According to the 2007 Global Venture Capital (VC) Survey, released on July 12, and sponsored by Deloitte & Touche LLP in cooperation with the National Venture Capital Association (NVCA): the percentage of U.S. venture capitalists investing globally lower than expected.
“Rather, U.S. VCs are investing cautiously in countries such as Canada, China, India and Israel. VCs say they prefer to play globally by investing in domestic companies with significant operations offshore vs. directly investing in foreign entities…“U.S.-based VCs are essentially dabbling in global markets, with the majority of U.S. VC respondents indicating that less than 5 percent of their capital is invested overseas, generally in less than three deals per fund,” said Mark Jensen, national managing partner of Deloitte’s Venture Capital Services. “VCs are making the majority of their foreign investments in areas with higher quality deal flow, entrepreneurial environments and access to foreign markets, as well as places where they have experience and thus greater comfort levels.”
Among the findings:
*Direct Global Investment Strategies Adopted by Minority of U.S. VCs
*Canada, China, India and Israel and Top Global Targets for U.S. VCs
*Global Investment Concerns Shrinking, but Still Prevalent
*Local Presence Key to Successful Overseas VC Investment; VCs Focusing Investment *Limited Partners Expanding Globally
*U.S. Regulatory Pressures Threaten Continued Leadership
The Black Swan and highly disruptive events
July 30, 2007
Wall Street Journal reporter Scott Patterson, in a July 13 article “Mr. Volatility and the Swan,” profiles Nassim Nicholas Taleb, with his book “The Black Swan: The Impact of the Highly Improbable” and his new investment fund, Universa Investments LP:
“Mr. Taleb believes most investors underestimate the likelihood of seeing a black swan — which he defines as extreme, highly disruptive events that send shockwaves through financial markets — and that there are huge profits to be made in such conditions. (The title alludes to the belief in the West, widely held until European explorers discovered the black swans that are native to Australia, that all swans are white. To call something a black swan was to imply it didn’t exist.)” “In it he argues that most investors don’t properly understand the risks they are taking and overlook ways to survive a steep market decline. Many investors plan for rainy days, he says, but not for tornadoes. In part that is because the use of common measures of risk on Wall Street trick investors into thinking the past is predictive, he says. In particular he cites reliance on the bell curve — a chart plotting the distribution of data like stock prices or the heights of all people in a room. In normal distribution, the chart resembles a bell, with rare events being plotted at the bottom edge of the bell. His black swan events, however, fall so far on the outer edges of the bell that investors underestimate the odds that such events will occur. Thus, bets on market-rattling events can be made on the cheap.”
“The biggest risk is in not understanding it”
A creative play on the “risk” theme from UBS Global Asset Management, connecting risk management across country, currency, industry, sector and security. “Some perceive risk as a problem. But at UBS Global Asset Management, we see it as the first step to delivering fresh, leading-edge investment solutions. It’s why we have an extensive network of risk management specialists collaborating around the world. The insights they provide help us assess and manage risk across asset classes at every level: country, currency; industry, sector and security. This integrated global view helps us meet your risk/return objectives.”
Definition of Systemic Financial Risk
July 26, 2007
Textbook definition of Systemic Financial Risk, taken from: “The Group of Ten: Report on Consolidation in the Financial Sector”:
“Systemic financial risk is the risk that an event will trigger a loss of economic value or confidence in, and attendant increases of uncertainty about, a substantial portion of the financial system that is serious enough to quite probably have significant adverse effects on the real economy. Systemic risk events can be sudden and unexpected, or the likelihood of their occurrence can build up over time in the absence of appropriate policy responses. The adverse real economic effects from systemic problems are generally seen as arising from disruptions to payment systems, to credit flows, and from the disruption of asset values.”
Moody’s: Market turbulance and systemic risk
July 26, 2007
Moody’s: Market turbulance and systemic risk. In a report issued by Moody’s Investors Service: “Another False Alarm in Terms of Banking Systemic Risk but a Reality Check”: financial market commotion exaggerating risks but forcing important reality check; shock-absorption capacity of financial system in focus; sub-prime troubles not systemic in intensity.
