Introduction aux produits dérivés de gré à gré (OTC Derivatives)

July 27, 2024 by Esten CHAUVIN

Introduction aux produits dérivés de gré à gré (OTC Derivatives)

Dans cet article, Esten CHAUVIN (ESSEC Business School, Grande Ecole – Master in Management, 2023-2026) partage son expérience et ses connaissances sur les produits dérivés de gré à gré (OTC Derivatives), leur fonctionnement et leurs applications en finance de marché.

Introduction

Les produits dérivés de gré à gré (OTC Derivatives) sont des instruments financiers négociés directement entre deux parties, sans passer par une bourse. OTC signifie “Over-The-Counter”, indiquant que ces transactions se font en dehors des marchés réglementés. Ces produits jouent un rôle crucial dans la gestion des risques financiers et l’optimisation des portefeuilles d’investissement. Cet article vise à introduire les concepts fondamentaux des produits dérivés OTC et à expliquer leur importance dans les marchés financiers.

Fonctionnement des produits dérivés OTC

Les produits dérivés OTC incluent une variété d’instruments tels que les swaps, les forwards et les options. Contrairement aux dérivés échangés en bourse, les dérivés OTC sont personnalisés en fonction des besoins spécifiques des parties impliquées. Par exemple, une entreprise peut utiliser un swap de taux d’intérêt pour échanger des paiements d’intérêts à taux fixe contre des paiements à taux variable afin de mieux correspondre à ses flux de trésorerie. De même, un forward peut être ajusté pour répondre à une date de livraison spécifique ou à des quantités exactes de produits, et une option peut être conçue avec des conditions particulières qui répondent aux stratégies de couverture ou de spéculation spécifiques d’un investisseur.

Types de produits dérivés OTC

Swaps : Contrats dans lesquels deux parties échangent des flux de trésorerie futurs selon des conditions préétablies. Par exemple, un swap de taux d’intérêt peut impliquer l’échange de paiements à taux fixe contre des paiements à taux variable.
Forwards : Contrats où deux parties s’engagent à acheter ou vendre un actif à une date future à un prix fixé aujourd’hui. Ces contrats sont souvent utilisés pour couvrir le risque de prix des matières premières.
Options : Contrats donnant le droit, mais non l’obligation, d’acheter ou de vendre un actif à un prix fixé à l’avance, à ou avant une date spécifiée. Les options OTC sont souvent personnalisées pour répondre aux besoins spécifiques des contreparties.

Processus de négociation des dérivés OTC

Négociation des termes : Les termes des dérivés OTC sont négociés directement entre les parties, incluant le type de dérivé, la durée du contrat, et les conditions spécifiques.
Évaluation et gestion des risques : Les deux parties doivent évaluer les risques associés au contrat et mettre en place des mesures pour les gérer, telles que la fourniture de garanties.
Suivi et gestion des contrats : Une fois le contrat en place, les parties doivent suivre et gérer activement le contrat pour s’assurer qu’il reste conforme aux termes négociés et aux conditions du marché.

Avantages et risques des produits dérivés OTC

Avantages

Flexibilité : Les dérivés OTC peuvent être personnalisés pour répondre aux besoins spécifiques des parties impliquées.
Gestion des risques : Les dérivés OTC permettent aux entreprises de couvrir divers types de risques, tels que les risques de taux d’intérêt, de change et de prix des matières premières.
Optimisation des portefeuilles : Les dérivés OTC peuvent être utilisés pour améliorer l’efficacité des portefeuilles d’investissement en permettant une gestion plus fine des expositions aux risques.

Inconvénients

Risque de contrepartie : Le risque que l’une des parties fasse défaut sur ses obligations contractuelles. Pour minimiser ce risque, les institutions financières mettent en place des accords de garanties.
Complexité : La complexité des dérivés OTC peut rendre leur gestion difficile, nécessitant des compétences spécialisées et une surveillance continue.
Transparence : Les marchés OTC sont moins transparents que les marchés régulés, ce qui peut rendre l’évaluation des risques plus difficile.

Réglementation et compliance

Les produits dérivés OTC sont soumis à des réglementations strictes pour garantir la transparence et la sécurité des transactions. Par exemple, la réglementation EMIR (European Market Infrastructure Regulation) en Europe impose des exigences de reporting et de compensation pour les dérivés OTC. Durant mon stage chez Oddo BHF, nous devions nous assurer que toutes les transactions étaient conformes à ces régulations, souvent en collaboration avec le département de compliance.

Impact sur les marchés financiers

Les produits dérivés OTC jouent un rôle crucial dans les marchés financiers en offrant des outils pour la gestion des risques et l’optimisation des portefeuilles. Cependant, ils peuvent également contribuer à la volatilité et à l’instabilité des marchés en période de crise financière. Un exemple notable est la crise financière de 2008, où l’utilisation excessive des dérivés OTC a amplifié les risques systémiques.

Cas pratiques et exemples

Lors de mon stage chez Oddo BHF, j’ai été directement impliqué dans la gestion des dérivés OTC. Par exemple, nous avons travaillé sur des swaps de taux d’intérêt pour couvrir les risques de fluctuations des taux pour une entreprise multinationale. Cette entreprise souhaitait échanger ses paiements d’intérêts à taux variable contre des paiements à taux fixe pour stabiliser ses coûts de financement. Nous avons négocié les termes du swap en tenant compte des conditions spécifiques de l’entreprise et des prévisions de marché, ce qui a permis à l’entreprise de réduire son exposition aux risques de taux d’intérêt. Par ailleurs, selon la Banque des Règlements Internationaux (BRI), le volume total des transactions de produits dérivés OTC s’élevait à plus de 640 000 milliards de dollars au second semestre 2023, reflétant l’importance croissante de ces instruments dans les marchés financiers. De plus, les swaps de taux d’intérêt représentaient environ 75% de ce volume, soulignant leur prédominance. Les forwards et les options ont également connu une activité significative, avec des volumes atteignant respectivement 90 000 milliards et 65 000 milliards de dollars.

Comparaison avec d’autres instruments financiers

Dérivés OTC vs dérivés échangés en bourse

Les dérivés OTC offrent une plus grande flexibilité et personnalisation par rapport aux dérivés échangés en bourse, mais ils comportent également des risques accrus en termes de contrepartie et de transparence. Les dérivés échangés en bourse sont standardisés et compensés par une chambre de compensation, réduisant ainsi le risque de contrepartie.

Dérivés OTC vs autres produits financiers

Les dérivés OTC peuvent être utilisés en complément d’autres produits financiers tels que les obligations, les actions et les options échangées en bourse. Ils offrent des moyens supplémentaires pour la gestion des risques et l’optimisation des portefeuilles, mais nécessitent une expertise spécifique pour être gérés efficacement.

Conclusion

Les produits dérivés de gré à gré (OTC Derivatives) sont des outils puissants pour la gestion des risques et l’optimisation des portefeuilles en finance de marché. Ils offrent une flexibilité et une personnalisation accrues par rapport aux dérivés échangés en bourse, mais comportent également des risques importants qui doivent être gérés avec soin. Pour les étudiants et les futurs professionnels de la finance, comprendre les mécanismes et les enjeux des dérivés OTC est crucial pour naviguer efficacement dans ce domaine complexe.

Ressources utiles

Regulation on Over-the-Counter Derivatives and Market infrastructures – Frequently Asked Questions

À propos de l’auteur

Cet article a été écrit en juillet 2024 par Esten CHAUVIN, étudiant en Master de Management à l’ESSEC Business School, ancien stagiaire OTC Derivatives, Stock Loans, Repos chez Oddo BHF.

Compliance et régulation dans le secteur financier : focus sur les prêts de titres et les dérivés OTC

December 27, 2024July 27, 2024 by Esten CHAUVIN

Compliance et régulation dans le secteur financier : focus sur les prêts de titres et les dérivés OTC

Dans cet article, Esten CHAUVIN (ESSEC Business School, Grande Ecole – Master in Management, 2023-2026) partage son expérience et ses connaissances sur la compliance et la régulation dans le secteur financier, avec un focus particulier sur les prêts de titres et les dérivés OTC.

Introduction

La compliance et la régulation jouent un rôle fondamental dans le secteur financier, garantissant la transparence et la sécurité des transactions. Cet article vise à expliquer les principaux aspects de la régulation en finance, en se concentrant sur les prêts de titres et les dérivés de gré à gré (OTC).

Importance de la compliance et de la régulation

Les régulations financières sont mises en place pour protéger les investisseurs, maintenir la stabilité des marchés et prévenir les pratiques frauduleuses. La compliance, quant à elle, assure que les institutions financières respectent ces régulations. Ensemble, elles forment le socle de la confiance dans le système financier.

Différence entre régulation et réglementation

La réglementation se réfère aux textes de lois, directives et règlements émis par les autorités compétentes pour encadrer les activités financières. Elle définit les règles et les normes que les institutions financières doivent suivre. La régulation financière, en revanche, est le processus par lequel ces règles sont mises en œuvre et appliquées. Elle inclut les activités de surveillance et de contrôle menées par les régulateurs pour s’assurer que les institutions se conforment aux réglementations en vigueur.

Origine et importance du reporting

Le reporting financier est né de la nécessité de fournir des informations transparentes et fiables aux régulateurs, investisseurs et autres parties prenantes. Il permet de suivre et d’évaluer les risques systémiques, de détecter les irrégularités et de garantir la stabilité du système financier. Par exemple, le reporting des transactions de prêt de titres et de dérivés OTC aide les régulateurs à surveiller les expositions et à prévenir les crises financières.

Principales régulations

Réglementation SFTR : La Securities Financing Transactions Regulation (SFTR) en Europe impose des exigences de reporting détaillées pour toutes les transactions de financement de titres. Cette régulation vise à augmenter la transparence et à réduire les risques systémiques.
Réglementation EMIR : L’European Market Infrastructure Regulation (EMIR) impose des obligations de compensation et de reporting pour les dérivés OTC. Elle a été mise en place pour améliorer la transparence et réduire le risque de contrepartie.
Dodd-Frank Act : Aux États-Unis, cette loi impose des réglementations strictes sur les dérivés OTC, visant à prévenir une autre crise financière.

Compliance dans les prêts de titres

Les prêts de titres, ou stock loans, sont soumis à une surveillance réglementaire stricte. Les institutions doivent s’assurer que les transactions sont correctement déclarées et que les garanties sont adéquates.

Exigences de reporting

Les transactions de prêt de titres doivent être déclarées aux régulateurs dans un délai spécifique. Cela inclut des informations détaillées sur les parties impliquées, les titres prêtés et les garanties fournies.

Gestion des garanties

Les garanties doivent être évaluées régulièrement pour s’assurer qu’elles couvrent adéquatement le risque de contrepartie. Par exemple, si la valeur des titres prêtés augmente ou diminue significativement, des ajustements des garanties peuvent être nécessaires.

Exemple pratique

Pendant mon stage chez Oddo BHF, j’ai travaillé sur des transactions de prêt de titres où nous devions ajuster les garanties en fonction des fluctuations du marché. Nous collaborions étroitement avec le département de compliance pour nous assurer que toutes les transactions étaient conformes aux régulations en vigueur.

Compliance dans les dérivés OTC

Les dérivés OTC sont également fortement régulés pour garantir la transparence et la sécurité des marchés financiers.

Compensation et clearing

L’European Market Infrastructure Regulation (EMIR) impose que certaines transactions de dérivés OTC soient compensées par des chambres de compensation centrales pour réduire le risque de contrepartie. Cela signifie que les parties impliquées dans une transaction doivent passer par une entité tierce qui garantit la transaction.

Exigences de reporting

Toutes les transactions de dérivés OTC doivent être déclarées aux régulateurs, incluant des détails sur les termes du contrat, les parties impliquées et les expositions au risque. Ces informations permettent aux régulateurs de surveiller les risques systémiques.

Exemple pratique

Durant mon stage, j’ai aidé à préparer des rapports de conformité pour les transactions de dérivés OTC. Cela impliquait de s’assurer que toutes les transactions étaient correctement enregistrées et que les expositions étaient gérées conformément aux régulations. Par exemple, une transaction de swap de taux d’intérêt nécessitait une déclaration précise et la mise en place de garanties adéquates.

Impact des régulations sur les opérations quotidiennes

Les régulations influencent fortement les opérations quotidiennes des institutions financières. Elles nécessitent des systèmes robustes pour le reporting et la gestion des risques, ainsi qu’une collaboration étroite entre différents départements.

Systèmes et technologies

Les institutions doivent investir dans des systèmes informatiques avancés pour gérer les exigences de reporting et de compliance. Cela inclut des logiciels de gestion des risques, des plateformes de reporting et des systèmes de suivi des garanties.

Formation et sensibilisation

Il est essentiel que tous les employés soient formés aux régulations et aux politiques de compliance. Cela inclut des sessions de formation régulières et des mises à jour sur les nouvelles réglementations.

Conclusion

La compliance et la régulation sont essentielles pour maintenir la confiance et la stabilité dans le secteur financier. Pour les étudiants et futurs professionnels de la finance, comprendre ces régulations est crucial. Les prêts de titres et les dérivés OTC sont deux domaines où la régulation joue un rôle particulièrement important, nécessitant une attention constante et une gestion rigoureuse.

Ressources utiles

ESMA – SFTR

ESMA – EMIR

À propos de l’auteur

Cet article a été écrit en juillet 2024 par Esten CHAUVIN étudiant en Master de Management à l’ESSEC Business School, ancien stagiaire OTC Derivatives, Stock Loans, Repo Loans chez Oddo BHF.

Back office, Middle Office, Front Office: quels rôles, quelles responsabilités ?

July 27, 2024 by Esten CHAUVIN

Back office, Middle Office, Front Office: quels rôles, quelles responsabilités ?

Dans cet article, Esten CHAUVIN (ESSEC Business School, Grande Ecole – Master in Management, 2023-2026) partage son expérience et ses connaissances sur les rôles et responsabilités du back office, middle office et front office en finance de marché.

Introduction

Les institutions financières sont structurées en plusieurs départements essentiels à leur fonctionnement. Parmi eux, le back office, le middle office et le front office jouent des rôles distincts mais complémentaires. Cet article a pour objectif de clarifier les responsabilités spécifiques de chaque département et d’illustrer comment leur interaction contribue à l’efficacité globale de l’institution.

Rôles et responsabilités du Back Office

Le back office est souvent considéré comme le moteur silencieux des institutions financières. Il est principalement responsable du traitement des transactions financières après leur exécution. Cela inclut la confirmation et le règlement des transactions. Par exemple, lorsque vous achetez une action, le back office s’assure que les titres sont correctement livrés et que les fonds sont transférés.

Outre le traitement des transactions, le back office gère les aspects administratifs et comptables. Cela signifie tenir les livres comptables de l’institution et préparer les rapports financiers nécessaires. Imaginez qu’à la fin de chaque journée de trading, toutes les transactions doivent être enregistrées avec précision pour les audits et les rapports financiers. C’est le back office qui veille à cette rigueur.

Des tâches spécifiques incluent le règlement et la livraison des titres, où les détails de la transaction sont confirmés avec les contreparties. Le back office gère également les confirmations et les réconciliations, en rapprochant les transactions entre les systèmes internes et les contreparties pour identifier et résoudre les divergences. Enfin, ils sont responsables du reporting réglementaire et financier, préparant et soumettant des rapports aux régulateurs financiers.

Rôles et responsabilités du Middle Office

Le middle office joue un rôle crucial en matière de gestion des risques et de trésorerie. Il identifie, mesure et gère les différents types de risques : marché, crédit et liquidité. Par exemple, si une banque a un portefeuille de trading important, le middle office utilise des modèles quantitatifs pour évaluer le risque associé.

La gestion de la trésorerie et des marges est une autre responsabilité clé. Le middle office surveille les flux de trésorerie et gère les marges pour s’assurer que l’institution dispose de suffisamment de liquidités pour ses opérations. Imaginez gérer au quotidien les besoins de trésorerie pour éviter les déficits et optimiser l’utilisation des ressources.

Parmi les tâches spécifiques, le middle office suit les positions et les expositions en temps réel pour identifier les risques potentiels. Il gère également les liquidités et le collatéral, optimisant leur utilisation pour maximiser l’efficacité financière. Enfin, il calcule et suit les risques de marché, de crédit et de liquidité, utilisant des modèles de risque pour évaluer et atténuer les risques potentiels.

Rôles et responsabilités du Front Office

Le front office est la vitrine de l’institution financière, en première ligne pour interagir avec les marchés et effectuer des transactions financières. Les traders du front office exécutent des ordres sur les marchés financiers, qu’il s’agisse d’actions, d’obligations, de devises ou de dérivés.

