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The paradox of government thrift Why Capitol Hill should stop worrying about debt

Third Issue Autumn 2013 Public choice Valuation multiples China’s property risk Careers in Bain


Editor Amaar Malik

"I wish I could tell you it would be finished before we'd get to the debt ceiling. Sorry, it doesn't work that way," – John Boehner Photo: US Congress

Writers Amaar Malik An Hu Henrik Mohr Nordviste Kjetil Stiansen Vidar Lyngvær

M ACRO The paradox of government thrift  Public choice 

Layout & graphics Lasse André Lyngaas ONLINE Publisher Equilibrium Magazine FLI c/o Økonomisk institutt Postboks 1095 Blindern 0317 Oslo Cover photo - Noclip [ 2 ] 

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FINANCE Interview: Erik Landgraff, portfolio manager, Skagen  Valuation multiples 

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Car eers Bain & Company 


Introducing our third issue I take great pleasure in introducing the third issue of Equilibrium Magazine on behalf of our editorial staff. We are currently distributing at nine universities and colleges in Norway and have successfully attracted more than a thousand readers from thirteen countries on four continents. Our main goal has always been to offer academic insights in economic and finance with an international perspective. Bearing in mind our goals, we have carried out an in-depth analysis of the debt ceiling debate in the US as well as academically analysing commonly used valuation multiples in corporate finance. We have also had the opportunity to interview the portfolio manager of Skagen’s Kon-Tiki mutual fund and discuss their value based investment philosophy. Further, our international experience part includes a rigorous analysis of the current situation of China’s property and emerging risk. Ultimately, in our careers section, we have carried out an interview with the management consultancy firm Bain & Company. Thus, this is the most internationally oriented and practically adapted issue to date.

We hope to, once again, equip students with the academic insight and the tools to understand the current economic and financial environment. In an environment that is characterised by huge political upheaval, as well as uncertainty and extensive risk aversion in the financial markets, we hope to play the vital role of triggering an important debate among students on these vital topics.


Amaar Malik, Editor-in-Chief Economics, University of Oslo

We are currently distributing at nine universities and colleges in Norway and have successfully attracted more than a thousand readers from thirteen countries on four continents.


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The paradox of government thrift ✎ Kjetil Stiansen

"I wish I could tell you it was going to be something which the website usdebtclock. pretty and polite, and it would all be finished org does beautifully, US federal debt now a month before we'd ever get to the debt ceil- amounts to over 106 percent of GDP or over ing. Sorry, it just doesn't work that way," 53 000 dollars pr citizen. These kinds of – Speaker of the House John numbers have been used by pundits and Boenher (Idaho Statesman) lawmakers in Washington to argue for deficit reduction, and “reforms” (i.e. cuts) The quote above refers to the upcoming to government programs. Despite massive debate over the debt ceiling in the United unemployment and record low yields on US States, which, sometime in October, will government bonds, debt has for a long time have to be raised once again to allow the been at the centre of the economic debate United States to meet their financial obligations. It reflects the bitterness and high stakes that have characterised the debate over sovereign debt in later years, both in the US and in Europe. Alarmed by the prospect of a Greek or Spanish style debt crisis, lawmakers from Paris to Washington have turned their eyes on the bulging deficits of their countries, intent avoiding the wrath of international financial markets. However, the United States does not have a debt problem; in fact the obsession with debt is causing more problems than debt itself. Debt, Debt Everywhere Looking at the raw numbers, American debt levels may indeed seem intimidating. At nearly 17 trillion dollars and counting, [ 4 ] 

The United States does not have a debt problem; in fact the obsession with debt is causing more problems than debt itself.

in Washington. Tensions over the level of government debt have peaked around the debates over the so called debt ceiling, the limit congress has set on how high US federal debt may become. The US is not the only country in which government debt has taken centre stage in the political debate. Frightened by the sovereign debt crisis in Europe’s periphery, the Conservative/Liberal Democrat government in Britain put deficit reduction at the centre of their economic policy following their 2010 election victory. As a result, hard fiscal austerity has been practiced to reduce government expenditures in an attempt to reduce the deficit. Despite high debt levels in both Britain and the US, yields on government bonds have reached historic lows in recent years. This stands in stark contrast to the experience in the debt plagued countries of the European periphery, where yields on government bonds have reached unsustainable levels, forcing them to implement harsh austerity measures, often as a prerequisite for financial aid. As such, unlike in the European periphery the austerity imposed both in Britain and the US, where public sector employment has shrunk considerably, has been largely voluntary.