Some observations by Pierre Cailleteau, Moody’s chief international policy analyst:
“In addition, in the current macro-economic and financial environment characterised by ample liquidity, there continue to be marginal risk-takers ready to pick up assets at adjusted prices. As such, the current episode does not seem to raise genuine systemic risk concerns, with Moody’s core bank ratings displaying a high degree of resilience in this regard.”
Second, and more generally, the combination of a significant wave of financial innovation with a relaxation of risk management/underwriting standards has proved to be a dangerous cocktail. “A normalisation in risk appetites will help, but the cautionary tale is that many of the observed deficiencies are likely to be enduring features of our environment — such as the inability to track risk accurately and predict risk crystallisation at times of stress, the recurrent lapses of market depth and the challenges of valuing highly customised products,” Mr Cailleteau says. “This, with hindsight, is the lasting lesson of LTCM.”
“In an environment where insecurity is unlikely to disappear, the existence of capital cushions and strong liquidity management at financial institutions is critical. Banks and regulators should not lower their guard.”
About Moody’s Investor Service: Moody’s Investors Service is among the world’s most respected and widely utilized sources for credit ratings, research and risk analysis. Moody’s commitment and expertise contribute to stable, transparent and integrated financial markets, protecting the integrity of credit. In addition to our core ratings business, Moody’s provides research data and analytic tools for assessing credit risk, and publishes market-leading credit opinions, deal research and commentary, serving more than 9,300 customer accounts at some 2,400 institutions around the globe.
What risk managers have learned since the shock of 1998?
July 26, 2007
Michael Gordon, Chief Investment Officer at Fidelity International, writes in a recent FT article: “Market insight: What risk managers have learnt since the shock of 1998”
Some questions: Does the collapse of confidence in the US subprime market have any similarities to the collapse of Long-Term Capital Management in September 1998? Have product innovation and industry consolidation helped create greater resilience across the financial system?
Part of the answer: “The subprime woes look a good candidate for the party-pooper, but if history teaches us anything it is that the biggest threats to markets are rarely the obvious ones.”
“Strategic Risk Taking: A Framework for Risk Management”
July 26, 2007
Strategic Risk Taking: A Framework for Risk Management
By Aswath Damodaran, Professor of Finance at NYU’s Stern School of Business:
“In business and investing, risk has traditionally been viewed negatively: investors and companies can lose money due to risk and therefore we typically penalize companies for taking risks. That’s why most books on risk management focus strictly on hedging or mitigating risk…But the enterprise’s relationship with risk should be far more nuanced. Great companies become great because they seek out and exploit intelligent risks, not because they avoid all risk. Strategic Risk Taking: A Framework for Risk Management is the first book to take this broader view, encompassing both risk hedging at one end of the spectrum and strategic risk taking on the other….World-renowned financial pioneer Aswath Damodaran–one of BusinessWeek’s top 12 business school professors–is singularly well positioned to take this strategic view. Here, Damodaran helps you separate good risk (opportunities) from bad risk (threats), showing how to utilize the former while protecting yourself against the latter. He introduces powerful financial tools for evaluating risk, and demonstrates how to draw on other disciplines to make these tools even more effective.”
Parrett and Deloitte: “The Sentinel CEO: Perspectives on Security, Risk, and Leadership in a Post-9/11 World”
July 8, 2007
“The Sentinel CEO: Perspectives on Security, Risk, and Leadership in a Post-9/11 World”
William G. Parrett is the former chief executive officer of Deloitte Touche Tohmatsu.
From the Inside Flap: “Terrorism is hardly a contemporary phenomenon. But it is ever present today, and its manifestations more diverse than ever before. U.S. companies conducting business abroad have an obligation to their stakeholders to be more attuned to local customs and standards if they expect to be effective—and to mitigate risk—in the global business arena. The Sentinel CEO shares the insights of various CEOs on changes they have adopted to sustain their leadership while providing security to their employees and companies in turbulent times. For many corporations, a new and increased focus on security has become an indisputable necessity in order to compete globally. Day-to-day operations now incorporate more security personnel, more frequent communication with employees, and more security briefings for people traveling abroad.