Le front office est également responsable de la génération de revenus pour l’institution. Les traders développent des stratégies de trading et prennent des positions pour maximiser les profits. Par exemple, ils analysent les marchés et prennent des positions en fonction des conditions économiques pour générer des gains.

En plus du trading, le front office offre des conseils et des services aux clients. Cela peut inclure des recommandations d’investissement ou des services de gestion de patrimoine. Ils élaborent également des stratégies de négociation basées sur l’analyse des marchés et des conditions économiques, utilisant leur expertise pour prendre des décisions éclairées.

Comparaison et interactions entre les trois départements

Bien que chaque département ait des fonctions et des responsabilités distinctes, ils sont étroitement liés et dépendent les uns des autres. Le front office, par exemple, dépend du middle et du back office pour le soutien opérationnel et la gestion des risques. Sans une collaboration efficace, les transactions ne pourraient pas être exécutées de manière fluide et les risques ne seraient pas correctement gérés.

La communication et la coordination entre les départements sont essentielles. Prenons l’exemple d’une transaction financière complexe : le front office exécute l’ordre, le middle office surveille le risque et le back office traite la transaction. Une communication efficace entre ces départements garantit que chaque étape du processus est réalisée correctement, minimisant ainsi les erreurs et les risques.

Conclusion

Chaque département – back office, middle office et front office – joue un rôle crucial dans une institution financière. Le back office assure le bon déroulement des transactions et la conformité administrative, le middle office gère les risques et la trésorerie, et le front office génère des revenus et interagit avec les marchés. Ensemble, ils contribuent à l’efficacité et à la rentabilité de l’institution.

Avec l’avènement des nouvelles technologies, comme l’automatisation et l’intelligence artificielle, les rôles traditionnels de ces départements évoluent. Les compétences requises se transforment également, et il est essentiel pour les futurs professionnels de se tenir à jour avec ces changements pour réussir dans le secteur financier.

Autres articles sur le blog SimTrade

▶ Youssef LOURAOUI My experience as a portfolio manager in a central bank

▶ Alexandre VERLET Working in finance: trading

▶ Akshit GUPTA Analysis of The Rogue Trader movie

Ressources utiles

Pour approfondir vos connaissances sur les rôles du back office, middle office et front office, voici quelques ressources recommandées :

Les différences entre le front, le middle et le back office en banque d’investissement

À propos de l’auteur

Cet article a été écrit en juillet 2024 par Esten CHAUVIN (ESSEC Business School, Grande Ecole – Master in Management, 2023-2026) et ancien stagiaire OTC Derivatives, Stock Loans, Repo Loans chez Oddo BHF.

Mon expérience chez OTC Securities Lending & Derivatives – Repo Loan

July 27, 2024July 27, 2024 by Esten CHAUVIN

Mon expérience chez OTC Securities Lending & Derivatives – Repo Loan

Dans cet article, Esten CHAUVIN (ESSEC Business School, Grande Ecole – Master in Management, 2023-2026) partage son expérience professionnelle comme stagiaire chez Oddo BHF dans le département OTC Securities Lending & Derivatives – Repo Loan.

A propos de l’entreprise

Oddo BHF est une société financière franco-allemande offrant des services bancaires et financiers diversifiés. Fondée en 1849, l’entreprise s’est développée au fil des décennies pour devenir un acteur majeur dans le secteur de la gestion d’actifs, de la banque d’investissement et des services financiers. Oddo BHF est particulièrement reconnue pour son expertise en matière de recherche et d’analyse financière.

Avec une présence dans plusieurs pays européens, Oddo BHF combine des valeurs traditionnelles avec une approche moderne de la finance, mettant l’accent sur l’innovation et la satisfaction client.

Logo de l’entreprise.
Logo de Oddo BHF
Source : Oddo BHF.

Mon stage / Mon apprentissage

Durant mon stage chez Oddo BHF, j’ai travaillé dans le département OTC Securities Lending & Derivatives – Repo Loan. Ce département est crucial pour la gestion des prêts de titres et des produits dérivés de gré à gré, jouant un rôle essentiel dans la gestion des risques et la liquidité de l’institution.

Mes missions

Mes missions principales consistaient à traiter et à valider les transactions de prêts de titres, à gérer les expositions aux risques, et à assurer la conformité des opérations avec les régulations en vigueur. J’ai également participé à l’optimisation des processus de gestion de la trésorerie et des garanties.

Compétences et connaissances requises

Pour réussir dans ce stage, il était essentiel de posséder des compétences techniques solides en finance et en analyse de données. La maîtrise d’Excel et des systèmes de gestion de risques était indispensable. En termes de soft skills, la rigueur, l’organisation et une excellente communication étaient cruciales pour interagir efficacement avec les différentes équipes.

Ce que j’ai appris

Ce stage m’a permis d’acquérir une compréhension approfondie des mécanismes des prêts de titres et des produits dérivés. J’ai également développé des compétences en gestion des risques et appris à naviguer dans un environnement réglementaire complexe. Ce fut une expérience enrichissante qui a renforcé mon intérêt pour la finance de marché.

Concepts financiers liés à mon stage

Prêts de titres

Les prêts de titres permettent aux investisseurs de prêter leurs titres en échange d’une garantie et de frais, optimisant ainsi l’utilisation de leurs actifs.

Repos Loans

Les repos loans sont des accords où un vendeur vend des titres avec l’engagement de les racheter à une date ultérieure, fournissant ainsi une source de liquidités à court terme.

Gestion des risques

La gestion des risques implique l’identification, l’évaluation et la mitigation des risques financiers, notamment en utilisant des modèles quantitatifs et des stratégies de couverture.

Pourquoi pourrais-je être intéressé par cet article ?

Si vous êtes un étudiant de l’ESSEC intéressé par une carrière en finance de marché, cet article vous donne un aperçu précieux des responsabilités et des compétences nécessaires pour réussir dans ce domaine. Mon expérience chez Oddo BHF vous aidera à mieux comprendre les défis et les opportunités de ce secteur.

Autres articles sur le blog SimTrade

▶ All posts about Professional experiences

▶ Alexandre VERLET Classic brain teasers from real-life interviews

▶ David-Alexandre BLUM My professional experience as an Institutional Sales Assistant with Lazard Frères Gestion

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

▶ Tanguy TONEL My experience as an Investment Specialist at Amundi Asset Management

Ressources utiles

Voici quelques ressources utiles pour en savoir plus sur Oddo BHF et le secteur financier :

Site officiel d’Oddo BHF

A propos de l’auteur

Cet article a été écrit en juillet 2024 par Esten CHAUVIN (ESSEC Business School, Grande Ecole – Master in Management, 2023-2026).

Exploring the SARR Fund: A New Approach to Innovative Corporate Financing

July 9, 2024 by Gilles de MALBOSC

Exploring the SARR Fund: A New Approach to Innovative Corporate Financing

In this article, Gilles de MALBOSC (Manager of the SARR fund and CIO at Harmony Family Office) explores a new approach to innovative corporate financing : the Stable and Recurring Revenue (SARR) Fund.

Exploring the SARR Fund: A New Approach to Innovative Financing

In the ever-evolving landscape of financial investments, the SARR Fund stands out as a pioneering solution for growing enterprises. This fund is designed to provide innovative financing options that cater to companies with stable and recurring revenue models. Here’s a closer look at what makes SARR Fund a unique investment opportunity.

Introduction to SARR Fund

SARR stands for Stable and Recurring Revenue. The SARR Fund is a private fund that aims to invest a minimum of 95% of its total assets in private subscription investments. Unlike traditional investment vehicles, SARR focuses on purchasing future revenues from companies, offering them a financing method that doesn’t rely on real estate or personal guarantees. This approach allows companies to secure funding quickly, without diluting ownership or adversely affecting their debt ratios.

Why SARR Fund?

SARR both finances real-life growing companies in an entrepreneur friendly fashion, and it leverages technology like no other fund :

Innovative Financing Solutions

SARR helps entrepreneurs.

Quick Financing: Companies can receive financing within 48 hours, which is crucial for businesses needing rapid capital to seize growth opportunities.
Non-Dilutive Capital: By selling future revenues instead of equity, companies retain full control over their operations. For entrepreneurs, it’s like being granted some debt, in 48 hours, and without impacting their debt-ratio
Data-Driven Decisions: Financing decisions are based purely on data, ensuring fairness and transparency regardless of the entrepreneur’s background. Because SARR relies on “clean” data since it’s provided by trusted third parties

Timing and Technology

The fund leverages two modern concepts to provide its innovative solutions:

Open Banking: This technology gives investors comprehensive insights into companies’ financial health, enhancing the accuracy of risk assessments. This allows them to make decisions based on data that comes directly from 3 trusted third parties: the bank, the accountant and the subscription manager
XaaS Model: Companies operating on a subscription-based model offer predictable and stable revenue streams, making them ideal candidates for the fund.

How Does SARR Fund Work?

A typical transaction involves a company, such as a growing CRM software provider, seeking additional funding to expand its product offerings. The step-by-step process is described below:

Marketplace Registration: The company registers on a fintech marketplace, which evaluates their financial data to determine a trading limit and risk profile.
Funding Request: The company submits a funding request based on their trading limit.
Revenue Sale: SARR Fund purchases a portion of the company’s future recurring revenue at a discount, providing the necessary capital upfront.
Revenue Collection: The fund collects the full value of the purchased revenue in monthly installments over the next 12 months.

Process of a transaction.

Source: The company.

Benefits for Investors

Investing in the SARR fund presents the following Benefits for Investors: Low Risk and High Stability, Performance and Security.

Low Risk and High Stability

Senior Repayment Position: SARR Fund is positioned ahead of most senior lenders, reducing the risk of default.
Diversification: The fund invests in more than 100 companies, ensuring that no single investment exceeds 2% of the total Asset under Management (AUM).
Monthly Liquidity: Investors have access to 7.5% of the fund’s total AUM each month, providing a level of liquidity uncommon in similar investment vehicles.

Performance and Security

Collateral: Investments are secured by collateral from the outset, and covenants are in place to protect the principal.
Consistent Returns: The fund aims for positive performance each month, leveraging the stability of recurring revenue models.

Target Audience

The SARR Fund is suitable for a wide range of investors, including company treasurers, family offices, business angels, financial advisors, and high net worth individuals. Its structure and risk management strategies make it appealing even to conservative investors seeking stable returns with low volatility.

Conclusion

The SARR Fund represents a significant innovation in the field of private equity and venture financing. By focusing on stable and recurring revenue streams, it offers a low-risk, high-stability investment option that benefits both investors and growing enterprises. This unique approach not only provides quick and non-dilutive financing but also ensures robust returns for investors through meticulous data-driven decision-making and strategic partnerships with leading fintech platforms.

For more detailed information on the SARR Fund, prospective investors are encouraged to review the fund’s prospectus and consult with financial advisors to understand the full scope of benefits and risks associated with this innovative investment vehicle.

Useful resources

The Future of Data-Driven Finance and RegTech: Lessons from EU Big Bang II European Banking Institute Working Paper Series 2019/35

From FinTech to TechFin: The Regulatory Challenges of Data-Driven Finance

New York University Journal of Law and Business, Forthcoming European Banking Institute Working Paper Series 2017 – No. 6

Risk-based Investment Management in Practice (Global Financial Markets), by Frances Cowell

Banks and the real economy: An assessment of the research, Allen N. Berger, Phil Molyneux, John O.S. Wilson

About the author

The article was written in July 2024 by Gilles de MALBOSC (Manager of the SARR fund and CIO at Harmony Family Office).

Top 5 Private Equity firms in Germany

July 9, 2024 by Margaux DEVERGNE

Top 5 Private Equity firms in Germany

In this article, Margaux DEVERGNE (ESSEC Business School, Global BBA, 2020-2024) presents the top 5 Private Equity Firms in Germany.

Introduction

Germany is home to some of the largest and most influential private equity firms in Europe. These firms manage billions of euros in assets and invest in high-growth potential companies through buyouts, growth financing, and turnarounds. Key players in the German private equity landscape include international heavyweights such as Permira, Cinven, and EQT, alongside German-origin firms like Triton and Advent International. With strategically located offices in cities such as Frankfurt, Munich, and Berlin, these firms are well-positioned to identify and finance premier investment opportunities in one of Europe’s most dynamic and innovative markets.

Methodology

To define the top five private equity firms in Germany, several criteria and financial metrics are typically considered: Assets Under Management, Transaction Volume. Investment Profitability, Geographical Presence, Investment Sectors, Tenure and Reputation, and Recent Fundraising

Assets Under Management (AUM)

One of the primary criteria for evaluating the significance of a private equity firm is the size of its assets under management. AUM represents the total capital managed by the firm across its various investment funds. Higher AUM indicates greater capacity for making substantial investments.

Transaction Volume

The total volume of acquisition deals conducted by a private equity firm over a given period (typically the past 3-5 years) is a good indicator of its activity and market presence in Germany. Large-scale transactions, or mega-deals, are particularly scrutinized.

Investment Profitability

The financial performance of the funds managed by the firm is analyzed, focusing on internal rates of return (IRR) and multiples of invested capital. Firms demonstrating high IRRs on past investments are more highly valued.

Geographical Presence

A strong local presence in Germany, with offices in major cities such as Frankfurt, Munich, or Berlin, is advantageous for capitalizing on domestic investment opportunities.

Investment Sectors

Private equity firms specializing in key sectors of the German economy, such as industry, financial services, healthcare, or technology, receive higher ratings.

Tenure and Reputation

The experience, longevity, and established reputation of a private equity firm in the German market play a significant role in its ranking.

Recent Fundraising

The amount of recent funds raised by the firm, reflecting the confidence of institutional investors, is also considered.

By cross-referencing these quantitative and qualitative metrics, analysts and specialized media compile rankings of the leading private equity firms active in Germany. Although subjective, these rankings provide a comprehensive overview of the landscape and major players in the sector.

How did I get these ranking results?

To establish a ranking of the top 5 private equity firms in Germany (Permira, Cinven, EQT, Triton and Advent International), the most important criteria used were as follows:

Assets under management (AUM): EQT appears to have a dry powder of €25.28 billion, which puts it in the lead for this criterion.

Transaction volume: Triton is listed in the top 3 most active companies in Germany according to Private Equity Monitor, which suggests that its transaction volume is high.

Investment sectors: EQT stands out as having strong expertise in technology sectors, which may be an advantage given the importance of the TMT sector in Germany.

From this we obtained the 5 firms to rank:

Permira
Cinven
EQT
Triton
Advent International

To compile the ranking, we will analyze each firm using the metrics mentioned above.

Permira

Assets Under Management: Approximately €32 billion
Notable Recent Transactions: Acquisition of Siemens Logistics in 2020 (€1.1 billion), buyout of Camfil in 2022 (€4.8 billion)
Profitability: Net IRR of 22.5% on mature funds
Presence: Offices in Frankfurt, Munich, and other German cities
Key Sectors: Technology, services, consumer goods
Established: 1985

Logo of the company.
Logo of Permira
Source: The company.

Cinven

Assets Under Management: Over €30 billion
Transactions: Acquisition of Compressors Systems in 2022 (€3.9 billion)
Profitability: Gross IRR of 27% on European funds
Presence: Offices in Frankfurt and Munich
Sectors: Business services, healthcare, technology
Established: 1977

Logo of the company.
Logo of Cinven
Source: The company.

EQT

Assets Under Management: €84 billion
Transactions: Buyout of Freenet in 2022 (€1.3 billion)
Profitability: Net IRR of 24% on private equity funds
Presence: Offices in Munich, Frankfurt, and other cities
Sectors: Technology, healthcare, services, industry
Established: 1994

Logo of the company.
Logo of EQT
Source: The company.

Triton

Assets Under Management: €18.5 billion
Transactions: Acquisition of Flender in 2021 (€1.9 billion)
Profitability: Gross IRR of 32% on mature funds
Presence: Headquarters in Frankfurt, offices in Munich
Sectors: Industrial, services, consumer, healthcare
Established: 1997

Logo of the company.
Logo of Triton
Source: The company.

Advent International

Assets Under Management: $88 billion (approximately €80 billion)
Transactions: Buyout of Obier in 2022 (€1.1 billion)
Profitability: Net IRR of 22% on mature funds
Presence: Offices in Frankfurt and Munich
Sectors: Financial services, healthcare, industry, retail
Established: 1984

Logo of the company.
Logo of Advent International
Source: The company.

Conclusion

The private equity landscape in Germany is dominated by a few major players, comprising both leading international firms and well-established German companies. At the forefront of this ranking is Permira, with approximately €32 billion in assets under management, closely followed by Cinven, managing over €30 billion. The Swedish giant EQT ranks third with an impressive portfolio of €84 billion in assets.

