Capital Markets and Private Equity

After a market is analyzed from a “top-down” perspective—with growth, inflation, fiscal and monetary policy, and structural reform in the mix—a deeper dive into stock or bond market carries distinct quantitative and qualitative dimensions. Investors have currency exposure in local markets and international stocks and bonds. Equity and debt investors look at headline size and liquidity in a first cut. Local bond markets are scrutinized for the range of government and corporate offerings, length of maturities, and yield curve. Stock exchange assessments will turn to “microstructure” aspects like turnover and P/E ratios, market makers, and free float. Investors also weigh background factors including ease of entry, taxes, the legal/regulatory environment, and corporate governance. Stock investor styles are active pickers, passive index, and a hybrid combination. Bond investors may specialize in a cross section of local instruments including government, municipal, and corporate or focus on hard currency-denominated sovereign or corporate bonds. Numerous indices track stock, bond, and currency performance, the best known are from MSCI and JP Morgan. Global and domestic ratings agencies provide guidance for bond creditworthiness as a standard reference that sophisticated institutions are typically legally bound to apply in overall examination. They answer the basic question of capacity and willingness to pay, but at times of crisis they are often behind the curve in lowering ratings. Private equity investments are directed to illiquid, unlisted on exchange companies, and investors commit to a long holding period, generally 3–7 years. Exit strategies can include a public offering, a mergers and acquisition deal with a domestic or international company or the fund can sell its stake back to the original owner or employees. Public equity fund managers have diversified into the strategy, and private debt is a burgeoning asset class. In the modern era, the World Bank’s IFC also jump started the field with stakes in pioneer funds and professional body formation.