Mr. Cameron’s magic money tree, the Bank of England.

Photo: Katie Chan

Money Grows on Trees are denominated in pounds: in the worst caused by too high sovereign debt, the The main difference between the coun- case scenario, the Bank of England could question asked in London, Washington tries in the European periphery and coun- simply print more pounds and pay credi- and elsewhere has been: could this haptries like the US and Britain is that the lat- tors back with this newly created money. pen to us? New York Times columnist ter borrow in their own currency. British Spain, Greece and the other peripheral and Nobel laureate Paul Krugman takes Prime Minister David Cameron declared European economies lack this lender of last on this question in the article The Simple in March this year that “It’s as if they think resort, as the European Central Bank has Analytics of Invisible Bond Vigilantes: For there is some magic money tree, and let me only reluctantly and infrequently played countries that borrow in their own currentell you a plain truth: there isn’t.” In this, this role. As a result, increased uncertainty cies, such as the US, Britain or Japan the anMr. Cameron is wrong. There is a magic regarding the sustainability of government swer is no. money tree, and in Britain it is called the debt in these countries has pushed up sovThe devastation in the euro-zone stems Bank of England. The Bank of England ereign debt yields, which in turn has made largely from the fact that the troubled pemay print as many British pounds as it the debt unsustainable, forcing yields ripheral countries have their debts denomdeems appropriate, and as such there is higher in a vicious circle. inated in Euros. This basically amounts no danger of Britain actually running out to having large amounts of debts denomof money. This further means that Britain Greek Mythology inated in a foreign currency, with a fixed will always be able to pay its debts, as these Seeing the devastation in the euro-zone exchange rate. Under a fixed exchange 1)


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The devastation in the euro-zone stems largely from the fact that the troubled peripheral countries have their debts denominated in euros. rate regime, or in this case with a shared the dollar, not an increase in domestic incurrency, the domestic interest rate will terest rates, meaning that any panic over be the risk free international rate plus US government debt would actually be exsome risk premium, reflecting the risk pansionary. Countries that borrow in their of owning for example Spanish or Greek own currencies do not suffer Greek style bonds. When this risk premium rises, the debt crises. domestic interest rate rises, depressing demand. This has been the case in Spain: Does Debt Hurt Growth? financial markets have lost confidence in In 2010 Jean Claude Trichet, then presthe sustainability of Spanish government ident of the European Central Bank (ECB) debt, pushing yields on government bonds declared that “It is an error to think that higher, resulting in increased domestic in- fiscal austerity is a threat to growth and terest rates. job creation. At present, a major problem is If financial markets were to start selling the lack of confidence on the part of houseoff large amounts of US debt, the effects for holds, firms, savers and investors who feel the US economy would be quite different that fiscal policies are not sound and susfrom those experienced in Spain. Again tainable”. In essence he called for austerity, the main difference is that the US borrows i.e. cuts to government expenditure, as a in its own currency. The US domestic in- means for bringing Europe back to growth. terest rate is set by the Federal Reserve, This doctrine of expansionary austerity has and thus US domestic interest rates would rested on the idea that high and growing be unchanged. Instead, the dollar would government debt undermines confidence, depreciate. Essentially, selling off large making firms and consumers unwilling amounts of dollar denominated assets is to spend today, slowing down economic selling dollars, weakening the dollar for growth. If high government debt levels unchanged interest rates. A weakened dol- hurt economic growth, shouldn’t we relar will in turn be expansionary for the US double efforts to reduce government debt? economy, boosting exports and decreasing Far from creating growth, the expanimports. Furthermore; when the dollar sionary austerity doctrine has failed misweakens, assets in other countries’ cur- erably. Austerity has predictably failed to rencies held by Americans become more produce growth in Europe, and has instead worth in dollars terms. As such US income wrecked enormous damage by further from foreign currency denominated assets depressing demand in already depressed will increase. The main point however is economies. The fact is that low demand, that a loss of confidence in US dollar de- not government debt is causing the curnominated assets causes a depreciation of rent economic problems. Low demand in [ 6 ] 