German firm Triton, with €18.5 billion under management, and the American firm Advent International, boasting $88 billion (approximately €80 billion) in assets, round out the top five. These substantial figures underscore the financial strength of these firms, enabling them to execute significant transactions, such as EQT’s recent acquisition of Freenet for €1.3 billion.

Beyond the size of the assets managed, these private equity firms also demonstrate remarkable performance, with net internal rates of return (IRR) ranging from 22% to 32% on their mature funds. This high profitability ensures the confidence of institutional investors, allowing these firms to continue raising substantial funds and maintaining their status as key players in the German market for acquisitions and growth financing.

Why should I be interested in this post?

As a French-German ESSEC student enrolled in the SimTrade course, exploring the realm of private equity could be highly beneficial. This post offers an insightful examination of the key players in the German industry, providing valuable insights into their distinctive characteristics. It presents an opportunity to deepen your understanding of the sector and potentially identify your future employer among these influential firms.

Useful resources

Permira Company

Cinven Company

EQT Group Company

Triton Partners Company

Advent International Company

About the author

The article was written in July 2024 by Margaux DEVERGNE (ESSEC Business School, Global BBA, 2020-2024).

Activists in financial markets and the corporate world

July 10, 2024June 23, 2024 by Nithisha CHALLA

Activists in financial markets and the corporate world

In this article, Nithisha CHALLA (ESSEC Business School, Grande Ecole Program – Master in Management (MiM), 2021-2024) presents information how individuals and groups (financial activists) use their influence as shareholders to drive strategic, operational, and governance changes within companies to improve performance, enhance shareholder value, and promote ethical practices.

Introduction

Activism in financial markets and the corporate world refers to the efforts of individuals or institutions (like hedge funds) to influence a company’s behavior. Their objectives can include changes in management, strategy, financial structure, or operational practices. Activists aim to improve company performance, enhance shareholder value, or promote social, environmental, or governance (ESG) objectives.

History

The concept of shareholder activism dates back to the early 20th century, but it gained significant momentum in the 1980s. During this period, activist investors began buying substantial shares in underperforming companies to gain control and enforce changes. For example, Paul Singer and AT&T, where Paul Singer’s Elliott Management took a $3.2 billion stake in AT&T in 2019. Over the decades, activism has evolved, with various methods and strategies being adopted to exert influence on corporate boards and top management.

Types of Activism

There are different types of activism: shareholder activism, Environmental, Social, and Governance (ESG) activism, operational activism, and proxy fights.

Shareholder Activism

Shareholder activism focuses on improving company performance and shareholder returns through changes in governance, strategy, or financial practices.

For example, in the case of Apple in 2015, Carl Icahn’s activism led to increased share buybacks and dividend payments, enhancing shareholder returns.

Environmental, Social, and Governance (ESG) Activism

Environmental, Social, and Governance (ESG) activism aims to promote sustainable and ethical practices within companies, addressing issues like climate change, labor practices, and board diversity.

The most common ESG-related litigation is based on alleged false disclosures in securities filings. Statements in proxy materials about companies’ commitment to diversity could be false and misleading because there is a lack of diversity and/or the companies fail to follow through on promises to increase diversity.

For example, the SEC reached a US$35 million settlement with a gaming company in February 2023 after the company failed to maintain disclosure controls related to workplace misconduct. This settlement came after a wave of shareholders advocated for leadership changes within the company and its board.

Operational Activism

Operational activism involves pushing for changes in the company’s operations, such as cost-cutting measures, divestitures, or restructuring.

For example, in the case of Procter & Gamble (P&G) in 2017, Nelson Peltz’s Trian Partners waged a successful campaign for board representation, leading to significant cost-cutting and strategic refocus.

Proxy Fights

Proxy fights occur when activists seek to gain seats on the company’s board to directly influence decisions.

For example, in the case of Yahoo in 2017, activist pressures from several hedge funds, including Third Point led by Dan Loeb, resulted in major leadership changes and a shift in strategic direction.

Methods and Strategies

To achieve their goals, activists have different methods and strategies: engagement and dialogue with companies, public campaigns, proxy battles, litigation, and shareholder proposals.

Engagement and Dialogue with Companies

Activists may initiate discussions with the top management and the board of companies to induce changes.

Public Campaigns

Activists may use media and public statements to rally support from other shareholders and put pressure on the company.

Proxy Battles

Through proxy battles, activists may gain enough shareholder votes during general meetings to win board seats and implement changes directly.

Litigation

Activists may take legal action to force companies to comply with certain demands.

Shareholder Proposals

Activists may submit proposals to be voted on at the companies’ annual meetings.

Short Selling

Activists may sell borrowed shares of a company with the expectation that the stock price will decline. Activists may release reports highlighting issues such as accounting irregularities or poor governance to justify their short positions.

Notable Activists

Carl Icahn: Known for his aggressive tactics, Icahn has targeted companies like Apple, eBay, and Xerox, pushing for strategic changes to enhance shareholder value.
Bill Ackman: Founder of Pershing Square Capital Management, Ackman has influenced companies like Target and Valeant Pharmaceuticals through high-profile campaigns.
Elliott Management: Led by Paul Singer, Elliott Management has been involved in numerous activism campaigns, including those at AT&T, Twitter, and SAP.
Jim Chanos: Famous for short selling, Chanos is known for his early identification of problems at companies like Enron. His approach often involves detailed research and public reports that bring issues to light.

Impact on Companies

Activist interventions can have significant impact on companies, both positive and negative.

Positive Impact

Activism can lead to improved governance, better financial performance, and enhanced shareholder value.

For instance, the activist campaign by Trian Partners at Procter & Gamble resulted in cost-cutting measures and strategic shifts that boosted profitability.

Negative Impact

On the downside, activism can create instability, distract management, and lead to short-termism.

For example, the intense activist pressure on Yahoo! led to management upheavals and strategic uncertainty.

Impact of Short Selling

Short selling activism can expose weaknesses and unethical practices within companies, leading to regulatory investigations and changes in management. However, it can also lead to significant volatility and negative sentiment in the stock market.

For instance, Jim Chanos’s short selling and public exposure of Enron’s accounting fraud played a crucial role in revealing one of the largest corporate scandals in history

Conclusion

Activists in financial markets and the corporate world play a crucial role in shaping the future of companies. While their methods can be controversial, the influence of activists has led to significant changes in corporate governance and performance. By pushing for accountability, transparency, and strategic improvements, activists continue to be a powerful force in the corporate landscape.

Why should I be interested in this post?

This article provides a comprehensive overview of activism in the corporate world, with clear examples and explanations of key concepts. For management students, understanding and analyzing the corporate world is equally important as being a part of it and making changes in it.

Useful resources

The hedgefund journal Shareholder Activism

Hogan lovells Recent developments in ESG shareholder activism around the world and suggestions for risk mitigation

Fordham law school Yahoo! and Hedge Fund Activism

Harvard Business Review Types of Activist Investors and How to Spot Them

Wikipedia Shareholder activism

About the author

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

Analysis of Visa’s Business Model and Market Prospects

June 24, 2024June 22, 2024 by Liner SHI

Analysis of Visa’s Business Model and Market Prospects

In this article, Liner SHI (ESSEC Business School, Global Bachelor of Business Administration (GBBA) – Exchange Student, 2024-2025) shares her analysis about Visa’s business model, industry conditions, and future trends.

What is Visa

Visa is a specialized bank card clearing institution that resolves authorization and transaction issues between banks.

Logo of VISA.

Source: Visa.

How visa was built : In 1950s, under the trend of installment payments, Bank of America became a leading credit card company. However, due to US banking laws, expansion outside California faced challenges. To overcome this, Bank of America started a franchise model. To deal with initial complications arising from complex authorization and currency exchange between banks, National BankAmericard Inc. was established. In 1973, transaction settlement costs was significantly reduced due to automation of the authorization process and then NBI was renamed to Visa.

In essence, Visa operates as a professional payment technology company under a four-party clearing model: banks, merchants, consumers, and clearing institutions. In 2023,Visa boasts 4.3 billion users, collaborates with 14,000 financial institutions, and records a payment volume of $12.3 trillion.Visa gained net revenue of $32.7 billion in 2023, representing a 11% increase compared to the previous year.

Visa’s Business Model

A typical Visa payment transaction

Visa payment process.

Source: VISA.
Source: Annual Report 2023

In a Visa C2B payment, the consumer uses a Visa card to buy from a merchant. The merchant sends the transaction to an acquirer, who sends it to VisaNet. VisaNet then checks with the issuer for authorization. Once authorized, the issuer pays the acquirer, minus fees. The acquirer pays the merchant, minus their fee. Visa earns by facilitating global money movement among consumers, merchants, and banks through innovative tech.

How Visa Makes Money—Visa’s Fee Structure

Visa earns revenue through various methods: transaction amount-based revenue and transaction count-based revenue.

Transaction Amount-based Revenue

Service Revenue ($14.8B in 2023): This includes income from Visa’s payment processing services and technological solutions like transaction processing, clearing, settlement, risk management, and security services.
International Transaction Revenue ($11.6B in 2023): Generated from cross-border transaction processing and currency conversion activities. Visa charges fees for these transactions due to their complexity, involving currency conversion and higher fraud risks.Nominal payment volume serves as a hedge against inflation, making it a primary revenue driver. If commodity costs rise, Visa’s revenue automatically increases.

Transaction Count-based Revenue

C.Data Processing Revenue ($16.0B in 2023): Visa earns revenue by processing transaction data and offering analytical services to partners. These services assist in customer behavior analysis, risk management, and marketing, thereby adding more value. In recent years, international transaction revenue has steadily increased while data processing revenue has slightly decreased, possibly influenced by inflationary growth.

Business Model Evaluation

Profitability

From 2017 to 2022, Visa’s average Return on Invested Capital (ROIC) stood impressively at 87%. This remarkable performance is primarily driven by a consistently high profit margin. Since 2011, Visa’s net profit margin has shown a steady increase, surpassing 50% after 2018. This growth is largely fueled by economies of scale. While Visa requires significant upfront capital investment, its operational costs per unit are comparatively low, almost negligible when compared to traditional banking institutions. Consequently, as Visa processes more transactions through its network, its profitability naturally expands. In the four-party model of bank card clearing, Visa avoids bearing customer acquisition costs and credit risks, thus enjoying the highest profit margins.

Business moat

Technology: Visa provides users with a network technology known for its high real-time performance and security. Notably, Visa excels in managing fraud by utilizing extensive labeled transaction data and advanced algorithms like neural networks, Bayesian, and SVM. This enables Visa to construct effective risk control models, preemptively intercepting risky transactions.
Brand and Switching Costs: In the payment industry, brand reputation significantly influences consumer choices. Visa’s strong brand power consistently attracts new customers. Moreover, existing customers are deterred from switching their bank cards to other clearing institutions due to substantial switching costs.
Economies of Scale: As transaction volume expands, the clearing industry benefits from economies of scale, leading to an oligopolistic competitive structure. Similar to logistics systems such as gas pipelines and highways, once convenient and cost-effective clearing networks are established in the market, new entrants find little to no space for market penetration.

Visa’s Future Assessment

Market Trends

Overview

The payments industry revenue pool expanded by 8.3% from 2017 to 2022 to reach $1.6 trillion. However, according to BCG, slower growth is on the way. Their estimates suggest that overall revenue growth will decline from today’s levels to a CAGR of 6.2% from now through 2027, increasing the global revenue pool to $2.2 trillion at the end of that period.

Global payment revenue trend.

Source: McKinsey.

Specific Analysis

Positive Factor 1: Personal consumption expenditure is the main driver behind the growth in payment transaction volumes. Over time, as living standards improve and inflation rises, personal consumption expenditure tends to increase. Technological advancements, such as the rise of contactless cards (NFC) and electronic wallets, make payment methods more convenient, leading to higher transaction frequencies for credit cards. Visa’s data shows that contactless bank cards have an average transaction frequency about 20% higher than regular bank cards, expanding the industry scale for clearing institutions. Moreover, following the COVID-19 pandemic, the surge in e-commerce adoption has shifted more people from cash to credit card payments, boosting the penetration rate of non-cash payments and driving payment amounts and volumes.
Positive Factor 2: At the same time, the global small-value payment systems’ total transaction volume stands at approximately $235 trillion, with B2B transactions accounting for about $125 trillion (53%), C2B transactions at $50 trillion (21%), and B2C transactions at $30 trillion (13%). Both the B2B and B2C payment markets still hold significant growth potential, offering opportunities for further scale expansion for clearing institutions like Visa.
Risk: Firstly, in the post-pandemic era, economic slowdown could lead to a decrease in transaction volume growth or even a decline. This presents challenges for clearing institutions on multiple fronts. They may face reduced revenue due to fewer transactions while also needing to navigate more stringent risk management and regulatory requirements. Secondly, according to the latest estimates from BCG, the emergence of new payment networks and the increasing popularity of electronic currencies may result in an overall reduction in scale. Market Trends

Competitive Analysis

Overview

Among existing competitors, Visa demonstrates robust performance, but concurrently, it may face threats from digital wallets and encrypted cryptocurrencies.

Specific Analysis

Existing competitors: Visa maintains a competitive edge over its rivals in market share, revenue performance, organizational efficiency, and technological prowess. Contrasting Visa with its primary competitor, Mastercard, between 2018 and 2022, Visa boasted an average Return on Invested Capital (ROIC) of 88% and a net profit margin of 48.5%, surpassing Mastercard’s 54% ROIC and 41.3% net profit margin. This superiority stems from Visa’s early market entry advantage, higher market penetration, and lower customer acquisition costs. Moreover, Visa exhibits greater efficiency in internal organizational management, particularly focusing on clearing operations, while Mastercard’s management expense ratio tends to be approximately 10 percentage points higher. In terms of technology, Visa’s transaction processing capability outshines Mastercard’s, with Visa processing 65,000 transactions per second compared to Mastercard’s 5,000 transactions per second.
Substitute competitors: Visa’s primary threat comes from other payment networks and digital wallets such as Apple Pay, Google Pay, and PayPal. These services are increasingly popular among consumers and may eventually erode Visa’s market share. Additionally, the rise of cryptocurrencies may lead to reduced demand for traditional payment networks like Visa.

Conclusion

Visa possesses a strong advantage in the current payment industry market development and competitive landscape. However, it is likely to be impacted in the short term by macro-market fluctuations and in the long term by the development of emerging payment technologies

Why should I be interested in this post?

This article will give you a better understanding of Visa as a company, while also providing you with more knowledge and information about similar clearing institutions and the payment industry. This will help you prepare for job interviews by equipping you with valuable insights into the workings of Visa and its counterparts, enabling you to demonstrate a deeper understanding of the industry during the interview process.

Useful resources

BCG Global Payments Report 2023

Visa Annual Report 2023

McKinsey The-2023-mckinsey-global-payments-report

Goldmansachs 2008-entire-annual-report

About the author

The article was written in June 2024 by Liner SHI (ESSEC Business School, Global Bachelor of Business Administration (GBBA) – Exchange Student, 2024-2025).

Datastream

June 21, 2024 by Nithisha CHALLA

Datastream

In this article, Nithisha CHALLA (ESSEC Business School, Grande Ecole Program – Master in Management (MiM), 2021-2024) presents information referring to a global financial dataset, which plays a vital role in today’s financial markets for making informed investment decisions.

Introduction

Datastream is a global financial dataset that contains current and historical time series data on stocks, indices, bonds, funds, futures, options, interest rates, commodities, currencies, and economic indicators for 175 countries and 60 markets. It is accessible via two platforms: WRDS and LSEG Workspace.

It is an industry-leading analytical data source that enables detailed exploration of relationships between data series: perform correlation and relationship analysis, test investment and trading ideas, and research countries, regions and industries with time series sometime available from the 1900s onwards.

History

Datastream was developed by Thomson Reuters, now part of Refinitiv, and has been a vital tool for financial professionals for several decades. It has continually evolved to incorporate more data and improve its user interface, reflecting advancements in technology and the increasing demand for comprehensive financial information.

With over 35 million individual instruments or indicators across all major asset classes, including 8.5 million active economic indicators and over 14 million economic time series every day. It features 120 years of data, across 175 countries – the information and tools you need to interpret market trends, economic cycles and the impact of world events.

Its history extends as far back as the 1900s for G7 countries, the 1970s for other major markets and the 1980s for smaller countries.

Uses of Datastream

There are different uses of Datastream such as for investment research, economic analysis, portfolio management, academic research and financial reporting.

Investment Research

Investors and analysts use Datastream to research and evaluate potential investments by analyzing historical performance and financial health. Refinitiv offers in-depth coverage of more than 12,500 global companies across 74 countries, with over 630 metrics and history dating back to 2002.