In this candid book, author William Parrett—CEO of Deloitte Touche Tohmatsu—draws on interviews with America’s leading CEOs, security experts, public officials, and academics to explore the subtle and profound ways American businesses have changed since 9/11, with special attention to issues of risk in a global environment. Underscoring how core values can help companies address and recover from unforeseen threats, The Sentinel CEO examines a variety of risks facing business of all sizes that operate in a global environment, including the implications of China and India’s increasing economic might, growing anti-American sentiments abroad, pandemics such as the avian flu, and the impact of tougher immigration laws on the talent pool in the United States.
Examining our post-9/11 world from the perspective of senior executives, William Parrett delves deep within today’s leading corporations to discover: 1. The kinds of new strategic decisions they are making 2. Who they are relying on to identify threats, assess security, and protect their company’s human and physical assets 3. What their take is on the new challenges the global war on terror is creating for today’s business leaders 4. If U.S. business can continue to prosper abroad against the backdrop of highly confrontational foreign policy 5. Whether U.S. business leadership is sustainable, given immigration and education concerns, or if China and India will take the lead 6. Rich with personal insights, The Sentinel CEO helps today’s corporate executives anticipate and confront unexpected risks so they can remain leaders in the global market.”
“IBM’s Global Innovation Outlook: a worldwide conversation about innovation that matters”
In 2007, the GIO will focus on three new areas that represent trillions of dollars in economic activity, have far-reaching societal impact and are ripe for innovation:
1. Media and Content — the challenges every organization and individual faces resulting from the changing nature of content creation, distribution and ownership;
2. Africa — investment strategies and policy implications as the African continent more fully enters the global economy;
3. Society and Security — balancing societal and individual interests in the areas of personal, commercial and national security.
From The Global Innovation Outlook’s blog: “The GIO, as it is affectionately known, is essentially a global series of open and candid discussions –- called “deep dives” — with business leaders, academics, politicians, non-profit groups, and other influential types that have the knowledge and ability to affect change through innovation.”
On June 21, Oracle announced the availability of Oracle(R) Governance, Risk, and Compliance (Oracle GRC) for Financial Services, an industry-first initiative to comprehensively address key GRC issues specific to the financial services industry, which includes banking, insurance and capital markets.
“The increasingly complex risk and compliance environment requires financial services executives to make decisions based on real-time views of enterprise-wide data,” said Rajesh Hukku, Senior Vice President and General Manager, Oracle Financial Services Global Business Unit and Chairman of i-flex solutions. Oracle’s Governance, Risk, and Compliance solution for Financial Services provides chief compliance, risk and information officers with a holistic view of their governance.”
Oracle GRC for Financial Services helps financial institutions gauge the effectiveness of governance policies, manage enterprise risk and future-proof compliance spend across Basel II/IA (risk-based capital); MiFID (Markets in Financial Instruments Directive, the EU Commission’s financial services action plan for investment services across the 30 member states of the European Economic Area); RegNMS (Regulation National Market System): SEC initiative and trade-through rule that will make best price and fast quotations a requirement for U.S. equities trading; Solvency II: improves and streamline European insurance regulation; Gramm Leach Bliley Act (GLBA): Financial Services Modernization Act of 1999, provides limited privacy protections against the sale of private financial information; PATRIOT Act, deters and punishes terrorist acts in the United States and around the world by enhancing law enforcement investigatory tools; and the Anti-Money Laundering (AML).
Sarbanes-Oxley Act, signed into law in September of 2002, led governments and regulators to revisit existing standards and create new rules on internal controls over financial reporting stateside and around the world. The Sarbanes-Oxley Act changed the management, oversight, and compliance responsibilities of CEOs, CFOs, auditors and corporate boards. It has created a new era of accountability to which other sectors and countries have converged.
Oracle now delivers the industry’s most comprehensive offering to manage strategic, financial, technology and operational risk across the enterprise regardless of compliance mandate.
For example, the suite includes support for international financial regulations including: OMB A-123 in the U.S; Multilateral Instrument 52-109 in Canada; and the Turnbull Report in the U.K.
Risk Ventures 