turn leads to depressed tax income and increased welfare payments, weakening the government budget balance. Cutting government expenditures in such an environment only serves to depress the economy further, especially since consumers and firms are cash constrained, and interest rates already at near zero, which means that multipliers are especially large. Low growth causes high government debt, not the other way around. Borrower of Last Resort Just like countries that borrow in their own currencies benefit from having a lender of last resort, their governments should in times like these take on the role as borrower of last resort. Debt is indeed a problem in most of the developed world. But it is private debt, not public debt that is causing current woes. After a long period of rapid credit expansion, both the US and Europe are having their so called Minsky Moment, when private borrowers are all trying to pay down their debt at the same time. In this economic climate, the government needs to borrow and spend more, not less to sustain economic activity. However, with unemployment painfully high in both the US and the European Union, while budget deficits shrink, fiscal policy is still pulling in the wrong direction. For the United States, Britain and other countries borrowing in their own currencies, the current danger is not borrowing too much, it is not borrowing enough.


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What happens when politicians maximise utility?

An introduction to “Public Choice” ✎ Henrik Mohr Nordviste Although Public Choice theory gained momentum as early as improve their efficiency. One cannot, for instance, expect marthe 50s, it has enjoyed little attention from Norwegian academia. kets to establish functioning patent rights, financial laws, secuPublic Choice utilizes economic theory and thinking in describ- rity regulation, and environmental considerations by themselves. ing government behaviour. It can be seen as a mix of economics The need for government regulation is widely recognised. This and political science. What characterizes this theory is its view is also where we encounter the very essence of Public Choice: of politicians, government officials, and bureaucrats Efficient, well-organised governmental institutions as utility maximising actors. Politicians are not are a necessity, not only for creating efficient budifferent from everyone else. They too seek reaucracy, but also for establishing efficient to avoid things that cause pain and focus regulation of markets. on things that raise their level of happiness. Public Choice theorists claim that Rational ignorance if people in the marketplace are motiIn Public Choice, a politician maxvated by wealth, power and prestige, imises his utility by securing as many then this must also hold for politicians. votes as possible. Before we contemThe theory is then used to highlight plate further on the outcomes of this how politicians’ self-interest can cause practise, it is essential to understand more damage than good when governhow politicians actually go about doing ments interfere in markets. so. In the theory, voters are understood Applying economics’ most basic asas rationally ignorant. Because a single sumption, namely the maximisation of vote never will determine an election, the self-interest, on political behaviour is really rational thing for a voter to do, is to not waste not as problematic as it may sound. Misuse of time reading up on politics (a quick glance at any power has been around forever, and methods of online newspaper’s discussion board will confirm The Norwegian Storting. preventing it has been built securely into constituthis behaviour). Because voters don’t know exactly Photo: Fabio Mendes tions since the time of Montesquieu. What is probwhat it is that politicians actually do, and in addilematic, however, is the consequences of politicians’ actions when tion don’t have any good reason to spend time finding out; politithey are motivated by self-interest rather than a profound convic- cians have room to depart from their voters’ preferences in some tion of serving the greater good. By all means, there are various areas without losing votes. In addition, it is said that anyone who good reasons for governmental regulation of markets in order to spend other people’s money on someone other than them[ 8 ] 

The sitting government will often spend extra money to boost the economy before the election, in an attempt to lure the voters over to their side.

selves will be less careful than when they spend their own money on themselves. This provides us with the general framework in which Public Choice can be utilised to analyse how various types of interference in the marketplace causes market failure. If you roll my log then I’ll roll yours A classic example of unfortunate economic politics can be seen before an election. Since the well-being of your wallet plays a substantial role in deciding whom to vote for, the sitting government will often spend extra money to boost the economy before the election, in an attempt to lure the voters over to their side. Politicians’ urge of maximising their own utility by persuading voters to vote for them, poses, in this example, threats to the stability of the economy in the long run. Another unfortunate phenomenon, namely “logrolling”, is a direct result of both voters and politicians being, at least partly, concerned about self-interest. An example illustrates the problem with the phenomenon well: Imagine three politicians, representing the North, West and the East respectively. The Northern representative wants to build a tunnel, the Western one wants a bridge and the Eastern one wants nothing else then to avoid having to pay for any of the proposals. At the same time neither the North nor the West wants to pay for each other’s plans. When Parliament votes, both projects will get one vote for and two votes against, thus not being realised. The Eastern representative is happy not having to pay for projects that won’t affect his constituency. But the next day, the representatives of the North and West have teamed up. Because politicians are motivated by the same factors as everyone else, and therefore maximise utility by

