.

With this information and the previously stated higher barriers to entry, we can consider that the current state of the market might actually be beneficial to the luxury sector’s main actors’ Pricing Power.

Funds and ETFs with Pricing Power at their core

To conclude this article, we will cite some funds that have been basing their investment strategies around Pricing Power.

We selected three of these funds, all primarily invested in Eurozone. The funds are Delubac Pricing Power I (FR0011304229), Pictet Premium brands I (LU0217138485, also invested in the US) and Amplegest Pricing Power (FR0010889857).

Top 10 Delubac Pricing Power.
Delubac PP top 10
Source: Morningstar.

Top 10 Pictet Premium Brands.
Pictet PB top 10
Source: Morningstar.

Top 10 Amplegest Pricing Power.
Amplegest PP top 10
Source: Morningstar.

While examining their top 10 stocks, it is interesting to note that some brands, well-established as having Pricing Power, can be found in all three allocations (LVMH, L’Oréal, Linde).

For your information, here are the funds’ performances over the last five years, compared to their zone of investment’s.

Performances over 5 years
PP funds 5y track
Source: Quantalys.

Performances in 2023
PP funds 2023
Source: Quantalys.

Annual Performances from 2017
PP funds perf from 2017
Source: Quantalys.

And yes, investing with conviction can be rewarding and a great way to differentiate your product, but it doesn’t always beat the market!

Why should I be interested in this post?

If you wish to work in Asset Management, as an analyst or funds manager, or as a customer, this post will help you understand what kind of criteria might be used to do so. Asset Managers sell a product, not just a track record, and it is important to know how to build a portfolio around a concept in order to differentiate yourself on a very saturated market!

Related posts on the SimTrade blog

   ▶ Youssef LOURAOUI Asset Allocation Techniques

   ▶ Louis DETALLE A quick interview with an Asset Manager at Vontobel

   ▶ Akshit GUPTA Asset Allocation

Useful resources

Pricing Power is the magic ingredient for equity investors

JP Moorgan Combating inflation with pricing power

Morgan Stanley Combating inflation with pricing power

About the author

The article was written in February 2024 by Chloé ANIFRANI (ESSEC Business School, Global Bachelor in Business Administration (GBBA), 2019-2024).

Posted in Contributors, Financial techniques | Leave a comment

Top 5 Asset Management firms in Europe

Top 5 Asset Management firms in Europe

Chloé ANIFRANI

In this article, Chloé ANIFRANI (ESSEC Business School, Global Bachelor in Business Administration (GBBA), 2019-2024) discusses the top 5 Asset Management firms in Europe.

Methodology

To define the top 5 Asset Management firms in Europe, we built a methodology based on a selection of criteria. However, as the initial pool of firms would have been too extensive to analyze, we first looked for rankings online, led by independent research institutes, to reduce the area of research.

We then took the companies that appeared in their top 5 the most often, and obtained this first ranking:

  1. Amundi Asset Management
  2. BlackRock
  3. Allianz Group
  4. UBS Group
  5. Legal & General Investment Management (LGIM).

However, this ranking will not be final.

While we will use it to know which companies to analyze, we will reorganize our list thanks to the following elements, which seem like the most relevant and the most useful for an objective comparison. We also think these elements will be the most interesting to a student trying to learn more about the Asset Management field for their future career. The following criteria will each bring insights on the companies’ businesses and sizes, on their catalogs (interesting for customers), and on their social policies (interesting for employees) :

  • Global Asset under Management (AuM)
  • 2023 net inflows
  • Diversity of product offer
  • Employee well-being.

Considering the AuM, we would have rather used European numbers, instead of global, but we couldn’t access this data.

Therefore, our final ranking will be a top 5 of Asset Management firms in Europe in 2023, based on these criteria. The criterion of reputation was already considered by the original rankings, which is why we won’t use it.

For each criterion, we will rank each firm according to the other’s results, 1 being the highest rank and 5 the lowest. Then, we will compute the average score of each company and rank them accordingly.

Asset under Management and 2023 net inflows will be found on the firms’ websites or in press releases.

To grade firms’ offers’ diversity, we will see how many funds each company sells (source: Quantalys), but also what type of products they offer (stocks funds, fixed income, diversified, ETFs, structured products…).

To grade their employee’s well-being, we will use their average scores on Glassdoor, a website where employees can grade their firms. Each criterion weights the same.

Amundi Asset Management

Logo of Amundi

Asset under Management 2023: 1973bn€

Net inflows 2023: 69bn€

Diversity of product offer: 673 funds (stocks, structured products, diversified, fixed income, monetary, real estate)

Employees’ well-being: 3,9/5 (841 reviews)

BlackRock

Logo of BlackRock

Asset under Management 2023: +10000bn$

Net inflows 2023: 289bn$

Diversity of product offer: 876 funds (stocks, fixed income, diversified, monetary)

Employees’ well-being: 3,9/5 (5812 reviews)

Allianz Group

Logo of Allianz

Asset under Management 2023: 2162bn€

Net inflows 2023: 2,2bn€

Diversity of product offer: 290 funds (stocks, fixed income, diversified, monetary, structured products)

Employees’ well-being: 4/5 (8509 reviews)

UBS Group

Logo of UBS

Asset under Management 2023: 146,9bn$

Net inflows 2023: 11,5bn$

Diversity of product offer: 542 funds (stocks, fixed income, diversified, monetary)

Employees’ well-being: 3,9/5 (14212 reviews)

Legal & General Investment Management (LGIM)

Logo of LGIM

Asset under Management 2023: 1471bn$

Net inflows 2023: 271bn€

Diversity of product offer: 48 funds (stocks, fixed income)

Employees’ well-being: 3,7/5 (219 reviews)

Conclusion

Once we consider all these elements, here are the ranks we obtain for each criterion and their average for each firm:

Ranking of asset management firms.
Ranking of asset management firms
Source: The author.