For example, Refinitiv MarketPsych ESG Analytics (a part of Datastream) are real-time data series which can easily be incorporated into your investment and analysis process, whether quantitative or qualitative. Refinitiv MarketPsych ESG data is available on 100,000+ public and private companies and 252 countries and regions, covering more than 250 strategic ESG data measures, structured into 10 categories underlying the four areas of corporate performance.

Economic Analysis

Economists and policy makers use the database to monitor economic trends, make forecasts, and formulate economic policies.

Economists uses Datastream to access historical GDP data, inflation rates, employment figures, and other relevant economic indicators.

Portfolio Management

Portfolio managers use Datastream to track the performance of assets, optimize asset allocation, and manage risks of their portfolios or funds.

The risk manager uses Datastream to analyze historical price volatility, correlations between assets, and economic indicators that impact market risk. Datastream has had a number of marked firsts within the industry and was a pioneer when it came to calculating indices’ relative data on a daily basis. Thanks to their vast coverage of constituents across the major asset classes, users can construct benchmarks tailored to their respective strategies. This means a fund’s relative performance can be tracked more accurately.

Datastream also offers extensive global coverage of historical end-of-day fund data, with over 30 years of history and a range of measures including net asset value, dividends and performance metrics, plus supporting and operating data such as classifications, identifiers and legal entity all sourced directly from Refinitiv Lipper.

Academic Research

Scholars and students in finance and economics use the extensive data for empirical research, thesis work, and academic publications.

Financial Reporting

Financial institutions use the data for internal reporting, regulatory compliance, and strategic planning.

Finance teams use Datastream to pull data on the company’s stock performance, compare it with industry benchmarks, and include relevant economic indicators.

Advantages of Datastream

To achieve their goals, Datastream is used by various entities and individuals for various reasons: comprehensive coverage, historical depth, user-friendly interface, reliable and timely data, and customization.

Comprehensive Coverage: One of the most extensive databases available, covering a wide range of financial instruments and global markets.
Historical Depth: Offers deep historical data, essential for long-term analyses and trend identification.
User-Friendly Interface: Intuitive tools and interfaces for data extraction, charting, and analysis.
Reliable and Timely Data: Provides accurate and up-to-date information, crucial for making informed financial decisions.
Customization: Users can customize data queries and reports to meet specific research and analysis needs.

Challenges of using Datastream

Given that Datastream deals with real-time or near-real-time data, there are several challenges in processing the streaming data:

Data Overload: The vast amount of financial data available can be overwhelming, making it difficult to filter relevant information.
Data Quality: Ensuring the accuracy and reliability of financial data is crucial, as incorrect data can lead to poor investment decisions.
Cybersecurity: Protecting financial data from cyber threats and unauthorized access is a significant concern for financial institutions and data providers.
Cost: Access to premium financial data services can be expensive, posing a challenge for individual investors and smaller firms.

Conclusion

Datastream plays a critical role in the modern financial ecosystem. By providing real-time access to a wide array of financial data, it empowers investors, analysts, and institutions to make informed decisions, enhance market transparency, and drive economic growth. As technology continues to evolve, the accessibility and quality of financial data will only improve, further transforming the landscape of financial markets.

Why should I be interested in this post?

This article provides a comprehensive overview of Datastream, with clear examples and explanations of key concepts. For management students, understanding and analyzing the corporate world is equally important as being a part of it and making changes in it.

Useful resources

LSEG Refinitiv datastream

Princeton University Library Datastream

Thomson Reuters Thomson Reuters Datastream Economics

NYU libraries Datastream Guide

European University Institute (EUI) Datastream description

About the author

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

S&P Global Market Intelligence

May 30, 2024 by Nithisha CHALLA

S&P Global Market Intelligence

In this article, Nithisha CHALLA (ESSEC Business School, Grande Ecole Program – Master in Management (MiM), 2021-2024) presents S&P Global Market Intelligence, which provides financial data, news and analytics for the financial community.

Introduction

S&P company believes that to keep pace with today’s constantly evolving markets, data must be smarter, deeper, and instantly accessible. Their new Market Intelligence platform puts a world of information at the fingertips of market participants, allowing them to make strategic business decisions with conviction, speed, and laser-focused insight.

Logo of S&P Market Intelligence
Logo of S&P Global
Source: S&P Global

History

Standard & Poor’s (S&P) was established in 1860 by Henry Varnum Poor, initially focusing on providing financial data and analysis to investors. The company gained prominence for its pioneering efforts in financial transparency and market insights.

In 1923, Standard & Poor’s introduced the S&P Composite Index, a benchmark index that would later evolve into the iconic S&P 500. This index became a cornerstone of the financial industry, representing the performance of leading U.S. companies.

Throughout the 20th century, Standard & Poor’s expanded its offerings beyond indices, incorporating market intelligence services to provide comprehensive financial data and analytics to institutional investors, analysts, and businesses. In the early 2000s, Standard & Poor’s enhanced its global reach and capabilities through strategic acquisitions and partnerships. This period marked the integration of diverse datasets, analytics, and research services into a unified platform.

In 2016, Standard & Poor’s Financial Services LLC merged with McGraw Hill Financial, forming S&P Global Inc. This merger brought together a diverse portfolio of financial information services under the S&P Global brand. In 2018 they acquired Kensho, whose leading AI and machine learning capabilities drive actionable insights from very complex data.

In 2022, S&P Global and IHS Markit merge, leveraging complementary products to increase customer value and power the markets of the future. Today, S&P Global Market Intelligence remains committed to simplifying financial insights, offering a wide range of products and services that enable users to navigate complex markets with confidence. From earnings estimates to comprehensive coverage of asset classes, S&P Global’s history of innovation and dedication to excellence continues to shape the future of financial technology.

Key Components of S&P Global Market Intelligence

Earnings Estimates

S&P Global Market Intelligence aggregates consensus estimates from financial analysts covering a wide range of industries. Users could easily navigate through the most recent consensus and detailed estimates, revisions, guidance, multiples, surprises, trends, growth rates, and charts for fast and effective estimate tracking.

As of their platform, users seamlessly receive comprehensive global estimates straight into their systems, portals, and business applications through the company’s flexible Data Feed, Cloud, and API Solutions. With S&P Capital IQ Estimates, users can take advantage of historical and real-time consensus estimates, company guidance, analyst coverage, estimate revisions, and more to power their analysis and models.

Direct access and query S&P Capital IQ Estimates via Snowflake eliminates the data ingestion process and improves your productivity and efficiency.

Revenue Projections

S&P Global Market Intelligence delivers revenue projections on both a quarterly and annual basis. This allows investors to track short-term performance and long-term growth trends, offering a complete picture of a company’s revenue trajectory. We can rely on the latest information when we need it. Estimated revisions are updated intraday. Forecasted numbers are presented with point-in-time data.

Revenue projections are available across various sectors and industries, enabling users to conduct sector-specific analyses and comparisons. This helps investors understand industry trends and identify high-growth areas within the market. S&P Global Market Intelligence incorporates macroeconomic indicators into its revenue projections, such as GDP growth, inflation rates, and consumer spending patterns. This holistic approach ensures that revenue forecasts are grounded in broader economic realities.

Forecasts for Key Financial Metrics

Currently S&P Global is working on expanding its industry specific, segment and product level estimates. But its metrics already include general metrics (44), industry specific metrics for oil and gas, banks, insurances and REITs (Real Estate Investment Trust) and Commodity price targets.

Coverage

The S&P Market intelligence platform has a data coverage of over 15,000 banks, 13,257+ global insurance companies, properties across 101 countries with property data going back to 1995, Trucost’s deep environmental performance data on 15,000+ companies around the globe.

S&P Capital IQ Estimates are collected from broker research reports or from estimates feeds provided by the brokers directly. Their estimates data set does not include automated or computer generated estimates. The brokers in their network tend to be institutions and the estimates displayed on S&P Capital IQ Pro are collected from sell-side analyst estimates.

S&P Capital IQ Estimates capture “per share” estimates on the ticker/trading item level. If a user is not seeing all the contributors he/she expect for a company with multiple listings, the company recommends to check under the other listing(s). For example, Sony trades on TSE under 6758 and NYSE under SONY. They reflect the different estimates from analysts for the two trading items respectively. There is more estimates coverage for TSE:6758 compared to NYSE:SONY. The user may be looking at NYSE:SONY but expecting TSE:6758 coverage.

Period

The S&P Market intelligence historical data dates back to 1997 internationally and 1999 specifically for North American companies. The length of history varies based on metric.

Frequency

Their Data Feed Solution, Xpressfeed, paired with their proprietary loader technology, automates the download and management of data packages and enables delivery at any frequency.

The typical turnaround time is 2 hours for estimates (earnings, revenues, etc.), 1 hour for headlines, and 3 hours for guidance. For other vendors, the typical turnaround time is 24 hours, 12 hours and 12 hours (resepectively). This is one of the main qualities that differentiate S&P from other vendors.

Firms and Financial analysts

In a complicated world where one event triggers challenges for seemingly unrelated industries, S&P Global experts can provide market participants in-depth insights into the intersection of topics such as economics, shipping, automotive, commodities trading, oil and gas, financials, sustainability and more. S&P Global Market Intelligence provides high-quality industry data, financial data, news, analysis, and research to its client investors based on the client’s portfolio. Its clients include universities, corporations, government agencies, and investment professionals.

Pricing

Pricing depends on the scope of the usage regarding the following input factors:

Departments to be licensed (accessing the data)

Regions/locations that will have access to the data

Number of users that will have access to the data

Also for API / Datafeed solutions there are separate pricing guidelines, which depend on the amount of data items to be retrieved. This would need to be discussed with the business unit itself.

Use of S&P Global Market Intelligence by the Financial Community

Benchmark for Analysis

S&P Global Market Intelligence provides a vast array of financial metrics, including revenue, earnings, profit margins, and other key financial indicators. The platform offers tailored data for specific industries, enabling precise comparisons within sectors. This helps in understanding industry norms and identifying outliers. For instance, companies can benchmark their financial performance against the top players in their industry to identify strengths and weaknesses.

Market Expectations

S&P Global Market Intelligence plays a pivotal role in shaping and understanding market expectations. By aggregating analysts’ forecasts and market data, the platform helps users gauge investor sentiment and market trends. Key applications include Consensus Estimates, Market Sentiment Analysis and Trend Identification.

Earnings Season Preparation

During earnings season, S&P Global Market Intelligence is indispensable for preparation and analysis. Financial professionals use the platform to access earnings forecasts, historical performance data, and company reports, enabling them to anticipate results, post-earnings analysis and investor communications.

S&P Global Market Intelligence and Tests of Market Efficiency

Academic works

S&P fosters experiential learning with sustainability data and research that offer comprehensive data coverage, robust data linking, and flexible data delivery in the finance lab, student investment fund, research competition, and more. The platform also aids in identifying and analyzing market anomalies, contributing to the academic discourse on market efficiency. Researchers perform event studies to analyze how markets react to new information, such as earnings announcements or economic data releases.

Information Dissemination

S&P Global Market Intelligence excels in the rapid dissemination of financial information, ensuring that market participants have access to timely and accurate data. Real-time data, Custom Alerts and Comprehensive Coverage provided by the platform make it much easier to disseminate the information.

Pros and Cons

S&P Global Market Intelligence platform analysis helps investors evaluate the effectiveness of investment strategies and identify sources of outperformance or underperformance. It provides powerful analytical tools, real-time updates and comprehensive data.

On the other side, S&P Global Market Intelligence platform subscription costs can be high, potentially limiting access for smaller firms or individual investors. And the depth of information and tools available may require a learning curve for new users.

Conclusion

S&P Global Market Intelligence is a vital resource for the financial community, providing essential data, insights, and tools that support a wide range of financial activities. From benchmarking and market analysis to earnings season preparation and academic research, the platform empowers financial professionals to make informed decisions and stay ahead in a dynamic market environment.

Why should I be interested in this post?

Understanding how financial professionals use platforms like S&P Global Market Intelligence can contribute to your professional development, especially if you’re pursuing a career in finance, investment management, or financial advising. It demonstrates your interest in industry trends and best practices.

Useful resources

S&P Global The Market Intelligence Platform

Wikipedia S&P Global

S&P Global Estimates

S&P Global Data into insights

S&P Global Coverage and analytics

About the author

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

Zacks Investment Research

May 30, 2024May 30, 2024 by Nithisha CHALLA

Zacks Investment Research

In this article, Nithisha CHALLA (ESSEC Business School, Grande Ecole Program – Master in Management (MiM), 2021-2024) presents Zacks Investment Research, which provides financial data, news and analytics for the financial community.

Introduction

Zacks Investment Research (ZIR) is a prominent financial services company known for its stock research, analysis, and investment tools. Zacks is best known for its proprietary Zacks Rank stock-rating system, which uses earnings estimate revisions to identify stocks that are assured to outperform the market. This system, along with a wide array of financial tools and resources, has made Zacks a trusted name among individual investors, financial advisors, and institutional investors alike.

Logo of Zacks Investment Research

Source: Zacks Investment Research

History

Zacks Investment Research has a rich history that began in 1978 when it was founded by Len Zacks, a Ph.D. in mathematics from MIT. Len Zacks was driven by a pioneering idea that earnings estimate revisions are the most powerful force impacting stock prices. His vision was to develop a research methodology and tools that leverage this insight to help investors make better investment decisions.

In 1978, Len Zacks founded Zacks Investment Research with a focus on earnings revisions. His research suggested that changes in analysts’ earnings estimates had a significant impact on stock prices, and he aimed to harness this insight to create a predictive stock-rating system.

In 1981, Zacks developed the Zacks Rank, a proprietary quantitative model that ranks stocks based on changes in analysts’ earnings estimates. It became the cornerstone of the company’s product offerings, known for its ability to identify stocks likely to outperform the market. In 1986, The Zacks Rank system was made available to institutional investors. It gained credibility and popularity due to its consistent performance in predicting stock price movements.

In 1992, Zacks Investment Research expanded its offerings to individual investors. In 1996, The company launched its website, Zacks.com, making its research and stock ratings accessible to a broader audience.

In 2002, Zacks introduced its mutual fund ranking system, applying its earnings revision methodology to mutual funds. This allowed investors to identify funds with strong earnings potential. In 2004, The company expanded its research offerings to include ETF (Exchange-Traded Fund) ratings and analysis, catering to the growing interest in ETF investing.

In 2015, Zacks Investment Research expanded its institutional services, offering advanced analytics, data feeds, and customized research solutions for hedge funds, asset managers, and financial institutions.

In 2023, Zacks Investment Research still remains a leading provider of financial research, known for its robust stock ranking system, comprehensive research reports, and a wide range of tools that help investors make informed decisions.

Key Components of Zacks Investment Research

Earnings Estimates

Zacks’ early contribution to investment analysis was the discovery that Earnings Per Share (EPS) estimate revisions are the most powerful force affecting stock prices. This discovery gave birth to the Zacks Indicator which, along with being the first to calculate consensus EPS estimates of quarterly earnings and to create the concept of EPS surprises, as well as the first to analyze price response to EPS surprises placed Zacks among the top innovating pioneers in the investment industry.

Zacks gathers earnings estimates from a wide range of sources like Wall Street Analysts, Company Reports, and Economic Indicators. Earnings estimates play a crucial role in the proprietary Zacks Rank system, which ranks stocks from top 5 strong buys to strong sells. The Zacks Rank system leverages these revisions to identify stocks that are likely to outperform or underperform the market.

Earnings estimates are a foundational element of the Zacks Rank system. The Zacks Rank is a proprietary stock rating model that uses changes in earnings estimates to rank stocks.

Model portfolio

The Zacks Investment Committee has maintained a model portfolio since 1996. This portfolio called the Zacks Focus List, is designed for long-term investors and reflects the opinions of Zacks Director of Research Mr. Sheraz Mian. It is published weekly and will list any additions or deletions to the portfolio from the previous week.

Zacks Chief Equity Strategist, John Blank PhD., publishes this monthly report that provides the Zacks forecasts for all major asset classes and the details of Zacks outlook. This report is derived from several resources to come up with individual asset class forecasts.

Forecasts for Key Financial Metrics

In the early 1990s, Zacks developed consensus estimates of other key investment metrics such as brokerage analyst stock ratings, forecasts of future sales, and target prices. More recently, Zacks have expanded again the set of items for which they calculate consensus estimates to include many of the line items and ratios that can be determined from income statements such as ROE, Margins, Net Income, etc.

The Zacks Fundamental database includes 260 operational metric items covering over 900 companies in 32 different industries. The history of the metrics items goes back to 2003. For more details on the operational metrics, download the overview document below.

Coverage

In 1981, Zacks began processing, organizing, and evaluating research produced by US brokerage firms. Today Zacks receives daily electronic data feeds and printed research reports on over 8,500 North American publicly traded companies from over 185 brokerage firms, produced by more than 3,200 analysts amounting to over 500,000 pages of brokerage research. Zacks’s extensive data sets give you access to over 25 years of data history on over 16,000 active and inactive US and Canadian equities.