securing votes, North and West devise a cunning plan to get their projects built anyway. They have discovered that if they vote for each other’s projects then both will get two votes for. Thus, both projects are given the green light. Since the total bill, in the form of raised taxes, is shared between all three, the two smart representatives only pay one-third each. The added pleasure of new infrastructure, however, is not shared with anyone. The interesting thing about this whole situation is that neither project initially had majority backing. To begin with, the majority, which we know is supposed to be a representation of the real voters’ preferences, would actually prefer the exact opposite: Lower taxes over more bridges and tunnels. Rent seeking The practise of businesses trying to maximise profit in the marketplace is called rent seeking. In the markets, businesses try to gain an advantage by producing better, more sought after products. This healthy practise improves market efficiency because weaker, less productive competitors will fall out. But businesses can also try to gain an advantage by increasing their influence on the political scene. Competitive bidding, tax relief and public projects are examples of government activity that creates opportunities for doing so. While rent seeking in the markets is for the greater good, rent seeking in the world of politics usually just makes everybody else worse off. Imagine 10 companies spend $100K each in an effort to win a government contract worth $1M. In this case one company will earn $900K while the nine others will lose $100K. At the same time, nothing has actually been produced and society’s total income is the same. But the distri  [9]

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While rent seeking in the markets is for the greater good, rent seeking in the world of politics usually just makes everybody else worse off.

bution of resources is now more skewed than before. When governments regulate some market they, at the same time, create an opportunity for unhealthy political rent seeking. Because businesses can make big money on beneficial regulation they will spend time and money trying to persuade politicians to favour them. The same patterns as above will follow, where money is redistributed and time is spent without adding a cent to GDP. Another example is the protection of certain professional titles of carpenters, doctors, lawyers and so on. One argument for protecting them is of course to prevent you from having your appendix removed by Johnny the Blacksmith, but it is interesting to note that initiative for title protection often comes from the professionals themselves. In both cases, the call for regulation shuts out potential competitors from the marketplace, hence obstructing a healthy, efficient market.

to give them the advantage of being protected. The same inefficient spending of money as above occurs here too. An example to illustrate just how bad protectionism can get in the way of efficient markets is found in the American car industry. In 1984, R. Crandall found that the car industry’s protection from international competition throughout the years had saved 26,000 jobs, but at the same time its cost had been $160K per worker. It seems obvious that everyone would be better off if there were no protection and that money instead had gone straight to the workers’ pockets. This would also mean Americans would have been able to buy better, cheaper and more environmentally friendly cars. A helpful spotlight Log rolling and various types of rent seeking described above are just a few examples of market failure caused by assuming that politicians are simply normal people who avoids pain and maximises happiness. That being said, its important to underline that Public Choice does not necessarily advocate reducing government interference in markets, nor reduce the size of the public sector for that matter. Its main function, and also it’s value as an interesting addition to economics, is rather it’s ability to shed light on the costs and inefficiencies of government activity that can, and should, be reduced or improved upon.

Mine, mine, mine! The problem of rent seeking might be most clear in the context of protectionism. In 1994, W. C. Mitchell and R. T. Simmons calculated the yearly dead-weight loss caused by protectionism in the US to be close to 6% of GDP, or billions of dollars. In 2009, the Norwegian Consumer Council criticised its government, stating that simply following the rules set by the EEC-agreement would halve food prices in the country. Protectionism always makes local producers the winners, while consumers, import businesses Suggested further reading and international producers are all losers. Because protection- •• Introductory: Tullock, Seldon & Brady – Government Failure – A Primer In Public Choice ism raises prises on local goods, local producers have financial incentives for spending time and money on persuading politicians ••Academic: Mueller – Public Choice III [ 10 ] 