Therefore, our new ranking for the top 5 Asset Management firms in Europe in 2023 is :

  1. BlackRock
  2. Amundi
  3. Allianz
  4. UBS
  5. LGIM

Why should I be interested in this post?

As an ESSEC student in the SimTrade course, you might be interested in Asset Management, and wanting to know more about its key players. This post will be a good way for you to know more about them and their characteristics. Maybe your future employer is one of them!

Related posts on the SimTrade blog

   ▶ Louis DETALLE A quick presentation of the Asset Management field…

   ▶ Akshit GUPTA Asset management firms

   ▶ Youssef LOURAOUI ETFs in a changing asset management industry

Useful resources

Mordor Intelligence Asset management markets in Europe size & share analysis – growth trends & forecast

Yahoo! Finance Global Asset Management Market Insights (2022-2029): Development Trends and Dynamics, Latest Opportunities, Growing Factors, Qualitative and Quantitative Analysis, Emerging Technologies and Forecast to 2029

MarkWide research Europe Asset Management Market Analysis-Industry Size, Share, Research Report, Insights, Covid-19 Impact, Statistics, Trends, Growth and Forecast 2024-2032

About the author

The article was written in February 2024 by Chloé ANIFRANI (ESSEC Business School, Global Bachelor in Business Administration (GBBA), 2019-2024).

Posted in Contributors | Leave a comment

My experience as an Asset Management Sales Assistant for Amplegest

My experience as an Asset Management Sales Assistant for Amplegest

Chloé ANIFRANI

In this article, Chloé ANIFRANI (ESSEC Business School, Global Bachelor in Business Administration (GBBA), 2019-2024) shares her professional experience as Asset Management Development Assistant for Amplegest.

About the company

Amplegest was established in 2007 and operates across three main business segments: Private Wealth Management, Family Office, and Asset Management.

Private Wealth Management

Wealth Engineering: A team of wealth engineers provides personalized advice to clients, addressing evolving issues related to wealth, taxation, and family matters over time.

Discretionary Portfolio Management: The firm offers the market expertise of its fund managers, developed through extensive experience in banks or asset management firms. Amplegest actively seeks new investment opportunities across all asset classes and geographical regions, employing a short and collaborative decision-making process for responsiveness.

Profiled Portfolio Management: The firm offers specific profiled portfolios to retail investors, who manage their own clients’ portfolios.

Family Office

Amplegest serves high-net-worth individuals in France and internationally through a dedicated department, Canopée FO, offering fully customized services.

Asset Management

Amplegest’s Asset Management division offers three expertise:

  • Equity: with 5 funds, the firm covers many thematics (such as technological innovation, pricing power), capitalizations (large, mid and small caps) and regions (global, US and Eurozone),
  • Diversified portfolios: with its Latitude range, the firm offers diversified funds with precise return objectives and risk allocation, with an offer for each profile of investor,
  • Fixed Income: the firm distributes Octo AM’s funds, a company specialized in bonds funds, with a Value management style.

Key Facts and Figures

  • Assets under Management (AuM): 3bn€
  • A large product range of more than 13 funds
  • Diverse clientele: institutional, retail, funds selectors…
  • All activities of Amplegest are approved by the AMF (Autorité des Marchés Financiers).

Logo of the company.
Logo of Amplegest
Source: Amplegest.

My internship

My internship was in the sales department of Amplegest Asset Management. With a team of five sellers, I learned about the different distribution channels of funds in a B2B model (the team I was in did not work with final clients). The focus of the team is on institutional and retail clients. In 2023, we mainly worked on distributing Octo AM’s bonds funds, which have met a great success following the interest rates’ raises. The firm’s fixed income’s AuM went from €350m in 2022 to €800m in 2023.

My missions

Over the course of six months, I supported the team with customer relationship management and enhancing our understanding of the firm’s competitive landscape.

One of my primary responsibilities involved diligently preparing for client appointments. This entailed creating comprehensive briefs on Amplegest funds and conducting in-depth analyses of their competitive environments. Whether addressing global competition or specific funds selected by clients, my aim was to highlight the differentiating aspects of our offerings.

In addition to client-focused tasks, I took charge of producing documents containing technical information about the funds, ensuring compliance with our customers’ regulatory requirements such as “étude de transparisation”, KYC, and Due Diligence. Monthly, I managed the dispatching of these documents, tailoring the frequency to the individual needs of each client.

Collaborating closely with both the Asset Management and Marketing teams, I actively contributed to the planning and execution of numerous B2B events. This encompassed the coordination of trade fairs such as Patrimonia, organizing large-scale professional lunches and presentations, facilitating webinars, and orchestrating engaging professional afterwork events.

Furthermore, I dedicated efforts to augment the firm’s understanding of its funds’ positions in the market. Collaborating with dedicated tools designed to gather real-time information on competitors’ performance and track records, I systematically compared these metrics against our own. This included the creation of specific peer groups tailored to each fund, providing valuable insights into their relative standing within the market.

Required skills and knowledge

In Asset Management firms, the role of Sales Assistants requires a multifaceted skill set that encompasses technical expertise and strong interpersonal skills. B2B clients expect sales professionals to possess an in-depth understanding of the market and its dynamics, coupled with the ability to articulate a fund’s management process, recent market movements, and current values with the same proficiency as a portfolio manager.