In addition, ZIR records 25,000 earnings estimate revisions and changes in broker recommendations weekly. This information is made available through institutional and non-institutional product lines and websites such as MSN MoneyCentral, Quicken.com, Bloomberg.com, and FoxBusiness.com, as well as our websites.

On the whole it covers 6,000 US companies, plus 550 non-US companies traded as ADRs on US exchanges from 35 foreign countries, plus 200 Canadian companies trading on US exchanges.

Period

Zacks began in 1978 collecting the individual EPS estimates for over 4,400 US and Canadian companies made by 3,000 analysts employed by 180 US brokerage firms.

Frequency

Zacks maintains a history of annual EPS estimates going back to 1979 and quarterly estimates going back to 1982. Zacks consensus ratings history goes back to 1985. Consensus Sales estimates and Price Targets are maintained back to 2000.

Sales Estimates – 2000 to Present – Monthly, Weekly, Daily Frequency.

Price Targets – 2000 to Present – Monthly, Weekly, Daily Frequency

Zacks data is accessible through raw data feeds for both history files and updates, as hosted web pages that can be framed into finance-oriented websites, as APIs in XML or JSON format, and through partners providing on-demand data-as-a-service (DaaS) platforms.

Firms and Financial analysts

For the 3,800 largest companies Zacks provides over 500 fields of annual standardized data from 2001 forward, and 87 fields from 1979 to 2001. For the 2,800 smaller companies and ADRs, ZIR provide 87 fields of annual standardized data from 1979 to the present.

Zacks employs a rigorous quality control process to make sure all data points are recorded accurately. For each company, a trained analyst enters the data from SEC filings, which is then double-checked by a senior analyst. Once the data is entered, a senior analyst signs off on final completion after reviewing all the data. In addition, the data is subjected to a battery of automated checks to verify balancing relationships and correct errors. All data items are reviewed by multiple sets of trained eyes as well as automated computer checks.

Pricing

There are several types of pricing offered by Zacks Investment Research namely Zacks premium, Zacks Investor Collection, Zacks Ultimate.

Zacks Premium features daily updates of the Zacks Rank, full access to the Zacks #1 Rank List, Equity Research Reports, Focus List portfolio of 50 longer-term stocks, Premium screens and much more. The subscription fee for this per year is $249.

Zacks Investor Collection is a bundle of top subscription services for long-term investors. Customers can access to all of the real-time buy and sell signals from all of Zacks long-term investor portfolios, including the exclusive stocks under the $10 strategy which isn’t available to the general public. Customers can also get full access to all the premium research tools and reports for finding winning stocks, ETFs, and mutual funds. For this program they give access to all the data for $1 in the first 30 days and later prices at $59 per month and $495 per year.

Zacks Ultimate program gives customers access to Zacks’ market insights and the most private picks from Zacks portfolio recommendation services for only $1 in the first 30 days and later they price at $299 per month or $2,995 per year.

Use of Zacks Investment Research by the Financial Community

Benchmark for Analysis

Financial professionals often use Zacks Investment Research as a benchmark for analyzing stocks and making investment decisions. The company’s data and analytical tools provide a reliable foundation for comparative analysis. Investors use the Zacks Rank system to screen for stocks that are expected to outperform the market based on earnings estimate revisions.

According to the company website, it states that “The Zacks Mutual Fund Rank is a rating system that will help you find the best mutual funds to outperform the market. Use the Zacks Mutual Fund Rank to evaluate your current funds, find better funds, and track your funds. In addition, you can follow top-ranked funds featured in daily articles from Zacks’ team of analysts.” which shows how an investor can use their analyses as a benchmark.

Market Expectations

Zacks aggregates earnings estimates from multiple analysts to form a consensus estimate. By monitoring changes in earnings estimates, investors can understand shifts in market sentiment and expectations. Upward revisions typically indicate positive market sentiment, while downward revisions may signal potential concerns.

Zacks tracks earnings surprises, which occur when actual earnings differ significantly from consensus estimates. These surprises can lead to significant market movements and are closely watched by investors.

Earnings Season Preparation

Before earnings announcements, Zacks offers previews that include analysts’ expectations, historical earnings performance, and key factors to watch. After earnings reports are released, Zacks provides detailed analyses comparing actual results to estimates, offering insights into the implications for the company’s stock price and future performance.

Zacks Investment Research and Tests of Market Efficiency

Academic works

Zacks Investment Research is a valuable resource for academic researchers studying market efficiency and other financial theories. Researchers analyze how markets react to earnings announcements and other significant events, using Zacks’ data to test hypotheses about market efficiency.

Information Dissemination

Zacks Investment Research excels in providing up-to-date data and insights to its users. Zacks provides real-time updates on earnings estimates, stock ratings, and market news. Users can set up custom alerts for specific stocks or market events.

Zacks research and data are accessible through various platforms, including its website, mobile apps, and third-party financial services, making it easy for users to stay informed.

Pros and Cons

The Zacks Rank system and earnings estimates are known for their accuracy in predicting stock performance. Zacks offers extensive and detailed financial data, covering a wide range of companies and metrics.

On the other side, Zacks’ premium services can be expensive, potentially limiting access for smaller firms or individual investors. And the depth of information and tools available may require a learning curve for new users.

Conclusion

Zacks offers a wealth of data and analysis that helps in making informed investment decisions. By focusing on earnings estimates and revisions, Zacks helps investors predict stock performance more accurately. The user-friendly tools and real-time updates make it accessible for both beginners and experienced investors.

Why should I be interested in this post?

For management students, understanding and utilizing tools like Zacks Investment Research can provide a significant edge in the financial world. Learning to use such resources effectively can enhance our analytical skills and prepare us for a successful career in finance and investment management.

Useful resources

Zacks Investment Research Zacks Fundamental Data – Company Profile and Financial Statement Data

Zacks Investment Research Our Research. Your Success.

Fidelity Research Firm: Zacks Investment Research

Zacks Investment Research Find the Service That’s Right For You

Zacks Investment Research Zacks Mutual Fund Rank

About the author

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

Structured Debt in Private Equity: Rated Feeder Funds and Collateral Fund Obligations

April 17, 2025May 22, 2024 by Dante MARRAMIERO

Structured Debt in Private Equity: Rated Feeder Funds and Collateral Fund Obligations

In this article, Dante MARRAMIERO (ESSEC Business School, Master in Strategy and Management of International Business (SMIB), 2022-2023) explains structured debt in Private Equity: Rated Feeder Funds and Collateral Fund Obligations. Such debt products open the market for insurance companies.

Structured Financing for Investment

In the intricate world of finance, innovative structures continually emerge to meet investor demands under the current regulatory framework. Among these structures are Rated Feeder Funds (RNFs) and Collateralized Fund Obligations (CFOs), which facilitate investments for investors with specific investment criteria. This happens particularly with insurance companies and asset managers, to access private equity or alternative strategy funds such as growth funds or private credit funds through rated debt instruments. However, structures like RNFs and CFOs are not without their complexities and regulatory scrutiny, especially in light of historical parallels to Collateralized Debt Obligations (CDOs) and the financial crisis of 2008. CFOs and CDOs have exactly the same structure but have different underlying assets: CDOs are based on debt, specifically mortgages while CFOs are based on Private Equity funds.

The two figures below represent the financial structure of RNFs and CFOs.

Figure 1. Financial structure of an RNF.

Source: the author.

Figure 2. Financial structure of a CFO.

Source: the author.

Rated Feeder Funds (RNFs) and Collateral Fund Obligations (CFOs) thus represent innovative approaches to structured financing, aiming to bridge the gap between investors and private equity or alternative strategy funds.

Why are CFOs and RNFs attracting insurance companies?

CFOs and RNFs are both characterized by a blend of debt and equity components. These vehicles raise capital by issuing debt securities, which are then used to invest in a diversified portfolio of assets across multiple funds. The presence of both debt and equity elements not only provides investors with exposure to various underlying assets (in which the various funds have invested) but also introduces a diversification effect that can attract capital seeking lower risk profiles. The debt issued by CFOs typically undergoes scrutiny by rating agencies to determine their creditworthiness, thereby providing assurance to investors regarding the quality of the investment.

On the other hand, RNFs operate through a structure where investors’ capital is channeled through a special purpose vehicle (SPV) or feeder fund. This feeder fund then invests in a master fund managed by the sponsor. This setup allows investors to gain exposure to the underlying assets of the master fund without directly participating in its operations. RNFs, similar to CFOs, offer rated debt instruments to investors, providing them with a regulated and transparent avenue to access private fund investments.

Regulatory Considerations and Risk Mitigation

One of the key attractions of RNFs and CFOs is the regulatory capital treatment they offer to institutional investors. By investing through rated debt instruments, regulated institutions such as insurance companies can benefit from reduced capital requirements compared to direct equity investments in underlying funds.

However, regulatory scrutiny is a critical aspect of these structures, particularly in jurisdictions like the United States and Europe. In the US, concerns have been raised regarding the applicability of risk retention rules, especially in CFO transactions where repayment primarily depends on limited partnership interests. Similarly, European regulations such as the UK and EU Securitization Regulations impose stringent requirements.

In the US, currently, the NAIC – National Association of Insurance Commissioners has blocked investments from insurance companies in CFOs but is working on possible ways to regulate the market and open the investment again in the future.

Conclusion: Balancing Innovation with Regulatory Compliance

Rated Feeder Funds (RNFs) and Collateral Fund Obligations (CFOs) represent innovative solutions for investors seeking exposure to private funds while optimizing regulatory capital requirements. However, their structural complexities and regulatory scrutiny, particularly in the aftermath of the 2008 financial crisis, underscore the importance of due diligence and compliance.

As financial markets evolve, the challenge lies in striking a balance between innovation and regulatory compliance. While RNFs and CFOs offer opportunities for capital efficiency and investment diversification, they must navigate a complex regulatory landscape to ensure stability and mitigate systemic risks. Only through careful consideration of lessons from history and adherence to regulatory guidelines can these structured financing solutions fulfill their promise in the modern financial ecosystem.

Example of precedent transaction: Tikehau raise a $300 million CFO

Tikehau Capital has raised $300 million collateralized fund obligation backed by cashflows from commitments to its direct lending and private debt secondary strategies. The CFO’s assets consisted of interests in Tikehau’s own debt funds as well as third-party managed private debt funds originated by the firm’s private debt secondaries strategy, according to a statement from Jefferies, which advised on the transaction.

Specifically, the CFO assets were largely Tikehau-managed funds: the direct lending and private debt secondaries which were held on the firm’s balance sheet. This transaction allowed Tikehau to raise capital from the big American insurance companies that otherwise would have considered investing in Tikehau’s funds as out of scope.

Why should I be interested in this post?

This post could be particularly intriguing for business students because it highlights diverse methods of fundraising within the private equity sector. This knowledge could benefit students aiming for careers in finance and those seeking to secure funding for their own ventures. Moreover, it provides valuable insights into the pivotal role that debt plays in financing strategies. Furthermore, it could be a good competitive advantage during Private Equity interviews to know about structured finance as it is an emerging topic in the Private Equity industry and not everyone is up to date with it!

Useful resources

Hanson R. (08/11/2023) Collateralised fund obligations and rated note feeders: options for structuring investment into private funds Morgan Lewis

Cadwalader Brief Primer on CFOs and Rated Feeder Funds

About the author

The article was written in May 2024 by Dante MARRAMIERO (ESSEC Business School, Master in Strategy and Management of International Business (SMIB), 2022-2023).

Private Equity and Italy, is it a nice combination?

May 22, 2024May 19, 2024 by Dante MARRAMIERO

Private Equity and Italy, is it a nice combination?

In this article, Dante MARRAMIERO (ESSEC Business School, Master in Strategy and Management of International Business (SMIB), 2022-2024) explains about the peculiar situation of the Italian Private Equity market.

Italian conservative market is now opening up

Italy’s family-owned enterprises, steeped in tradition yet poised for transformation, stand at a crossroads of opportunity. For decades, these businesses have been the backbone of the country’s economy, rooted in principles of heritage and resilience. Yet, as the global marketplace evolves, so too must they. Enter private equity – once a distant concept, now a beacon of possibility, offering two distinct paths for growth: co-investment and external capital infusion.

As previously mentioned, family businesses dominate the Italian economy, with around 784,000 companies (nearly 85%) being family-owned according to AIDAF, the Italian Association of Family Businesses. These small and medium-sized enterprises are mainly active in sectors like fashion, mechanical engineering, and food, producing high-quality “Made in Italy” products.

One driver for ownership changes in Italian family businesses is succession planning, as many seek external capital to finance growth, international expansion, technology investments or innovations due to being undercapitalized. Private equity funds have stepped in to provide this capital, with Italy being one of Europe’s most mature private equity markets. As a confirmation of this, annual private equity investments in Italy correspond to around 0.36% of GDP, on par with Germany but lower than the UK, Netherlands, and France.

Key target sectors for Italian private equity include IT/communications and industrial goods. Around 14% of Italian family office assets are invested in private equity, with surveys suggesting most intend to increase these allocations. What could make the difference for the future is that younger generations of Italian wealth holders are expected to further drive family office investments into private equity and venture capital, being more interested in backing early-stage businesses, especially in technology. Their international outlook and experience abroad are also influencing asset allocation decisions.

Co-Investment: Fostering Collaboration for Shared Success

Traditionally, family businesses have been hesitant to engage with private equity, wary of relinquishing control and diluting their legacy. However, a paradigm shift is underway as a new wave of private equity firms sets its sights on these familial enterprises, offering tailored solutions to suit their diverse needs.

Co-investment, as mentioned earlier, represents one avenue for growth. Through co-investment, family businesses can partner with private equity firms to pursue inorganic growth opportunities while retaining operational control. This collaborative approach allows for shared risk and rewards, leveraging the strengths of both parties to unlock new synergies and market opportunities.

External Capital Infusion: Embracing Change for Accelerated Growth

Yet, co-investment is not the only path forward. Another emerging trend in Italy’s business landscape is the willingness of family businesses to open their doors to external capital funding, including partial divestment to private equity firms. While this option may involve ceding a degree of ownership and autonomy, it also presents an opportunity to access significant capital infusion and strategic guidance.

The decision between co-investment and external capital infusion is not a one-size-fits-all proposition. Each option carries its own set of benefits and considerations, depending on the unique circumstances and aspirations of the family business in question. Some may find co-investment to be a more palatable approach, allowing them to maintain a greater degree of control over their operations. Others may see external capital infusion as a means to accelerate growth and access new markets.

The Role of Family Offices

Integral to navigating these choices is the role of the family office – a trusted advisor tasked with safeguarding the financial interests of affluent families. Whether pursuing co-investment or external capital infusion, family offices play a crucial role in guiding decision-making and ensuring alignment with long-term goals.

As Italy’s family businesses chart a course toward the future, the convergence of private equity and family offices offers a wealth of opportunities for growth and revitalization. By embracing both co-investment and external capital infusion, these enterprises can leverage the strengths of private equity partnerships while preserving their unique identities and legacies.

Conclusion: Two Paths, One Destination

In conclusion, the dual paths of co-investment and external capital infusion represent two sides of the same coin for Italy’s family businesses. By carefully weighing the options and leveraging the expertise of family offices, these enterprises can navigate the complexities of modern business and chart a course towards sustainable success in an ever-changing world.

Why should I be interested in this post?

This post presents a valuable opportunity to better understand the unique characteristics of the Italian market, predominantly driven by family businesses, and to explore its evolving landscape as it embraces a new business paradigm: Private Equity. Studying this transition offers insights not only for academic enrichment but also for future career prospects in Private Equity. Understanding how Italy’s traditional family business-dominated market is adapting to and integrating Private Equity opens doors for both educational exploration and potential professional paths in this sector.

Useful resources

Bocconi Student Private Equity Club (2024) Overview: The Private Equity Market in Italy over the last 20 years

Deutsche Bateiligungus AG (2023) Private equity in Italy – an undervalued market

FamilyCapital (2020) The big private equity groups backed by families

AltiGlobal (2023) Italy’s next generation of wealth holders step up to grow family wealth while they wait for senior leadership roles

About the author

The article was written in May 2024 by Dante MARRAMIERO (ESSEC Business School, Master in Strategy and Management of International Business (SMIB), 2022-2024)

The selling process of funds

May 11, 2024 by David-Alexandre BLUM

The selling process of funds

In this article, David-Alexandre BLUM (ESSEC Business School, Global Bachelor in Business Administration (GBBA), 2019-2023) explains about the selling process of funds.

The process of selling a fund involves several key steps and stakeholders. The fund is built by management teams that develop the strategy, allocation, and follow the macroeconomic scenario of economists. Let’s take the example of Lazard Frères Gestion.