Next issue: Spring 2014

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Interview with

Erik Landgraff Portfolio manager of Skagen Kon-Tiki emerging market fund

✎ Amaar Malik Macro China is rebalancing its economy from investments towards conIn the U.S., there has been a lot of talk about the Fed’s bond ta- sumption as well as downscaling the excess capacity and tightening pering and the upcoming budget debate. How do you think this will credit. How has this affected equity valuations? affect the global investment market and your investment decisions in In China, there has firstly been a focus towards driving domesthe future to come? tic consumption and internal demand. The initial backdrop imNormally, the macro environment does not provide the ba- plies that local consumer companies such as car producers can sis for our investment decision. The tapering issue is interesting benefit. Secondly, we have become cautious about financials, as because usually good macroeconomic news, a good PMI read- we are not comfortable with the level of debt and the wide dising, and pick-up in production and in housing markets tend to crepancies in estimates of total credit in the system. As we are not increase market sentiment. However, the reaction of the markets comfortable with the banks, we do not have any Chinese finannow has been opposite as good economic data have increased fear cials in our portfolio except for a transaction based brokerage. of tapering and the end of monetary stimulus. There have also been worries across Asia due to the equity market The U.S. looks to be going along with a low growth rate, which falls coupled with big currency fluctuations. How have these affected represents a rather strange recovery.. Usually, the economy fires your portfolios? on more cylinders as we move from recession to growth. Housing The fall have presented some attractive opportunities as some has been a positive surprise whilst many other indicators have re- companies now are undervalued relative to their intrinsic value mained relatively subdued. based on future earnings and assets. Volatility also provides a Emerging market equities and bonds are still perceived as risky chance to find good companies at a discount. As some emerging assets. The tapering has resulted in an outflow of money from market equities are now trading at low valuation, we believe it can emerging markets, in a typical flight to safety. Now the market be an attractive entry point. has started acknowledging that the taHow are the bigger buy-side players bepering may occur sooner than expected, having in terms of their earlier risk aversion? Erik Landgraff something that has resulted in a quite dra- •• Skagen Kon-Tiki’s Fund Manager The VIX X index, an indicator of exmatic fall in equity prices in emerging marpected volatility, is currently low. since August 2012. BA Political Scikets. In many cases, you have gotten a douHowever, this index is usually low before ence, Dartmouth. (Source: Skagen) ble negative effect, as weak equity returns stock markets turn bad. It is difficult to have been coupled with weak currencies. read too much into it. We will need [ 12 ] 

[ 13 ]

PHOTO: Skagen Funds

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In a long-term perspective, the past 10-15 years have been poor for equity investors. If the sentiment around equities as an asset would change, that could drive risk appetite. Erik Landgraff

further signs of a robust recovery for the risk aversion to abate. In Europe and the U.S. there have been positive indicators of late, which have given investors confidence. In a long-term perspective, the past 10-15 years have been poor for equity investors. If the sentiment around equities as an asset would change, that could drive risk appetite.

analyse the long-term prospects of the company, not the next one or two quarters.

Kon-Tiki Your description says that you “actively manage” and “invest in undervalued, under-researched and unpopular companies around the world, with at least half of the assets in global emerging markets”. Industry Is it fair to say that you are primarily focused on emerging markets? How did the collapse in 2008 affect Skagen? Yes. We are almost exclusively focused on emerging markets. Our goal since our inception in 1993 has been to find good and Our mandate allows us to invest in companies in developed marundervalued investment opportunities. That approach has not kets as well. That is primarily because there are some companies changed. However, we have become more aware of counterparty based in developed markets that have large exposure to emerging risk and liquidity for instance. On a general markets. basis, I believe the downfall provided a good Why have the emerging markets underperwake-up call in terms of liquidity management. formed recently? What is different in 2013 compared to 2012? There are three main reasons for the unIn 2013, we have seen turbulence in emergderperformance. The tapering has led to ing markets, which have led to lower valuations money going out from risky assets and into and presented attractive investment opporsafer assets. Secondly, growth has moderated. tunities. In addition, major indicators from Thirdly, there have been some political unrest Europe have been encouraging. However, it in countries like Turkey and Brazil. is important to realise that there are big difWhat has to change in order to witness a pick Source: Skagen Fondene ferences among the emerging markets as the up in market activity? economies have developed differently. There We need better results from companies and are countries with big account deficits as well as those with solid the tapering issue needs to be resolved. The scale of quantitative surpluses. For us, investing is about companies. We spend most easing intervention also needs sorting out. No one really knows of our time on equity analysis, and believe that it is easier to an- the effect of a scale back. ticipate a company’s future prospects than predicting macroecoValuation of our portfolio is very low now running at 6-7 P/E nomic developments. and 1 P/BV, despite decent earnings results from our companies Are you more confident in emerging markets companies delivering What are your favourite themes going forward? results now than you were 12 months ago? We believe in bottom-up investing in companies that are unI believe there are more challenges now. There have been two dervalued. That being said, we have identified a few interesting effects. Firstly, equity valuations have fallen and provided some themes that provide a good source of investment ideas. Favourite good investment opportunities. Secondly, many companies are themes include preference shares, autos, solar and state-owned expecting to grow less going forward and have moderated their companies. growth forecasts. When we carry out valuation, it is critical to We also like companies that are shareholder friendly. [ 14 ] 