Upon assuming the role, I prioritized enhancing my knowledge of current events, particularly those related to the stock market and global financial trends. Each day commenced with a thorough review of newsletters, and I highly recommend daily publications by Bloomberg for comprehensive insights. This proactive approach allowed me to respond swiftly when clients sought information about the prevailing market conditions and how they correlated with Amplegest’s product offerings.

A good knowledge of the regulatory environment of Asset Management firms is also essential. The rules that govern this profession are numerous and constantly updated. This means that a great interest for current events (suits and convictions in other firms, general recommendations…) will be beneficial, as well as a good understanding of the guidelines provided by the Compliance department.

A proficiency in Excel is paramount, serving as a vital tool for data analysis, reporting, and decision-making within the asset management landscape. Additionally, financial analysis skills are crucial for interpreting complex financial data and providing comprehensive insights to clients.

In terms of soft skills, effective communication is fundamental—both verbal and written—enabling the clear and concise articulation of complex financial concepts. Strong client relationship management skills are essential for building and maintaining long-term partnerships, understanding client needs, and providing excellent customer service.

Adaptability is key in navigating evolving market conditions, client preferences, and organizational changes. Problem-solving skills come into play in identifying challenges and proposing effective solutions to address client inquiries and concerns.

Negotiation skills are valuable in securing mutually beneficial agreements with clients, while team collaboration is essential for working effectively with colleagues across different departments, fostering a cooperative and supportive work environment. Effective organization and multitasking are necessary for managing multiple tasks and projects simultaneously, while analytical thinking is crucial for making data-driven decisions and providing valuable insights to clients.

Furthermore, networking skills contribute to building a professional network within the industry, attending relevant events, and staying informed about industry trends. Finally, strong time management ensures efficient task prioritization, meeting deadlines, and delivering results in a fast-paced environment. Together, these skills collectively contribute to the effectiveness of an Asset Management Sales Assistant in navigating the complexities of the financial industry and delivering value to clients and the organization.

What I learned

In terms of knowledge, I learned a lot about the organization of an Asset Management firm, and its funds. In this internship, I gained practical knowledge of the regulatory landscape governing the financial sector. I also learned about fund organization and shares, exploring the nuances of fund structures, issuance of shares, and compliance with legal frameworks. Moreover, I developed a perspective on the distinctions between the back, middle, and front office specific functions within an asset management firm. This exposure allowed me to appreciate the integral roles each department plays in the overall operational efficiency and success of the organization.

In this role, I was also able to use skills developed in previous internships. Time management was one of them, which, as explained earlier, revealed itself to be a crucial component to a good experience in this field. Indeed, some requests from clients and coworkers needed to be tended to in a matter of minutes or may make the firm lose millions (a bit extreme, but sometimes realistic). Therefore, my other missions needed to be done as soon as possible, to allow time for the more pressing ones. I learned to organize my work to optimize my efficiency on this matter.

In terms of technical skills, I learned funds analysis, with the ability to evaluate their performance, risk profiles and underlying strategies thanks it their allocation and communications. This involved a systematic examination of the firm’s competitive market and its key players and trends.

Thanks to this in-depth benchmark, a sales team is able to prepare clients’ briefs, but also to offer new strategies and product offerings to their managers, identifying market opportunities and specific needs for the clients.

This experience has not only enhanced my analytical capabilities but also deepened my understanding of the intricate dynamics within the financial markets.

As a Sales Assistant, I also developed my VBA skills, and learned the power of this tool, especially used in finance firms. Excel VBA helped me to automate and streamline numerous tasks related to data analysis, reporting, and client communication, thereby significantly enhancing my efficiency and productivity. By developing proficiency in Excel VBA, I could create customized macros and scripts tailored to the specific needs of our team, automating repetitive processes and allowing me to focus more on strategic aspects of sales and client relationship management.

Overall, this experience not only broadened my knowledge and skills base but also equipped me with practical insights crucial for navigating the complex and highly regulated landscape of asset management.

Financial concepts related my internship

Fixed income

As explained earlier, 2023 was the year of fixed income. Because of this, understanding the inner workings of a bond funds was essential, as those funds are more complex than equity funds.

In order to give the clients the information they required and work adequately with the provided documents, this knowledge was a real necessity.

Diversified Asset Allocation

In preparing briefings for clients and partners, I often had to summarize the recent movements made on the firm’s diversified funds. Those funds invest in ETFs, bonds, monetary funds structured products in order achieve their expected annual return and respect their risk budget. Therefore, this type of product is, once again, more complex than equity funds, and require a deep understanding of active asset allocation and market movements.

Return on Investment

In order to have more insight on Amplegest’s clients’ satisfaction, I had to compute their total RoI, taking into account every movement they made over the course of their investment in the firm (subscription/redemption), in different funds at different times and with different net asset value of the shares they bought. This required a good understanding of Return on Investment.

Why should I be interested in this post?

As ESSEC students, we often think of working in Asset Management firms as working as a portfolio manager. However, there are many other functions in this field, and sales is one of them. If you are looking to expend your knowledge on the field and your potential future job inquiries, this post will teach you more about a very exciting position!

Related posts on the SimTrade blog

   ▶ All posts about Professional experiences

   ▶ Louis DETALLE A quick interview with an Asset Manager at Vontobel

   ▶ Akshit GUPTA Asset management firms

Useful resources

Asset management markets in Europe size & share analysis – growth trends & forecast

Amplegest

About the author

The article was written in February 2024 by Chloé ANIFRANI (ESSEC Business School, Global Bachelor in Business Administration (GBBA), 2019-2024).