Lazard Frères Gestion is characterized by active management based on fundamental analysis. Financial analysis and knowledge of companies are at the heart of the management process. All institutional management relies on the same macroeconomic scenario. Financial assets are the major source of financing for the real economy. The economy is cyclical. Financial assets are also cyclical. Volatility or bubble effects can cause the market price of an asset to diverge from its fair economic price in the short term, but not in the long term. Over time, it is the ability to capture the different phases of the cycle that creates outperformance.

Lazard Frères Gestion’s investment philosophy is based on both reading the economic cycle and evaluating companies. When products are launched and marketable, the distribution team prospects new clients (through seminars, contacts, or research), responds to tenders, or meets specific client requests.

The client meeting

Once the initial contact has been made, the sales team must prepare a specialized presentation for clients, gathering necessary documents (such as reports, management points, comparative studies, etc.). The preparation of such a presentation is crucial and should not be overlooked. It is important to choose the right arguments to highlight, taking into account the current economic environment and supporting the scenario put forward by the management team.

Selling a fund requires a thorough understanding of the management process, portfolio values, managers’ philosophy, as well as the benchmark performance and various risk and performance indicators of the presented fund.

Once the speech is prepared and the materials finalized, it is up to the seller to showcase the fund’s qualities. If the meeting goes well and negotiations are successful, the transaction can follow quickly or the client may request an entirely different service, such as a dedicated fund (customized fund), if it meets the criteria for accessing the service.

The team then needs to manage the contractual and administrative aspects to finalize the operation. The potential buyer conducts thorough due diligence on the fund, examining financial documents, contracts, internal procedures, and regulatory compliance to ensure there are no hidden issues or unforeseen risks.

Once due diligence is completed and the terms of the transaction are finalized, the parties draft and sign the sales contracts. In addition, they obtain the necessary approvals from the relevant regulatory authorities to transfer the fund’s management to the buyer.

After obtaining regulatory approvals, the client transfers the fund’s assets and liabilities to the buyer. This may include transferring securities, contracts with custodians and fund administrators, as well as communicating with the concerned investors.

Once the transfer is completed, the buyer integrates the fund into their own management structure and takes over the daily management of the fund, ensuring that investment objectives and applicable regulations are met.

Managing the relationship and the customer service

The team’s work does not stop at mere sales. Its role is much more important. It must ensure the proper receipt of financial and legal documents sent to clients periodically. It must also respond to all information requests about the subscribed products and ensure that the services subscribed by the client are performed. It is their duty to do everything possible to justify any underperformance and to nourish the relationship with information and explanations. To do this, they attend various committees and internal meetings to keep abreast of different movements and tactical bets. The sales team can encourage its client to invest more in its product and propose new products that seem to meet the client’s demand. In the event that the client chooses to withdraw from the fund, the relationship does not end there, and it is up to the sales team to work to potentially bring their client back.

From a technical standpoint, the sales team must master the knowledge of its products. The sales team must deeply understand the characteristics of the fund, including investment strategy, objectives, underlying assets, sectoral and geographical allocation, as well as fees and associated costs.

It is essential to know the historical performance of the fund, risk-adjusted returns (such as the Sharpe ratio), and comparisons with benchmark indices or similar funds. The sales team must be able to explain the main risks associated with the fund, such as market, credit, liquidity, and currency risks, as well as the measures taken by the fund manager to mitigate these risks.

Knowledge of regulations applicable to investment funds, such as UCITS or AIFMD directives in Europe, and disclosure and reporting requirements, is crucial to ensure compliance and client trust.

The sales team must be able to identify target investors for the fund, taking into account their risk profile, investment objectives, and liquidity needs.

Team members must master the procedures for subscribing and redeeming fund shares, including deadlines, fees, and specific conditions.

Communication and presentation: Communication and presentation skills are essential for clearly and convincingly explaining the benefits of the fund and addressing potential clients’ questions.

By mastering these technical aspects, the sales team will be able to effectively present the investment fund to potential clients, address their concerns, and assist them in making informed investment decisions.

Why should I be interested in this post?

The sales process of a fund helps to better understand the functioning of the investment fund market and the dynamics between asset management companies, investors, and financial intermediaries.

Investors who understand the sales process of a fund are better equipped to evaluate fund offerings and make informed investment decisions based on their objectives and risk tolerance. Professionals working or considering working in the financial industry, particularly in the areas of asset management, sales, and investment advisory, will benefit from a deep understanding of the fund sales process to enhance their skills and professional performance.

Furthermore, understanding the sales process of a fund can assist investors and financial advisors in comparing different investment products, such as mutual funds, exchange-traded funds (ETFs), and alternative investment funds, to determine the best solution for their specific needs and objectives.

Useful resources

Lazard Frères Gestion

Lazard Frères Gestion Les métiers de la gestion d’actifs (webinaire)

Lazard Frères Gestion Qu’est-ce que la gestion d’actifs ?

Lazard Frères Gestion Quelle allocation d’actifs pour un portefeuille diversifié ?

Hull J., P. Roger (2017) Options futures et autres actifs dérivés Pearson Education.

About the author

The article was written in May 2024 by David-Alexandre BLUM (ESSEC Business School, Global Bachelor in Business Administration (GBBA), 2019-2023).

Bloomberg

May 20, 2024May 3, 2024 by Nithisha CHALLA

Bloomberg

In this article, Nithisha CHALLA (ESSEC Business School, Grande Ecole Program – Master in Management (MiM), 2021-2024) presents Bloomberg, which provides financial data, news and analytics for the financial community.

Bloomberg

Bloomberg is a company that provides financial data, news, and analytics to people in finance and other industries. The company was created to address the need for better financial data and analytics access in the business world. Bloomberg’s flagship product is the Bloomberg Terminal, a computer software system that provides real-time data on financial markets, economic indicators, and news.

Logo of Bloomberg

Source: Bloomberg

History

Bloomberg LP was founded in 1981 by Michael Bloomberg, a former investment banker who recognized the growing demand for reliable financial information and analytics. The company initially focused on developing and selling computer terminals that provided real-time data on stocks, bonds, and other financial instruments.

Bloomberg’s key innovation, Bloomberg Terminal, was introduced in the early 1980s. This groundbreaking platform revolutionized the way financial professionals accessed market data and news, offering a comprehensive toolset for trading, analysis, and research.

Over the years, Bloomberg expanded its offerings beyond terminals to include data analytics, financial software, and media services. Bloomberg News, launched in 1990, became a prominent source of business and financial journalism, providing timely news coverage and insightful analysis to subscribers worldwide.

In the 21st century, Bloomberg continued to innovate and diversify its business, introducing new products and services tailored to the evolving needs of the financial industry. The company expanded its global presence with offices in major financial centers across North America, Europe, Asia, and beyond.

Today, the company’s commitment to innovation, integrity, and excellence has solidified its position as a trusted partner for businesses, governments, and institutions seeking reliable financial information and insights.

Bloomberg has evolved since its introduction in 1981 and has grown the company from a single location to 176 locations and with 20000 employees. Bloomberg with over 40 years of history, facilitates bottom-up and top-down analysis to better assess potential growth and risk as well as future value across industry, sector, index, country, and region.

Bloomberg covers a wide range of firms across different industries, sectors, and regions. According to Chen (2023), Bloomberg grew to a leading financial company with over 325,000 subscriptions to its professional services, almost 1 million global circulations of Bloomberg Businessweek, and over 150 news bureaus internationally. To support this massive network of financial information, data encryption, messaging, and trading, Bloomberg employs over 4,000 computer engineers around the globe.

Key Components of Bloomberg

Earnings Estimates

Bloomberg provides estimates and forecasts about how companies will perform financially. It collects data from many sources and use it to predict things like earnings and revenue for different businesses.

According to Guttmann from Statista (2022), Bloomberg LP, which operates within the business of information services, news services, broadcasting, streaming, and print, generated an estimated 12.2 billion U.S. dollars. A year earlier, the company’s revenue results stood at 10 billion dollars.

Revenue Projections

Alongside earnings estimates, Bloomberg provides forecasts on how much revenue companies are expected to generate. This helps stakeholders analyze and project the growth and performance of businesses over specific periods.

For example, on June 01, 2023, Bloomberg Intelligence released an expected revenue projection on the AI industry for the next ten years stating “Rising demand for generative AI products could add about $280 billion of new software revenue and the Emerging Industry Could Grow at a CAGR of 42% Over the Next 10 Years”. This helps stakeholders of the respective industry to analyze, project, and invest accordingly.

Forecasts for Key Financial Metrics

Bloomberg’s platform includes forecasts for various important financial metrics beyond earnings and revenue, such as cash flow, profit margins, and growth rates. These forecasts assist in assessing the overall financial health and prospects of companies.

In April 2024, Bloomberg launched a point-in-time data solution that gives quants a competitive edge. By pre-ingesting, mapping, and linking many different data sources together, Bloomberg allows customers to significantly reduce the time needed to generate signals or insights. With this launch, Bloomberg is responding to customers’ need for differentiated, value-adding data with standardized company-level fundamentals, estimates, and deep industry-specific metrics, alongside macro information.

Coverage

Bloomberg covers a wide range of companies across different industries, from large corporations to smaller businesses. This extensive coverage ensures that users have access to comprehensive financial data and insights.

Bloomberg Markets maintains coverage of stocks, bonds, commodities, emerging markets, and forex markets from more than 160 countries. Bloomberg Politics holds the largest news agency in the world in US politics and major global events with more than 1000 reporters and staff. Bloomberg News publishes around 5000 stories daily.

Period

Bloomberg usually provides data with the longest available time period. For example, for Bitcoin data starts in 2010.

Frequency

The period and frequency of forecasts on Bloomberg vary based on user needs and market dynamics. Users can access real-time updates and forecasts as frequently as necessary to stay informed about market changes and company performance.

Bloomberg offers the only cloud-native real-time data delivery option suitable for capital markets use. It delivers B-PIPE through an intra-cloud connection to a managed virtual private cloud on Amazon Web Services (AWS) via AWS Private Link. This low-latency option provides speed, reliability, and security via connectivity that remains solely in AWS.

Pricing

The specific pricing for accessing Bloomberg data is mentioned on the Bloomberg website and it states to have categories like all-in access, limited access, and also has special student access for limited data. The cost likely varies based on the package and offerings selected, which can include different data sets, yearly or monthly subscriptions, and access methods. For detailed pricing information, it is recommended to directly go through the Bloomberg website as it includes very precise information that pretty much caters to all the needs based on the functionality.

Bloomberg charges a fee for its services, usually on a subscription basis. The cost can be high, but many financial professionals find it worth it for the valuable information they receive.

Use of Bloomberg by the Financial Community

Benchmark for Analysis

Professionals rely on Bloomberg’s extensive database of financial data, economic indicators, and market news to conduct in-depth analyses of companies, industries, and markets. The platform provides powerful tools and customizable features that enable users to create detailed financial models, perform comparative analysis, and track key performance metrics.

Market Expectations

Financial professionals use Bloomberg to stay informed about market expectations and sentiment. The platform aggregates market forecasts, including earnings estimates, revenue projections, and economic indicators, allowing users to assess consensus expectations and potential market trends. Bloomberg’s real-time updates and customizable alerts enable users to monitor shifts in market sentiment and adjust investment strategies accordingly.

Earnings Season Preparation

During earnings seasons, Bloomberg becomes an essential tool for financial professionals preparing for corporate earnings releases. The platform’s earnings analysis tools help users interpret financial results, identify underlying trends, and make informed decisions based on earnings reports.

Bloomberg and Tests of Market Efficiency

Academic works

Researchers and scholars leverage Bloomberg’s vast dataset and analytics tools to conduct empirical studies on market behavior, information dissemination, and the efficiency of asset pricing models. By analyzing historical market data and real-time information flow, academics assess the degree to which markets reflect all available information and efficiently incorporate new information into asset prices.

Information Dissemination

One key aspect of market efficiency is the speed and accuracy of information dissemination. Bloomberg facilitates the rapid dissemination of market news, economic data, and corporate announcements to a global audience of financial professionals. Researchers use Bloomberg to study how quickly information is incorporated into asset prices and whether markets efficiently reflect public and private information.

Pros and Cons

Given its history and operations in widely known industries and markets, we certainly need to know the pros and cons of Bloomberg.

Bloomberg provides users with access to extensive financial data and analytics, enabling rigorous empirical studies on market efficiency. Bloomberg’s customizable tools and advanced features facilitate complex analyses and modeling for testing various market efficiency hypotheses. The platform offers real-time updates and historical data, allowing researchers to analyze market behavior over different periods and market conditions.

On the other side, Bloomberg’s subscription costs may limit access to users with limited budgets or academic institutions with constrained resources. The complexity of Bloomberg’s interface and data structure may also present a learning curve for users new to the platform.

Conclusion

Bloomberg’s impact extends across the financial community, serving as a trusted resource for investors, traders, analysts, and corporate professionals worldwide.

Why should I be interested in this post?

According to me, mastering Bloomberg can equip management students with valuable skills and knowledge that are directly applicable to careers in finance, business analysis, and strategic management. It offers a practical way to enhance analytical capabilities, stay updated with industry trends, and build a strong foundation for future professional success.

Useful resources

Bloomberg

Wikipedia Bloomberg L.P.

Statista Estimated revenue generated by Bloomberg LP worldwide from 2015 to 2022

Bloomberg Generative AI to Become a $1.3 Trillion Market by 2032, Research Finds

Bloomberg Bloomberg Launches Point-in-Time Data Solution that Gives Quants a Competitive Edge

About the author

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

Bitcoin est un rêve, un idéal, un espoir

April 15, 2024April 9, 2024 by Jean-Marie CHOFFRAY

Bitcoin est un rêve, un idéal, un espoir

Dans cet article, Jean-Marie CHOFFRAY (Professeur Ordinaire Honoraire d’Informatique Décisionnelle à l’Université de Liège, PhD-77, Management Science, Massachusetts Institute of Technology) introduit son recent article “Mille quatre cent milliards de dollars”.

Personne ne sait précisément ce qu’est Bitcoin (avec « Bvle réseau). Au plan conceptuel, bitcoin (avec « b le jeton) est une chaîne, aussi indestructible que possible, de blocs d’enregistrements, aussi sécurisés que possible. Cette technologie nouvelle est donc un projet en cours dont personne ne peut préjuger l’avenir, quelle que soit la dimension considérée. Bitcoin deviendra ce que la majorité de ses utilisateurs décidera, et surtout aura le courage, d’en faire. Pour Satochi Nakamoto, c’était un rêve. Pour ceux qui travaillent aujourd’hui sur son code, c’est un idéal. Enfin, pour ceux qui l’utiliseront demain, c’est un espoir. L’Histoire de l’Humanité, une autre chaîne de blocs d’enregistrements – à l’évidence, non sécurisés et falsifiables ! – , s’apparente au reflet d’une montée de la Conscience individuelle et collective (cf. « Le phénomène humain » de Pierre Teilhard de Chardin). Bitcoin, c’est L’espoir maintenant (entretien entre Jean-Paul Sartre et Benny Lévy) : « une tension vers la fin, que l’échec, le tragique ne sauraient annuler… La valeur économique de bitcoin serait-elle le prix de la liberté ?

▶ Lire l’article Bitcoin est un rêve, un idéal, un espoir

Autres articles sur le blog

▶ Snehasish CHINARA Bitcoin: the mother of all cryptocurrencies

▶ Jean-Marie CHOFFRAY Mille quatre cent milliards de dollars

A propos de l’auteur

L’article a été rédigé en mars 2024 par Jean-Marie CHOFFRAY (Professeur Ordinaire Honoraire d’Informatique Décisionnelle à l’Université de Liège, PhD-77, Management Science, Massachusetts Institute of Technology).

Types of Market Consensus

April 15, 2024April 9, 2024 by Nithisha CHALLA

Types of Market Consensus

In this article, Nithisha CHALLA (ESSEC Business School, Grande Ecole Program – Master in Management (MiM), 2021-2024) explains what are the market consensus and different forms of into financial sentiments.

Introduction

Market consensus often talked about in financial circles, goes beyond just a collective opinion; it reflects how investors feel and what’s happening in the financial world. This article looks into different types of market consensus: the agreement on prices between buyers and sellers, the insights provided by financial analysts who study companies’ basics and economic indicators, and the views of technical analysts who analyze stock prices. Several things affect market consensus, like how people generally feel about the market, expectations for market changes, and the actions of important players like central banks.

Understanding the various forms of market consensus is essential for investors and traders navigating the complex world of finance. These collective opinions shape market trends and impact investment decisions.