We believe in bottom-up investing in companies that are undervalued. Erik Landgraff

Companies that generate a high level of Return on Equity (ROE) and Return on Capital Employed (ROCE) will we happily let reinvest their cash pile in operations. However, dividends and buybacks are signs of good cash generation ability and show investor-friendliness among the management of companies. Many good companies are trading cheaply in the auto space. Textbook knowledge may imply that this is a cyclical sector, but we believe there is a structural story and therefore the cyclicality is overshadowed. In Europe, the conditions are tough but some car manufacturers are experiencing record-sales due to the growth in emerging market demand. The auto industry has made great growth in recent years in China, whilst the low car penetration in India makes the country attractive for car manufacturers. In addition, the solar industry is also looking attractive now. Some years ago, there was a lot of excitement around this industry that drove valuation and it turned out that the assumptions were too optimistic. The industry relied on subsidies and the cost base was too high. Now, the cost of solar is cheaper than retail electricity prices in some countries, even without state subsidies This makes makes large scale solar projects commercially viable, at last. How do you deal with the currency risk of your investments? We have no hedging strategies, as we are not convinced that the cost of hedging would outweigh its benefetis over time. For some companies, we buy A DR and GDR shares overseas at exchanges denominated in USD and GBP. What is the timeframe of a typical investment decision you make? We invest in long-term opportunities. Typically, we aim to own a company for at least two or three years, as long as the investment returns good earnings and operating performance and valuation Remains reasonable. For instance, we have been invested in Samsung Electronics since 1997. As Skagen have a value based investment philosophy, how do you go about valuing a company? What we are looking for are companies that are being traded at less than their intrinsic value. The analysis process consists of de-

termining what a company should be trading at, i.e. what its real value is. It can be broken down to a two-step procedure: Finding good companies: This part consist of knowing the industry and having a good business understanding. Important factors to consider are revenues, cost-base, management, competitive advantages, margins and fundamental knowledge in general. Valuation: This part consist of finding a company’s intrinsic value. This can be carried out by a DCF models or by comparable analysis. However, although a DCF is useful, it is very sensitive on its inputs such as discount rates and terminal growth rates. The comparable analysis consists of identifying key metrics such as P/E, P/BV, EV/EBIT, P/Sa les and EV/Sales. I generally prefer the EV and EBIT ratios compared to the P/E ratio as it also takes into account a company’s capital structure. Further, I also prefer numbers such as operating earnings rather than accounting entries such as net income or EPS. More importantly, I believe discipline is crucial. It is important to wait and buy the right company at the right price and practice conservatism in estimates as well as having marginal safety. How do you measure your performance? We measure both the risk-adjusted return, using metrics such as the Sharpe and IR ratios as well as benchmarking our performance against the MSCI Emerging Markets Index. Our main focus is on delivering good absolute returns. Is there anything in particular you would like to tell students who invest their pocket money in the financial markets? I would say the most important thing is to have a clear philosophy. Both quant-funds and value-based funds have good records of accomplishment. I believe it is important to have an approach you believe in and understand. At Skagen we have a value-based investment philosophy, which is about finding undervalued companies. In addition, it is important to understand that investing lies at the intersection between economics and psychology. Ultimately, I would recommend to read as much as possible and thus learn from those who have lived before you. History may not repeat itself in the financial markets, but it does seem to rhyme.   [ 15 ]