Posted in Contributors, Professional experiences | Tagged , , | Leave a comment

M&A Strategies: Benefits and Challenges

M&A Strategies: Benefits and Challenges

Lilian BALLOIS

In this article, Lilian BALLOIS (ESSEC Business School, Bachelor in Business Administration (BBA), 2019-2023) explains about the M&A Strategies.

Reminder: What are Mergers & Acquisitions?

M&A (short for Mergers and Acquisitions) refers to the processes of combining two or more companies into a single entity or the purchase of one company by another. These activities are typically undertaken to achieve specific objectives such as expanding market share, gaining competitive advantages, increasing efficiency, or accessing new technologies.

In a merger, two companies come together to create a new entity, while in an acquisition, one company acquires another, which may result in the acquired company becoming part of the acquiring company or continuing to operate as a subsidiary.

What are the five main M&A strategies?

M&A activities can take various forms and involve different strategies, such as vertical mergers, horizontal mergers, conglomerate mergers, market extension and product extension. Each approach comes with its own set of benefits and challenges.

Vertical strategy

Vertical strategy.
Vertical strategy
Source: The author

A vertical strategy involves the consolidation of two or more businesses operating at different stages of the supply chain to create an integrated product or service. A notable example of a vertical merger is the merger between Walt Disney and Pixar Animation Studios in 2006 for $7.4 billion. The merger drove growth between the businesses. The benefits of a vertical strategy include increased operational efficiency, lower operating costs, higher profits, and improved quality control. On the other hand, challenges may arise from opposing company cultures, potential loss of key team members due to role combinations, and increased bureaucratic costs.

Horizontal strategy

Horizontal Merger.
Horizontal Merger
Source: The author

A horizontal strategy involves two businesses within the same industry merging to eliminate competition. A good example of a horizontal merger is the merger between Exxon and Mobile in 1998 for $75.3 billion. This strategy offers benefits such as increased revenue, diversification of products and services, a larger market reach, and reduced competition. Nonetheless, it comes with challenges, including heightened regulatory scrutiny, decreased business mobility, less control over decision-making, and the risk of providing less value to customers compared to pre-merger offerings.

Conglomerate strategy

Conglomerate Merger.
Conglomerate Merger
Source: The author

A conglomerate strategy involves merging two companies with distinct business activities, either through pure mergers, where each company continues operating independently in their respective markets, or mixed mergers, involving product and market extensions. In 2017, Amazon acquired Whole Foods Market for $13.7 billion. The merger enabled Amazon to step foot in the grocery sphere and Whole Foods accessed Amazon’s vast customer base to boost its sales. The benefits of a conglomerate merger include a larger market share, business diversification, and increased revenue through cross-selling. However, challenges may arise, including reduced efficiency, conflicts in workplace cultures, and a shift in core business values that could lead to friction with customers and stakeholders.

Market extension strategy

Market extension strategy.
Market extension strategy
Source: The author

The acquisition of LinkedIn (valued at $26.2 billion) by Microsoft from 2016, illustrates a market extension strategy, uniting two entities that offered distinct services — Microsoft’s technology and productivity solutions with LinkedIn’s professional networking platform. While both companies operated in different spheres of the market, the merger aimed to create synergies by integrating their respective strengths. The benefits of this merger allowed Microsoft to broaden its reach and enhance services by tapping into LinkedIn’s extensive database of professional connections. For LinkedIn, the benefits were an expanding client base and market presence. However, challenges such as increased business responsibility, higher capital requirements, and the potential for accumulating debt were factors that need careful consideration in the post-merger landscape.

Product extension strategy

Product extension strategy.
Product extension strategy
Source: The author

An example of a product extension merger is when Pepsi Co acquired Pizza Hut in 1977. This merger involved two companies operating in the same market, offering complementary products designed for joint consumption. Pepsi Co’s acquisition of Pizza Hut aimed to diversify their offerings and tap into a broader customer base. By linking Pizza Hut exclusively to Pepsi beverages, Pepsi Co expanded sales and market reach. Within a year of the merger, Pizza Hut sales exceeded $436 million. Benefits of product extension mergers include an expanded customer base, shared resources, and reduced operational costs through collaboration. However, challenges such as potential market clutter and confusion, as well as decreased efficiency in production and marketing efforts, may arise. Despite these challenges, the primary advantage lies in creating a “mega product” that leverages a wider customer base, while the downside involves the risk of market saturation and reduced operational efficiency.

Ensuring fair competition

L’Autorité de la Concurrence

The French competition authority (Autorité de la Concurrence), uses several mechanisms to prevent mergers and acquisitions from resulting in anti-competitive practices:

  1. Merger Control Review: The Autorité de la Concurrence conducts a review of proposed mergers and acquisitions to assess their potential impact on competition. It evaluates factors such as market concentration, barriers to entry, and the likelihood of unilateral or coordinated effects that could harm competition.
  2. Market Analysis: The authority conducts market analyses to understand the dynamics of relevant markets affected by the merger or acquisition. This analysis helps to identify potential competition concerns and assess whether the transaction could lead to the creation or strengthening of a dominant market position.
  3. Assessment of Efficiencies: While examining mergers and acquisitions, the Autorité de la Concurrence also considers potential efficiencies that could benefit consumers, such as cost savings, improved product quality, or innovation. These efficiencies must outweigh any potential harm to competition.
  4. Imposition of Resorts: If the authority identifies competition concerns arising from a merger or acquisition, it may impose resorts to address them. Resorts can include divestitures of overlapping businesses or assets, licensing agreements, behavioral commitments, or other measures designed to preserve competition in affected markets.
  5. Legal Enforcement: If a merger or acquisition raises significant competition concerns and cannot be resolved through resorts, the Autorité de la Concurrence can prohibit the transaction outright. It can also impose fines or other sanctions for violations of competition law.