Price Consensus

One of the most visible forms of market consensus is reflected in asset prices. The principle of supply and demand drives prices, with consensus emerging as traders and investors assess the value of an asset based on various factors such as economic indicators, company performance, and geopolitical events. As these factors change and influence perceptions, they contribute to the evolving consensus reflected in asset prices.

Example: In 2020, Tesla’s stock experienced a tremendous surge as market consensus shifted positively around electric vehicles and renewable energy. Investors believed in the company’s potential for growth, leading to a significant increase in Tesla’s stock price.

Market consensus by financial analysts

Consensus on revenues and earnings

Earnings consensus revolves around the expected future earnings of a company. Analysts and financial experts often provide earnings estimates, and market consensus forms around these forecasts. Deviations from these expectations can lead to significant price movements as investors reassess the company’s performance and prospects. This dynamic interaction between earnings forecasts and market reactions underscores the importance of consensus expectations in shaping investor sentiment and market behavior.

Example: Apple’s quarterly earnings announcements are highly anticipated by the market. If Apple reports earnings that exceed analysts’ consensus estimates, it can lead to a surge in its stock price, reflecting the positive earnings consensus.

Consensus on economic indicators

Economic indicators, such as GDP growth, inflation rates, and unemployment figures, shape the macroeconomic consensus. Governments, central banks, and international organizations routinely release data that analysts and investors leverage to assess the broader economic landscape. Market responses frequently track deviations from consensus forecasts related to these indicators. When actual economic data diverges from expectations, it can trigger significant market movements as investors adjust their outlook on economic conditions and potential policy responses.

Example: During the global financial crisis of 2008, there was a consensus among economists that the world economy was entering a recession. This consensus influenced investor behavior, leading to widespread selling in equity markets and a shift towards safer assets.

Market consensus by technical analysts

Market consensus by technical analysts revolves around interpreting stock price movements and patterns to forecast future market trends. Technical analysts use charts and indicators to identify potential buying or selling opportunities based on historical price data. By analyzing patterns such as support and resistance levels, moving averages, and trading volumes, technical analysts contribute insights into market sentiment and potential price directions. This approach to market consensus complements fundamental analysis and provides a different perspective on investor behavior and sentiment. Breaking through a significant resistance level might lead to a bullish consensus; similarly, breaking through a significant support level might lead to a bearish consensus.

Factors influencing the market consensus

Size of the company and coverage by financial analysts

The size of a company and how many analysts are covering it also influence the stock market consensus. If only a handful of analysts are assigned to the stock, the market consensus estimates are more likely to vary from actual results.

Market sentiment

The sentiment of market participants plays a crucial role in shaping market consensus. Investor sentiment can be bullish or bearish, influenced by factors like news, social media, and market events. Contrarian investors often excel by taking positions opposite to prevailing sentiment, capitalizing on opportunities arising from market overreactions and sentiment shifts. Understanding and analyzing market sentiment is essential for gauging potential market directions and identifying contrarian investment opportunities.

Example: The GameStop saga in early 2021 is a notable example of sentiment consensus. Retail investors on social media forums collectively drove up the stock price of GameStop, challenging traditional market dynamics and catching institutional investors off guard.

Volatility expectations

Volatility expectations, measured by metrics like the VIX (Volatility Index), represent a form of consensus about future market stability. Traders and investors use volatility as an indicator of market risk, and consensus around heightened volatility can lead to defensive strategies, such as increased hedging or reduced risk exposure. Understanding and interpreting volatility consensus is essential for adapting investment strategies to prevailing market conditions and risk perceptions.

Example: The COVID-19 pandemic in 2020 led to a consensus on increased market volatility. The VIX (Volatility Index) surged as investors anticipated heightened uncertainty, prompting shifts in investment strategies to account for the expected market fluctuations.

Policy Consensus

Central bank policies, government regulations, and fiscal measures contribute to policy consensus. Market participants closely monitor statements and decisions made by central banks and governments, forming expectations about interest rates, monetary policy, and regulatory changes. Any surprises in these areas can lead to market volatility.

Example: The announcement of the U.S. Federal Reserve’s quantitative easing policies during the 2008 financial crisis influenced market consensus. The expectation of increased liquidity and lower interest rates contributed to a rally in stock markets.

Technological Consensus

Technological consensus refers to the collective agreement or perception within the technology sector regarding emerging trends, innovations, or the adoption of specific technologies. Industry experts, analysts, and stakeholders contribute to this consensus through assessments of technology developments, market dynamics, and consumer behavior. Consensus within technology influences investment decisions, product development strategies, and market forecasts. Understanding technological consensus is crucial for businesses and investors seeking to navigate the rapidly evolving landscape of technology-driven industries.

Example: The rise of FAANG stocks (Facebook, Apple, Amazon, Netflix, Google) in the last decade reflects a technological consensus. Investors collectively believed in the transformative power of these technology giants, contributing to their substantial market capitalizations.

Conclusion

Market consensus, when explored through the lens of data and statistics, transforms from a theoretical concept to a tangible and actionable tool. Whether you’re an investor, a business leader, or an analyst, integrating statistical insights into your understanding of market consensus adds a layer of precision to decision-making. In the dynamic world of finance, where every percentage point matters, harnessing the power of market consensus with a data-driven approach ensures a more informed and strategic navigation of financial waters.

Why should I be interested in this post?

In essence, this article provides a holistic and data-driven perspective on market consensus, catering to the interests of investors, business professionals, and anyone seeking a nuanced understanding of how collective sentiments shape the financial landscape. Whether you’re actively involved in financial decision-making or simply intrigued by the dynamics of the market, this article offers valuable insights that bridge theory and real-world applications.

Useful resources

CNN Fear & Greed Index: What emotion is driving the market now?

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 April 2024 by Nithisha CHALLA (ESSEC Business School, Grande Ecole – Master in Management (MiM), 2021-2024).

Institutional Brokers’ Estimate System (IBES)

April 9, 2024 by Nithisha CHALLA

Institutional Brokers’ Estimate System (IBES)

In this article, Nithisha CHALLA (ESSEC Business School, Grande Ecole Program – Master in Management (MiM), 2021-2024) presents Institutional Brokers’ Estimate System (IBES), which provides market consensus for the financial community.

Introduction

In the fast-paced world of finance, the Institutional Brokers’ Estimate System, commonly known as IBES (often written as “I/B/E/S.”), stands as a linchpin in providing investors, analysts, and financial professionals with reliable forecasts and estimates.

IBES, with its roots in comprehensive data aggregation, takes center stage in providing a panoramic view of financial analysts’ estimates and forecasts. IBES acts as a centralized repository of earnings estimates, revenue projections, and other key financial metrics, serving as a vital resource for investors seeking actionable insights.

History

IBES was created in 1976 by the investment research firm, Lynch, Jones & Ryan (LJR). It was developed to address the need for a centralized system to collect and distribute earnings estimates from brokerage analysts. The database offers historical data from its inception and extends internationally from 1987. Over the years, IBES went through several ownership changes. In 1988, LJR was acquired by Primark Corporation. Primark Corporation later merged with Thomson Financial Services in 1990, and IBES became part of Thomson Financial. Thomson Financial subsequently merged with Reuters Group in 2008 to form Thomson Reuters. Thus, IBES became a part of Thomson Reuters. Then Thomson Reuters was acquired by private equity firm Blackstone Group and rebranded as Refinitiv in 2018. Refinitiv was later acquired by the London Stock Exchange Group (LSEG) in 2020. Therefore, IBES is currently owned by the London Stock Exchange Group (LSEG) through its subsidiary, Refinitiv.

Key Components of IBES

Earnings Estimates

IBES compiles earnings estimates from a multitude of financial analysts, providing a consensus view on the expected earnings of a company. As of the latest data, it aggregates forecasts from over 16,000 analysts worldwide, providing a robust consensus on expected earnings for companies across the globe.

Revenue Projections

Beyond earnings, IBES includes revenue projections, offering a comprehensive view of a company’s expected top-line growth. Analysts’ forecasts are aggregated to provide a consensus estimate, aiding investors in gauging revenue expectations.

Forecasts for Key Financial Metrics

IBES extends beyond earnings and revenue, encompassing a spectrum of financial metrics. This includes estimates for operating margins, cash flows, and other key indicators, providing a holistic view of analysts’ expectations. The sheer volume of data—covering over 18,000 companies—ensures a comprehensive snapshot of financial expectations.

Coverage

There are certain types of coverage when we are talking about data coverage such as the Number of Companies Covered, geographic Coverage, Market Capitalization Coverage, Industry Coverage, Depth of Coverage, and Historical Coverage.

According to LSEG data analytics, I/B/E/S Estimates data is displayed at the company level, screened with rigorous quality control methods across more than 23,400 active companies in more than 90 countries, and sourced from over 19,000 analysts.

Estimates Data from over 950 firms contribute data to I/B/E/S, from the largest global houses to regional and local brokers, with U.S. data back to 1976 and international data back to 1987.

Period

IBES has evolved since its introduction in 1976 and includes international data from 1987. I/B/E/S Global Aggregates, with over 30 years of history, facilitates top-down analysis to better assess potential growth and risk as well as future value across industry, sector, index, country, and region.

Frequency

Initially focusing on annual earnings estimates, the database subsequently broadened to encompass quarterly earnings forecasts.

Firms and Financial analysts

IBES covers a wide range of firms across different industries, sectors, and regions. This includes companies listed on major stock exchanges in numerous countries and markets around the world. 950+ contributors, across 90+ in developed and emerging markets, totaling over 19,000 individual analysts – the most in the industry. Unmatchable history across more than 60,000 companies back to 1976 for North America, 1987 for other markets.

Pricing

The specific pricing for accessing I/B/E/S data is not explicitly mentioned on the IBES website and you have to make a request through the LSEG website which manages IBES. The cost likely varies based on the package and offerings selected, which can include different data sets, access methods, and service frequencies. For detailed pricing information, it’s recommended to directly contact LSEG or the respective service providers you’re interested in, as they can provide more precise details based on your specific requirements and the scale of your intended use.

For academic and non-commercial research purposes, access might be available through institutional subscriptions with specific terms of use, as seen with Aalto University’s subscription financed by the Aalto University Data Hub for its users. This indicates that the availability and cost of I/B/E/S data may vary significantly based on the type of use and the access platform. For precise pricing and package options, directly contacting the service providers is the best approach.

Use of IBES by the Financial Community

Benchmark for Analysis

IBES serves as a benchmark for investors and analysts, quantifying market reactions, it dives into the numbers behind market reactions. According to Faster Capital, studies reveal that stocks experiencing positive earnings surprises, surpassing IBES estimates, tend to outperform the market. These numerical insights underscore the practical implications of aligning investment decisions with IBES consensus.

Market Expectations

Analysts and fund managers utilize IBES to gauge market expectations for specific companies. Understanding consensus estimates aids in forming investment strategies aligned with prevailing market sentiments.

Earnings Season Preparation

During earnings seasons, IBES becomes a critical tool for investors preparing for companies’ financial releases. It provides a consolidated view of analysts’ forecasts, helping investors assess potential surprises or disappointments.

IBES and Tests of Market Efficiency

Academic works

The data was subsequently used as the basis for articles in academic finance journals attempting to demonstrate that changes in consensus earnings estimates could identify opportunities to capture excess returns in subsequent periods.

Information Dissemination

IBES plays a pivotal role in disseminating timely information. As estimates are constantly updated based on new information, IBES ensures that market participants have access to the latest insights, contributing to market efficiency.

Pros and Cons

Given its history and operations in huge industries and markets, we certainly need to know the pros and cons of the IBES estimates. In terms of accuracy metrics, IBES relies on the accuracy of analysts’ forecasts. Statistical metrics, such as the mean absolute error (MAE), offer a quantitative evaluation of the system’s precision.

Conclusion

IBES, when viewed through a data-driven lens, transforms into more than a system and becomes a useful tool for decision-makers navigating the intricacies of financial markets.

Why should I be interested in this post?

In essence, this article discovers how the global data powerhouse, backed by impactful statistics, empowers investors, providing a data-driven lens into market expectations and offering actionable insights for informed decision-making in the dynamic world of finance.

Useful resources

London Stock Exchange Group (LSEG) I/B/E/S Estimates

Wikipedia Institutional Brokers’ Estimate System

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).

USD Coin: Deep Dive into the Role of Stablecoins in Modern Finance

January 15, 2025April 2, 2024 by Snehasish CHINARA

In this article, Snehasish CHINARA (ESSEC Business School, Grande Ecole Program – Master in Management, 2022-2024) explains the stable coin USD Coin.

Historical context and background

USD Coin (USDC) is a type of cryptocurrency known as a stablecoin, designed to maintain a stable value relative to the US dollar (USD). It was launched in September 2018 by Centre Consortium, a collaboration between cryptocurrency exchange Coinbase and blockchain technology company Circle. The primary goal of USDC is to provide a digital asset that can be easily transferred between users and used for transactions, while minimizing the volatility typically associated with other cryptocurrencies like Bitcoin or Ethereum.

The need for stablecoins like USDC arose due to the inherent volatility of many cryptocurrencies. While Bitcoin and other digital assets have gained significant attention and adoption, their prices can fluctuate dramatically over short periods, which can make them less practical for everyday transactions and financial contracts. Stablecoins like USDC offer a solution to this problem by pegging their value to a stable asset, such as the US dollar, thereby providing stability and predictability for users.

USDC operates on the Ethereum blockchain as an ERC-20 token, making it compatible with a wide range of decentralized applications (dApps) and enabling seamless integration with the broader cryptocurrency ecosystem. This infrastructure allows users to easily send and receive USDC tokens across various platforms and services, including exchanges, wallets, and payment processors.

Since its launch, USDC has seen significant growth in adoption and usage. It has become one of the most widely used stablecoins in the cryptocurrency market, with billions of dollars worth of USDC tokens in circulation. Its stability and liquidity have made it a popular choice for traders, investors, and businesses looking to transact in digital assets without exposure to the volatility of other cryptocurrencies.

USD Coin Logo

Source: Yahoo! Finance.

Figure 1. Key Dates in USDC History

Source: Yahoo! Finance.

Key features

Stability

USD Coin is a stablecoin, meaning it is pegged to the value of the US dollar on a 1:1 basis. This stability is maintained through regular audits and backing by reserves of US dollars held in custody by regulated financial institutions.

Transparency

USDC operates on blockchain technology, providing transparency and immutability of transactions. Every USDC token is backed by an equivalent number of US dollars held in reserve, which is regularly audited and transparently reported to ensure trust among users.

Speed and Efficiency

Transactions involving USDC can be executed quickly and efficiently on blockchain networks, enabling near-instantaneous settlement compared to traditional banking systems, which may take days for cross-border transactions.

Global Accessibility

USDC enables borderless transactions, allowing users to send and receive payments globally without the need for intermediaries such as banks. This accessibility empowers individuals and businesses, particularly in regions with limited access to traditional financial services.

Interoperability

USDC is compatible with various blockchain platforms and protocols, including Ethereum, Algorand, and Solana, among others. This interoperability facilitates its integration into a wide range of decentralized applications (DApps) and decentralized finance (DeFi) ecosystems.

Use cases

Remittances and Cross-Border Payments:

USDC provides a cost-effective and efficient solution for remittance payments and cross-border transactions, enabling individuals and businesses to transfer value across borders quickly and securely without the need for traditional banking intermediaries.

Stable Value Storage

Due to its stable value pegged to the US dollar, USDC serves as a reliable store of value and a hedge against volatility in the cryptocurrency market. Users can hold USDC as a stable asset to preserve purchasing power and mitigate the risks associated with price fluctuations in other cryptocurrencies.

Decentralized Finance (DeFi) Applications

USDC is widely used as a liquidity provider and collateral asset in various DeFi protocols and applications such as decentralized exchanges (DEXs), lending platforms, yield farming, and liquidity pools. Users can leverage USDC to earn interest, borrow assets, or participate in yield farming strategies within the DeFi ecosystem.

Commerce and Payments

Merchants and businesses can accept USDC as a form of payment for goods and services, leveraging its fast transaction settlement times and low transaction fees compared to traditional payment methods. Integrating USDC payments can streamline cross-border commerce and reduce friction associated with fiat currency conversions.

Financial Inclusion

USDC plays a crucial role in expanding financial inclusion by providing access to digital financial services for individuals and communities underserved by traditional banking infrastructure. By utilizing blockchain technology and stablecoins like USDC, individuals without access to traditional banking services can participate in the global economy and access a wide range of financial products and services.