Securities and Exchange Commission

The Securities and Exchange Commission (SEC) focuses on regulating securities markets and protecting investors, rather than directly overseeing antitrust aspects of mergers and acquisitions. Nevertheless, the SEC plays a crucial role in ensuring transparency and fairness in the disclosure of information related to M&A transactions, which indirectly contributes to preventing anti-competitive practices.

Here’s how the SEC helps ensure that M&A activities do not lead to anti-competitive practices:

  1. Disclosure Requirements: The SEC mandates that companies involved in M&A transactions disclose relevant information to shareholders and the public. This includes details about the terms of the merger or acquisition, potential risks, and the rationale behind the transaction. By providing comprehensive and accurate disclosures, the SEC helps investors make informed decisions and promotes transparency in M&A transactions.
  2. Enforcement of Securities Laws: While the SEC’s primary focus is on enforcing securities laws rather than antitrust laws, it may investigate M&A transactions if they involve violations of securities regulations. For example, the SEC may investigate cases of insider trading or fraudulent activities related to M&A deals.
  3. Proxy Statement Review: The SEC reviews proxy statements filed by companies involved in M&A transactions to ensure compliance with disclosure requirements. Proxy statements contain essential information about the proposed transaction, like details about the parties involved, the terms of the deal, and potential conflicts of interest. Through its review process, the SEC helps to ensure that shareholders receive accurate and complete information about M&A transactions.
  4. Regulation of Tender Offers: The SEC regulates tender offers to protect shareholders from coercive or fraudulent practices. Companies making tender offers must comply with SEC regulations regarding disclosure and fairness to shareholders. The SEC may intervene if it identifies any irregularities or violations of securities laws in tender offers.

While the SEC’s role in directly preventing anti-competitive practices in M&A transactions is limited, its oversight of disclosure requirements and enforcement of securities laws contribute to promoting transparency, fairness, and investor protection in the M&A process. Additionally, the SEC collaborates with other regulatory agencies, such as the Department of Justice (DOJ) and the Federal Trade Commission (FTC), which have primary responsibility for enforcing antitrust laws related to mergers and acquisitions.

Why should I be interested in this post?

This post offers a comprehensive understanding of Mergers & Acquisitions (M&A) strategies, providing insights into the benefits and challenges associated with various approaches. Covering the five main M&A strategies – vertical, horizontal, conglomerate, market extension, and product extension – the post dives into real-world examples. Readers will gain a deeper understanding of how different M&A strategies are implemented, their advantages as well as the challenges they may encounter. Whether you’re a business professional looking to expand your knowledge of M&A or a student delving into strategic management, this post offers valuable insights into the complexities of M&A strategies in today’s corporate landscape.

Related posts on the SimTrade blog

   ▶ Louis DETALLE A quick presentation of the M&A field…

   ▶ Louis DETALLE How does a takeover bid work & how is it regulated?

   ▶ Raphaël ROERO DE CORTANZE In the shoes of a Corporate M&A Analyst

   ▶ Rick MARCHESE Difference between a merger and an acquisition

Useful resources

Academic References

Bernile, G., Lyandres, E. and Zhdanov, A. (2011) A theory of strategic mergers European Finance Review, 16(2) 517–575.

A practical guide to mergers, acquisitions, and divestitures Delta Publishing Company

Specialized References

McKinsey & Company

PwC (2020). Mergers & Acquisitions

Securities and Exchange Commission (SEC)

Autorité de la Concurrence

Reuters Mergers and Acquisitions

Bloomberg

About the author

The article was written in February 2024 by Lilian BALLOIS (ESSEC Business School, Bachelor in Business Administration (BBA), 2019-2023).

Posted in Contributors | Leave a comment

Discovering Private Equity: Behind the Scenes of Fund Strategies

Discovering Private Equity: Behind the Scenes of Fund Strategies

Lilian BALLOIS

In this article, Lilian BALLOIS (ESSEC Business School, Bachelor in Business Administration (BBA), 2019-2023) explains about Private Equity fund strategies.

Reminder: What is Private Equity?

Private Equity entails investors directing capital into privately held enterprises that are not publicly traded on stock exchanges. Private Equity firms manage investors’ funds, which are utilized to secure ownership stakes in these companies, fostering their growth, innovation, or resolution of financial challenges. In exchange, investors anticipate yielding profits upon exiting the investment, typically within a span of 5 to 8 years.

Private equity thus offers a way for companies to receive strategic financing and for investors to earn returns on their investments, in an alternative way to traditional investments.

But how do you know which funds to invest in?

Decoding Success: How to choose the perfect Private Equity Investment Strategy

Aligning Investments with the Company Lifecycle

Private equity investments are aligned with various stages of a company’s lifecycle (Cf. chart below). In the early stages, venture capital provides funding for startups to assist in innovation and growth. As companies mature, growth equity offers expansion capital to fuel further development and market penetration. In the maturity stage, private equity often engages in leveraged buyouts (LBOs) to acquire established companies, implementing operational enhancements and strategic changes to boost efficiency and profitability. Finally, distressed capital may be deployed to support struggling businesses, offering resources and expertise to facilitate turnaround efforts.

Company life cycle.
Company Life Cycle
Source: The author

Venture Capital: at the Introduction Phase

Venture Capital is a private equity and financing approach focused on supporting early-stage startups and high-potential businesses. Investors, including affluent individuals, investment banks, and angel investors, contribute funds to fuel the growth of these companies. Apart from monetary contributions, investors may also offer technical or managerial expertise. An illustrative example of Venture Capital at work is Uber, which in 2010 received its initial major funding of $1.3 million led by First Round Capital. Shortly after, in early 2011, it raised $11 million in a Series A funding round led by Benchmark. With these funds, Uber expanded its operations to various cities in the United States and abroad, including Paris, where the concept originated. By December of 2011, Uber secured $37 million in Series B financing from Menlo Ventures, Jeff Bezos, and Goldman Sachs, further fuelling its global expansion and technological advancements.

Growth Equity: at the Growth Phase

Growth equity is a less speculative form of financing, aids companies in their expansion phase. Unlike venture capital, growth equity is directed at already profitable and mature businesses with minimal debt. This type of funding, commonly involving minority ownership through preferred shares, facilitates strategic business growth, such as entering new markets or acquiring other companies, with a balanced risk-return profile. Adyen, a prime example, initially self-funded, but experienced exponential growth after securing $250M in Series B funding led by General Atlantic in 2014. This injection of capital significantly accelerated Adyen’s trajectory, leading to its successful IPO on Euronext in June 2018, with a market capitalization of €7.1B. Adyen’s subsequent revenue surge to €721.7 million in 2022 further underscores the potency of growth equity in fuelling sustained business growth.

Leveraged Buyouts & Management Buyouts: during the Maturity Phase

Leveraged Buyouts

Leveraged Buyouts (LBOs) funds combine investment funds with borrowed capital to acquire companies, aiming to enhance profitability. By leveraging creditors’ and investors’ money, the fund manager has more capital to purchase larger companies, either outright or by securing a majority stake for strategic control. The term “leveraged buyout” reflects the use of borrowed funds to afford larger acquisitions, potentially resulting in substantial returns if the strategies pay off. An instance of an LBO is Elon Musk’s acquisition of Twitter, Inc. Despite initial resistance from Twitter’s board, who employed a “poison pill” strategy to deter hostile takeovers, Musk’s persistent pursuit led to the acceptance of his buyout offer of $44 billion on April 25.

Management Buyouts

Management Buyouts (MBOs) are transactions in which the existing management team of a company acquires a significant ownership stake or complete ownership of a business. In a MBO, the current managers collaborate with a private equity firm to purchase the business from its existing owners. This transaction is common when a company’s management team believes they can run the business more effectively or exploit growth opportunities better than the current ownership structure allows. The MBO of Dell Inc. in 2013 stands out as one of the largest and most significant in history. With a valuation reaching approximately $24.9 billion. The company’s founder, Michael Dell, partnered with Silver Lake Partners to reclaim control of the company he had founded. The move allowed Dell to implement long-term strategies and make pivotal decisions without the immediate pressures of quarterly earnings reports, facilitating a more nimble and adaptable approach to the rapidly evolving tech landscape.

Distressed Capital: at the Decline Phase

Distressed capital consists in lending to companies facing financial crises and to take control of businesses during bankruptcy or restructuring processes. The strategy involves purchasing distressed companies at a lower price, turn them around, and eventually sell them. Distressed capital carries inherent risk due to investing in financially challenged companies. For example, in May 2020, Hertz Global Holdings, filed for Chapter 11 bankruptcy due to the impact of the COVID-19 pandemic on its business, which saw a significant decline in travel demand. During its bankruptcy proceedings, Hertz secured funding from distressed debt investors to support their operations and restructuring efforts. This financing came from a consortium of lenders and institutional investors, providing Hertz with the liquidity needed to continue operations, pay essential expenses, and navigate the bankruptcy process.

Timeless Investing: Optimizing Portfolios through Vintage Year Diversity

What are “Vintage Years”?

“Vintage years” refer to specific time periods during which a fund was raised or initiated. Each vintage year represents a cohort of funds that were raised and deployed within a similar timeframe. These vintage years are often used by investors and analysts to track the performance of funds over time, as funds raised in the same vintage year may encounter similar market conditions and economic environments, which can affect their overall performance and returns.

Mitigating market cycles

Private equity has demonstrated superior performance compared to public equity throughout market cycles. However, returns are subject to fluctuations based on the phase of the business cycle. For instance, if a fund initiates investments during a downturn, it is likely to encounter a broader array of distressed and undervalued assets, with the potential for profitable exits when the market peaks. Conversely, a fund entering the market at its highpoint may face challenges as assets are likely to be expensive and may risk undervaluation upon entering public markets during the exit phase.

Given the unpredictability of market timing, diversification across vintages serves as a strategic approach to dampen this cyclical risk. This approach aims to create a more stable return profile that mirrors the overall characteristics of the asset class.

Establishing a self-sustaining portfolio

Company life cycle.
Self-funding Portfolio
Source: The author

As written above, funds can diversify through various vintages. This strategy allows to generate returns from an earlier vintage, which are reinvested as commitments for a subsequent vintage. In doing so, a self-funding portfolio is cultivated, steadily appreciating in value over time.

Exploring Sectors of Private Equity Investments

In 2023, technology continued to lead private equity investments, capturing a significant 31% share of total investments. Cloud-related ventures, especially enterprise Software as a Service (SaaS), remained appealing, fueled by expectations of sustained growth. Additionally, the rapid adoption of machine learning, driven by global enterprises integrating generative Artificial Intelligence (GenAI) into operations, signaled a broader trend towards innovation.

Consumer-focused investments, accounting for 14% of total investments, saw a focus on low-risk ventures in the food and agribusiness sector. Sustainable farming, combined agriculture, and timber ventures stood out, driven by increasing emphasis on environmental sustainability and responsible resource management.