Technology and underlying blockchain

USD Coin (USDC) operates on a blockchain-based infrastructure, primarily leveraging the Ethereum blockchain as its foundation. Utilizing Ethereum’s smart contract functionality, USDC tokens are issued, transferred, and redeemed in a transparent and trustless manner. The ERC-20 standard, a set of rules and protocols defining interactions between tokens on the Ethereum network, governs the behavior of USDC tokens, ensuring compatibility with a wide range of wallets, exchanges, and decentralized applications (DApps). Moreover, USDC employs a consortium model for governance and operation, with regulated financial institutions serving as members responsible for the issuance, custody, and redemption of USDC tokens. These institutions adhere to strict regulatory compliance measures and conduct regular audits to verify that each USDC token is fully backed by an equivalent reserve of US dollars held in custody. This combination of blockchain technology, smart contracts, and regulatory oversight ensures the integrity, transparency, and stability of USD Coin, making it a trusted and widely adopted stablecoin within the cryptocurrency ecosystem.

ERC-20 Standard of Ethereum for USD Coin

The ERC-20 standard, short for Ethereum Request for Comment 20, is a widely adopted technical specification governing the creation and implementation of fungible tokens on the Ethereum blockchain. Introduced by Fabian Vogelsteller and Vitalik Buterin in 2015, ERC-20 defines a set of rules and functions that enable seamless interoperability between different tokens, ensuring compatibility with various decentralized applications (DApps) and wallets. Tokens adhering to the ERC-20 standard are characterized by a consistent set of methods, including transfer, balance inquiry, and approval mechanisms, facilitating easy integration and widespread adoption across the Ethereum ecosystem. This standardization has played a pivotal role in the proliferation of tokenization, empowering developers to create diverse tokenized assets, conduct crowdfunding campaigns through Initial Coin Offerings (ICOs), and establish decentralized exchanges (DEXs) where ERC-20 tokens are traded autonomously. Additionally, ERC-20 compliance enhances security and interoperability, fostering trust and usability within the Ethereum network.

Supply of coins

The supply dynamics of USD Coin (USDC) are governed by its underlying smart contract protocol and the management of its issuer, Centre Consortium, a collaboration between Circle and Coinbase. USDC operates on a principle of full backing, where each USDC token issued is backed by an equivalent number of US dollars held in reserve. This backing ensures a 1:1 peg to the US dollar, maintaining its stability. The issuance and redemption of USDC are facilitated through regulated financial institutions that hold the corresponding fiat reserves. Moreover, USDC’s supply is transparently audited on a regular basis, with attestations provided by reputable auditing firms to verify the adequacy of reserves. Through these mechanisms, the supply of USDC remains elastic, expanding or contracting based on market demand while preserving its stability and trustworthiness as a stablecoin in the digital asset ecosystem.

Historical data for USDC

How to get the data?

The USDC is popular cryptocurrency on the market, and historical data for the USDC such as prices and volume traded can be easily downloaded from the internet sources such as Yahoo! Finance, Blockchain.com & CoinMarketCap. For example, you can download data for USDC on Yahoo! Finance (the Yahoo! code for USD Coin is USDC-USD).

Figure 2. USD Coin data

Source: Yahoo! Finance.

Historical data for the USD Coin market prices

The historical market price of USD Coin (USDC) has remained relatively stable, as its primary function is to maintain a value pegged to the US dollar at a 1:1 ratio. Since its inception, USDC has consistently traded around the $1 mark, with minor fluctuations typically attributed to market dynamics and liquidity conditions. Investors and traders often utilize USDC as a safe haven asset or a means of temporarily exiting volatile cryptocurrency markets, contributing to its stability. This stability has made USDC a preferred choice for individuals and institutions seeking to hedge against cryptocurrency volatility or facilitate seamless transitions between digital and fiat currencies. Additionally, the transparent backing of USDC by reserves of US dollars held in custody by regulated financial institutions further enhances market confidence and contributes to its stable market price over time.The historical market price of USD Coin (USDC) has remained relatively stable, as its primary function is to maintain a value pegged to the US dollar at a 1:1 ratio. Since its inception, USDC has consistently traded around the $1 mark, with minor fluctuations typically attributed to market dynamics and liquidity conditions. Investors and traders often utilize USDC as a safe haven asset or a means of temporarily exiting volatile cryptocurrency markets, contributing to its stability. This stability has made USDC a preferred choice for individuals and institutions seeking to hedge against cryptocurrency volatility or facilitate seamless transitions between digital and fiat currencies. Additionally, the transparent backing of USDC by reserves of US dollars held in custody by regulated financial institutions further enhances market confidence and contributes to its stable market price over time.

Figure 3 below represents the evolution of the price of USD Coin in US dollar over the period Oct 2018 – Dec 2022. The price corresponds to the “closing” price (observed at 10:00 PM CET at the end of the month).

Figure 3. Evolution of the USD Coin price

Source: Yahoo! Finance.

R program

The R program below written by Shengyu ZHENG allows you to download the data from Yahoo! Finance website and to compute summary statistics and risk measures about the USD Coin.

Data file

The R program that you can download above allows you to download the data for the USD Coin from the Yahoo! Finance website. The database starts on Oct, 2018. Table 1 below represents the top of the data file for the USD Coin downloaded from the Yahoo! Finance website with the R program.

Table 1. Top of the data file for the USD Coin

Source: computation by the author (data: Yahoo! Finance website).

Python code

You can download the Python code used to download the data from Yahoo! Finance.

Python script to download USD Coin historical data and save it to an Excel sheet::

import yfinance as yf

import pandas as pd

# Define the ticker symbol for USD Coin

usdc_ticker = “USDC-USD”

# Define the date range for historical data

start_date = “2020-01-01”

end_date = “2022-01-01”

# Download historical data using yfinance

usdc_data = yf.download(usdc_ticker, start=start_date, end=end_date)

# Create a Pandas DataFrame from the downloaded data

usdc_df = pd.DataFrame(usdc_data)

# Define the Excel file path

excel_file_path = “USDC_historical_data.xlsx”

# Save the data to an Excel sheet

usdc_df.to_excel(excel_file_path, sheet_name=”USDC Historical Data”)

print(f”Data saved to {excel_file_path}”)

# Make sure you have the required libraries installed and adjust the “start_date” and “end_date” variables to the desired date range for the historical data you want to download.

Evolution of the USD Coin

Figure 4 below gives the evolution of the USDC on a daily basis.

Figure 4. Evolution of the USD Coin.

Source: computation by the author (data: Yahoo! Finance website).

Figure 5 below gives the evolution of the USD Coin returns from Oct, 2018 to December 31, 2022 on a daily basis.

Figure 5. Evolution of the USD Coin returns

Source: computation by the author (data: Yahoo! Finance website).

Summary statistics for the USD Coin

The R program that you can download above also allows you to compute summary statistics about the returns of the USD Coin. Table 2 below presents the following summary statistics estimated for the USD Coin:

The mean

The standard deviation (the squared root of the variance)

The skewness

The kurtosis.

The mean, the standard deviation / variance, the skewness, and the kurtosis refer to the first, second, third and fourth moments of statistical distribution of returns respectively.

Table 2. Summary statistics for USDC.

Source: computation by the author (data: Yahoo! Finance website).

Statistical distribution of the USD Coin returns

Historical distribution

Figure 6 represents the historical distribution of the USD Coin daily returns for the period from Oct, 2018 to December 31, 2022.

Figure 6. Historical USDC distribution of the returns.

Source: computation by the author (data: Yahoo! Finance website).

Gaussian distribution

The Gaussian distribution (also called the normal distribution) is a parametric distribution with two parameters: the mean and the standard deviation of returns. We estimated these two parameters over the period from October, 2018 to December 31, 2022.

Figure 7 below represents the Gaussian distribution of the USD Coin daily returns with parameters estimated over the period from October, 2018 to December, 2022.

Figure 7. Gaussian distribution of the USDC returns.

Source: computation by the author (data: Yahoo! Finance website).

Risk measures of the USD Coin returns

The R program that you can download above also allows you to compute risk measures about the returns of the USD Coin.

Table 3 below presents the following risk measures estimated for the USD Coin:

The long-term volatility (the unconditional standard deviation estimated over the entire period)

The short-term volatility (the standard deviation estimated over the last three months)

The Value at Risk (VaR) for the left tail (the 5% quantile of the historical distribution)

The Value at Risk (VaR) for the right tail (the 95% quantile of the historical distribution)

The Expected Shortfall (ES) for the left tail (the average loss over the 5% quantile of the historical distribution)

The Expected Shortfall (ES) for the right tail (the average loss over the 95% quantile of the historical distribution)

The Stress Value (SV) for the left tail (the 1% quantile of the tail distribution estimated with a Generalized Pareto distribution)

The Stress Value (SV) for the right tail (the 99% quantile of the tail distribution estimated with a Generalized Pareto distribution)

Table 3. Risk measures for the USDC.

Source: computation by the author (data: Yahoo! Finance website).

The volatility is a global measure of risk as it considers all the returns. The Value at Risk (VaR), Expected Shortfall (ES) and Stress Value (SV) are local measures of risk as they focus on the tails of the distribution. The study of the left tail is relevant for an investor holding a long position in the XRP while the study of the right tail is relevant for an investor holding a short position in the XRP.

Why should I be interested in this post?

The post offers an opportunity for both newcomers and seasoned cryptocurrency enthusiasts to delve into the concept of stablecoins, gaining insights into how digital assets maintain stability amidst market volatility. Furthermore, the post highlights USDC’s role in fostering financial inclusion by enabling borderless transactions, appealing to readers passionate about democratizing finance. Additionally, exploring USDC’s significance in the burgeoning realm of decentralized finance (DeFi) could intrigue those interested in innovative financial technologies and investment opportunities. Examining USDC’s historical performance and market dynamics can offer valuable insights for investors and traders, while shedding light on its compliance measures and regulatory landscape can address concerns regarding legal risks, contributing to readers’ understanding and confidence in this digital asset.

Useful resources

Academic research about risk

Longin F. (2000) From VaR to stress testing: the extreme value approach Journal of Banking and Finance, N°24, pp 1097-1130.

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

Data

Yahoo! Finance

Yahoo! Finance Historical data for USDC

CoinMarketCap Historical data for USDC

About the author

The article was written in March 2024 by Snehasish CHINARA (ESSEC Business School, Grande Ecole Program – Master in Management, 2022-2024).

Private Banks : Treasuries Departments and proprietary asset allocation

April 1, 2024 by Quentin CHUZET

Private Banks : Treasuries Departments and proprietary asset allocation

In this article, Quentin CHUZET (ESSEC Business School, Global Bachelor in Business Administration (GBBA), 2019-2023) explains about Private banks Treasuries Departments and the challenges of proprietary asset allocation.

Introduction

Within the Treasury Department of a Private Bank, the role of its employees is to record incoming and outgoing cash flows, as well as to direct the allocation of assets that comprise its Treasury. Thus, on one hand, we find the amount of cash on the asset side, and on the other hand, on the liability side, the amount of client deposits. In other words, it can be said that the Treasury is primarily constituted by the various deposits made by clients.

These are grouped into 2 categories: sight deposits (money visible in the client’s bank account, available and usable at any time) and term deposits (money placed generally in interest-bearing accounts but only available once the placement has matured).

Private Bank balance sheet

Source: La Finance Pour Tous

To address performance and revenue challenges, the Treasury department manages cash by investing it in interest-bearing products, aiming to generate significant margins. This activity, performed by the Middle and Front Office teams, is referred to as proprietary trading or prop asset allocation.

Before the 2008 financial crisis, the regulatory environment was less stringent, granting banks greater freedom in risk management. However, the crisis highlighted the dangers of this approach, leading to a significant strengthening of regulations.

In 2013, Basel III introduced one of the most important regulatory agreements in banking. It aims to enhance the resilience of banks by increasing their capital and liquidity requirements. Basel III notably introduced a short-term liquidity ratio (LCR) and a long-term liquidity ratio (NSFR).

Regarding liquidity, private banks must now hold sufficient liquid assets to withstand mass deposit withdrawals. They must also comply with a liquidity coverage ratio (LCR), requiring them to have enough high-quality liquid assets to cover their net cash outflows over a 30-day period.

In terms of solvency, private banks must now comply with a capital adequacy ratio (Cooke ratio), requiring them to have sufficient capital to absorb potential losses. Basel III also introduced a leverage ratio, limiting banks’ leverage.

To ensure compliance with these new regulatory frameworks while continuing to maximize revenue, banks have implemented treasury policies and control ratios to define limits and mitigate risks. These treasury policies, spanning multiple pages, guide Front Office teams in asset allocation to maintain the most efficient risk/return ratio possible. It is important to note that each bank has its own risk level, hence treasury policies and their respective limits may vary from one bank to another.

In general, a bank tends to favor a very low-risk level by prioritizing assets that can be quickly liquidated while limiting exposure to interest rate fluctuations or certain sectors. In the risk management process, liquidity and solvency ratios are monitored, as well as ratios related to interest rate risk and non-systematic risk.

Treasury Policy

These Treasury policies, spanning multiple pages, guide Front Office teams in asset allocation to maintain the most efficient risk/return ratio possible. It is important to note that each Bank possesses a risk level unique to itself, which is why Treasury Policies and their constituent limits may vary from one to another.

Thus, this document is divided into several limits and control ratios aimed at protecting against incurred risks. Among the main ratios present in the Treasury Policies, we find:

Liquidity and solvability ratios

Among liquidity and solvability ratios, controls are placed on the recovery time of securities held by the Treasury, with constraints notably regarding recoverable assets within 2 days and those recoverable within 30 days. Through these ratios, the average lifespan of the portfolio is controlled as well as the maximum duration of the securities, as well as the portion of assets placed with the Central Bank, ensuring a high rate of return in periods of high rates and near-immediate liquidity, as it is possible to recover from one day to the next.

These ratios aim to protect against the greatest risk a bank may face: that of illiquidity. This risk is heightened during crises and when clients wish to make massive withdrawals. The bank must thus ensure that all liquidity can be returned.

Security portfolio allocation’s ratios

Through these ratios, the Bank adheres to exposure limits by sector, industry, or company outlined in the Treasury policy: the leverage ratio is a significant indicator. This allows for diversification of allocations and investments and thus frees from specific risk. There are also control ratios based on Moody’s, S&P, and Fitch ratings or ESG ratings.

Finally, there are also ratios aimed at calculating the share represented by each asset class. It should be noted that each asset class represents what is called a “position” in the Treasury Sheet. In other words, each different class represents a different line. Among these lines are placements in the Money Market (Bond Portfolio, NEUCP Portfolio, placements in OPC funds), term interbank loans, currency and rate SWAPs, etc.

Sensitivity ratios

Through these ratios, the Treasury department controls the sensitivity to rates faced by Treasury assets. The Treasury Policy indicates threshold limits that should not be exceeded to ensure optimal rate adjustments, in the event of both increases and decreases.

Risk Management and Asset Allocation

Managing liquidity and solvability risk

To manage liquidity risk as effectively as possible, Private Banks can consider various strategies:

Purchase securities eligible for ECB refinancing
Maintain a high proportion of assets placed at the Central Bank on a daily basis (as they are highly liquid and yield interest at times of high interest rates).
Maintain a short maturity of the security portfolio and short-term deposits.

Interest-rate risk management

Interest-rate risk is a major issue for Private Banks, since a change in interest rates would have a major impact on the yield and price of bond holdings. The sensitivity of an asset represents the length of time during which it cannot be subjected to a variation in its interest rate. Thus, depending on the prevailing trend surrounding interest rate movements, Treasury Traders must invest to maintain a balanced sensitivity ratio. For example, in a scenario where the market strongly expects a future rate decrease, a strategy aimed at maximizing the adjustment period to the rate and thus the sensitivity ratio may be the best option. Conversely, in a scenario where the market anticipates a significant rate hike in the upcoming period, reducing the adjustment period to the rate for the portfolio would allow a quick re-indexing to a higher rate and reduce the time during which those assets would be “under-earning”.

Specific risk and diversification

A specific risk is linked to a particular event, affecting a single company, a sector of activity or a specific financial instrument. It differs from systemic risk, which affects the entire financial system. To reduce this risk, diversification is a key element, which is why a Private Bank can specify limits by sector or asset class in its Treasury Policy.

Therefore, the Treasury department of the Bank and its Front Office teams can allocate their assets to government bonds, as well as to corporate bonds in sectors such as retail, energy, or Real Estate.

Conclusion

In conclusion, the challenges of asset allocation within the Treasury of private banks are manifold. Guided by Treasury Policies, limits, and control ratios, it must adapt to the emergence of a new regulatory environment to define low-risk, high-liquidity investment strategies while addressing performance and revenue maximization objectives. Furthermore, proprietary asset allocation drives private banks to enhance their internal resources and develop tailored management tools.

Why should I be interested in this post?

If you’re interested in proprietary asset management, or in the workings of a treasury department within a private bank, you’ll find a first overview of these topics in this article.

If you have any questions about the position or the sector, please don’t hesitate to contact me on my personal Linkedin page, I’ll be delighted to answer them.