In addition, financial services (11%) and health sectors (9%) saw significant private equity activity. In finance, investments spanned various subsectors, reflecting a pursuit of diverse opportunities. Meanwhile, health sector niches like enterprise imaging solutions and voice-based diagnostics attracted attention, driven by innovation in medical technology platforms, highlighting the sector’s transformative potential.

Company life cycle.
Sectoral Share in Private Equity Deal Values
Source: Moonfare

The private equity landscape in 2023 featured a diverse range of investment opportunities, with technology dominating while consumer, financial services, and health sectors also drew significant interest, providing distinct pathways for growth and value generation.

Why should I be interested in this post?

This post offers a comprehensive overview of private equity investing. It defines private equity and explores various investment strategies such as venture capital, growth equity, leveraged buyouts, management buyouts, and distressed capital, providing practical insights into their roles at different stages of a company’s lifecycle. Additionally, the post discusses the concept of vintage years and their significance in tracking fund performance over time, highlighting the importance of portfolio diversification and risk management.

Related posts on the SimTrade blog

   ▶ Louis DETALLE A quick presentation of the Private Equity field…

   ▶ Louis DETALLE A quick review of the Growth Capital…

   ▶ Louis DETALLE A quick review of the Venture Capitalist’s job…

   ▶ Matisse FOY Key participants in the Private Equity ecosystem

Useful resources

Academic References

Martin, J. and R. Manac (2022) Varieties of funds and performance: the case of private equity, The European Journal of Finance, 28(18) 1819–1866.

EVCA (2007) Guide on Private Equity and Venture Capital for Entrepreneurs

Caselli, S. and M. Zava (2022) Private Equity and Venture Capital Markets in Europe

Specialized Press

Investment Strategies in private equity

Barber F. and M. Goold (2023) The strategic secret of private equity Harvard Business Review

Private Equity Pulse: key takeaways from Q4 2023

Financial Times Private Equity

Wall Street Journal Private Equity

About the author

The article was written in February 2024 by Lilian BALLOIS (ESSEC Business School, Bachelor in Business Administration (BBA), 2019-2023).

Posted in Contributors, Financial techniques | Tagged | Leave a comment

My professional experience as a property manager assistant at Urban Premium

My professional experience as a property manager assistant at Urban Premium

Lilian BALLOIS

In this article, Lilian BALLOIS (ESSEC Business School, Bachelor in Business Administration Program, 2019-2023) shares his professional experience as a property manager assistant at Urban Premium.

About the company

Founded in 2010, Urban Premium specializes in the structuring and management of real estate investment trusts (REITs). The company specializes in the management of residential and commercial SCPIs (Société Civile de Placement Immobilier). A SCPI is a collective investment undertaking in the form of a company that is not listed on the stock exchange. SCPIs collect money from many investors with the sole aim of acquiring and managing a property portfolio for rental. Urban Premium specializes in inner-city real estate investment, incorporating attractive tax incentives like “Pinel/Denormandie”, “Malraux” and “Déficit Foncier”.

The Pinel and Denormandie instruments offer tax reductions for the construction or renovation of real estate in specific areas of France, based on the duration of the lease.

The Malraux Law promotes investment in high-quality real estate, often in city centres and protected areas, offering an income tax reduction.

The Déficit Foncier allows for reducing tax pressure by generating a deficit through investments in properties requiring renovations, deductible from rental income.

Logo of Urban Premium.
Logo of Urban Premium
Source: Urban Premium

As a property manager assistant, I was able to work alongside the front office managers. It was the central unit within the company, and it was responsible for implementing the investment strategy in line with tax incentives (Pinel/Denormandie, Malraux, and Déficit foncier). The front office was made up of one Managing Director, 5 managers and me.

In addition to these responsibilities, our department played a crucial role in managing funds and making strategic decisions. This involved overseeing the allocation of resources across various investment channels, ensuring optimal utilization of available funds while adhering to risk management protocols. Furthermore, our team engaged in market research and trend analysis to identify opportunities.

My internship

I had a 6-month internship at Urban Premium as an assistant property manager.

My missions

During my 6-month internship from September 2022 to February 2023, I engaged with multiple investment opportunities and projects. I took on the responsibility of analysing and crafting pitch-books for weekly meetings with managers when investment opportunity booklets were received. In addition to this, I had to monitor the accounting sheets of the real estate funds, analyzing, and providing insightful comments on their performance. While also overseeing fundraising to a lesser extent, my internship enabled me to understand the complexities of regulatory compliance concerning tax incentives for real estate finance and portfolio management within my company.

Required skills and knowledge

To be able to work in a real estate investment fund, it is necessary to have certain key skills:

  • Financial analysis to assess the profitability and viability of real estate investments.
  • A certain degree in accounting knowledge to understand and manage financial sheets. Particularly, you need a good knowledge of property valuation and lease accounting.
  • The ability to implement and analyse benchmarks to evaluate investment performance relative to the market.
  • Some background knowledge of the mechanisms of real estate markets and investment strategies.
  • Excellent communication skills to collaborate effectively with team members, partners, and investors.
  • Mastery of IT Tools, notably Excel.
  • Especially for the fund in which I was employed, knowing the principles of the different tax systems (Pinel, Malraux and Déficit Foncier).

What I learned

During my internship at Urban Premium, I learned new concepts and solidified the knowledge I already had. The hands-on experience provided through my internship gave me understanding of the management of real estate investment portfolios. Other important aspects of my internship were analyzing and contributing to the assessment of investment opportunities, navigating the complexities of project financing, and honing my skills in financial analysis.

Financial concepts related my internship

(Real estate) Financial analysis

Real estate financial analysis is the process of evaluating the financial aspects of property investments. It involves a comprehensive examination of various financial metrics and considerations to determine the profitability and feasibility of a real estate venture. This analysis encompasses factors such as property values, rental income, operating expenses, financing costs, and potential returns on investment.

Investment opportunity evaluation

Evaluation of an investment opportunity is the process of assessing the viability and potential returns of a specific investment. It involves an analysis of financial data, market trends, risks, and potential rewards. This evaluation aims to provide decision-makers with an understanding of the investment’s feasibility and align it with the overall goals and strategies of the investor or organization.

Portfolio Management

Portfolio management is the strategic and systematic process of overseeing and optimizing a collection of financial assets (real estate in this case), known as a portfolio, to achieve specific investment goals.

Why should I be interested in this post?

This post provides insights into the professional experience of working as a property manager assistant at a real estate investment trust (REITs) and managing residential and commercial SCPIs. It delves into real estate finance, including French tax incentives such as “Pinel/Denormandie”, “Malraux”, and “Déficit Foncier”. Additionally, the post outlines the responsibilities and skills required for working REITs, making it a must-read for anyone interested in pursuing a career in this field or seeking to enhance their knowledge.

Related posts on the SimTrade blog

   ▶ All posts about Professional experiences

   ▶ Arthur EVERARD My experience as a Real Estate Analyst at Eaglestone

   ▶ Clément KEFALAS My experience of Account Manager in the office real estate market in Paris

Useful resources

Urban Premium

About the author

The article was written in February 2024 by Lilian BALLOIS (ESSEC Business School, Bachelor in Business Administration Program, 2019-2023).

Posted in Contributors, Professional experiences | Tagged , , | Leave a comment

Extreme correlation

Extreme correlation

Shengyu ZHENG

In this article, Shengyu ZHENG (ESSEC Business School, Grande Ecole Program – Master in Management, 2020-2024) explains the concept of extreme correlation.

Background

In financial risk management, there is a concept that is often overlooked, the extreme correlation also known as tail dependence. Tail dependence reveals how extreme events in two variables are linked. The oversight could leave portfolios exposed to amplified risks during market turbulence. In this post, we will get to see the definition and implications of this concept.

Linear correlation and copula

As presented in the post on copula, using linear correlation to model the dependence structure between random variables poses many limitations, and copula is a more generalized tool that allows to capture a fuller picture of the dependence structure.

Let’s recall the definition of copula. A copula, denoted typically as C∶[0,1]d→[0,1] , is a multivariate distribution function whose marginals are uniformly distributed on the unit interval. The parameter d is the number of variables. For a set of random variables U1, …, Ud with cumulative distribution functions F1, …, Fd, the copula function C satisfies:

C(F1(u1),…,Fd(ud)) = ℙ(U1≤u1,…,Ud≤ud)

Here we introduce Student t-copula as an example, which will also be used as an illustration in the part of extreme correlation.

Tail dependence coefficient

The tail dependence coefficient captures the dependence level of a bivariate distribution at its tails. Let’s denote X and Y as two continuous random variables with continuous distribution F and G respectively. The (upper) tail dependence coefficient between X and Y is defined as:

with the limit of λU∈[0,1]

We can conclude that the tail dependence coefficient between two continuous random variables is a copula property, and it remains invariant with strict increasing transformations of the two random variables.

If λU∈(0,1], X and Y are considered asymptotically dependent in their (upper) tail. If λU=0, X and Y are considered asymptotically independent in their (upper) tail.

It is important to note that the independent of X and Y implies that λU=0, but the converse is not necessarily true. λU describes only the dependence level at the tails.

Examples of extreme correlation

Longin and Solnik (2001) and Gkillas and Longin (2019) employ the logistic model for the dependence function of the Gumbel copula (also called the Gumbel-Hougaard copula) for Fréchet margins, as follows:

This model contains the special cases of asymptotic independence and total dependence. It is parsimonious, as we only need one parameter to model the bivariate dependence structure of exceedances, i.e., the dependence parameter α with 0<α≤1. The correlation of exceedances ρ (also called extreme correlation) can be computed from the dependence parameter α of the logistic model as follows: ρ= 1-α^2. The special cases where α is equal to 1 and α converges towards 0 correspond to asymptotic independence, in which ρ is equal to 0, and total dependence, in which ρ is equal to 1, respectively (Tiago de Oliveira, 1973).

Related posts on the SimTrade blog

About extreme value theory

   ▶ Shengyu ZHENG Extreme Value Theory: the Block-Maxima approach and the Peak-Over-Threshold approach

   ▶ Shengyu ZHENG Optimal threshold selection for the peak-over-threshold approach of extreme value theory

   ▶ Gabriel FILJA Application de la théorie des valeurs extrêmes en finance de marchés

Useful resources

Academic resources

Gkillas K. and F. Longin (2018) Is Bitcoin the new digital Gold?, Working paper, ESSEC Business School.

Longin F. (2016) Extreme events in finance: a handbook of extreme value theory and its applications Wiley Editions.

Longin F. and B. Solnik (2001) Extreme Correlation of International Equity Markets, The Journal of Finance, 56, 649-676.

Zeevi A. and R. Mashal (2002) Beyond Correlation: Extreme Co-Movements between Financial Assets. Available at SSRN: https://ssrn.com/abstract=317122

Other resources

Extreme Events in Finance

Rieder H. E. (2014) Extreme Value Theory: A primer (slides).

About the author

The article was written in January 2024 by Shengyu ZHENG (ESSEC Business School, Grande Ecole Program – Master in Management, 2020-2024).

Posted in Contributors, Financial techniques | Tagged , , | Leave a comment