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Valuation multiples ✎ Motivation The author has discovered a gap between what most undergraduate students are taught in business school and what they will apply once they graduate. Nearly all corporate finance courses approach valuation in one way or the other. However, this valuation often consists of DCFs, and barely touches the theory behind valuation multiples. This alerts the author mainly for two reasons. Firstly, the practitioners often use multiples rather than DCFs when conducting valuations. Secondly, the fact that many young business students only look for companies trading on low multiples when doing investments reveals lack of business insight. As we will see from this article, that is not the way to use these tools. This article does not try to close the abovementioned gap, but rather tries to tickle the curious student to get a more thorough understanding of the intuition behind the common valuation techniques. These students are referred to the work of Becalli and Frantz (2007) and to the doctorate Andreas Schreiner (2007). It is important to mention that this is not in any sense a critique to DCFs. What is the value of a company? In class we are taught that the value of a company is the present value of its free cash flow to shareholders. A similar way to look at it is through accounting based valuation using abnormal earnings. This theory suggests that the value of a company is equal to the sum of its book value of equity and its present value of the abnormal earnings generated. One can look at normal earnings as the earnings that one should of the company, given its level of risk. Readers with a financial background will automatically think of the capital asset pricing model, and the others should try to convince themselves that the expected level of return on common equity (ROCE) [ 16 ] 

Vidar Lyngvær

would be equal to the cost of equity capital (COE). We can then define that a company that is generating higher ROCE than COE are generating abnormal earnings, and thus creating value for its shareholders. The only way for a company to achieve positive abnormal returns over an extended period of time is if the company have some sustainable competitive advantage, or an economic moat. This should in an efficient and competitive market prove difficult to sustain over time. It is companies that are able to beat these forces of competition that Warren Buffett refers to when he is speaking of wonderful businesses. You will seldom find these companies trading at very low multiples.

The formula shows that the value of a company is determined of the sum of the book value of common shareholder equity, and the present value of expected abnormal earnings. Why are multiples relevant? What makes professionals prefer multiples to intrinsic value methods? There are several reasons, but first and foremost it is due to their simplicity. It is far easier to communicate to a client that he can expect to earn in his investment in five years, rather than to go through a whole DCF model including assumptions on the telephone. The most common multiples are the P/B and the P/E. The intuition is that the investor wants to pay as little as possible for a share of the business (P/B) or for the company’s earnings (P/E). This is easily understood by clients, as the P/E can be inverted and

compared with interest rate on bonds for example. However, why do some companies trade on different multiples than others? One can argue in several different ways about what determines a company’s P/B and P/E-ratios, but in essence it is the expected level of pay off, and the risk associated with it. Does this remind you of something? Oh yes, the abnormal earnings, of course.

zero, the P/E ratio is only dependent of the cost of equity. If we assume that the cost of equity is equal to 10 %, we see that the normal P/E-ratio is 11. Hence, a P/E-ratio in excess of 11 suggests that the market expects a growth in the annual abnormal earnings from the current level. A lower P/E will suggest that the company is struggling with finding positive NPV-projects.

The link Normal intuition tells us that a high P/B must mean that the B is of a better quality than the B in a low P/B. This is true, but somewhat abstract. If we in the in the equation above divide by common shareholder equity (or book value of equity) on both sides of the equation, we will get the equation below, stating P/B on the left hand side.

Implied taxonomy By combining these two formulas, we can now make a 2x2-matrix with a useful taxonomy. The figure is created on the basis of the one on page 149 in Becalli and Frantz.





Rising stars

Recovering dogs


Falling stars


Dogs: companies that have both a low P/E and a low P/B are As it turns out, the high or low quality of book value of equity is usually distressed companies in which the market has little faith actually determined by its ability to generate abnormal earnings. is going to come out from its misery. Rising stars: when a company has both a high P/E and a high The implication here is that for a company to rightfully trade on a P/B in excess of one, it must mean that the investors are expecting P/B it is usually due to the fact that the market is expecting the it to generate returns in excess of the COE. We can see that in the company to continue to generate extraordinary returns, as well case of the present value of the abnormal returns is 0 and the com- as being able to utilize several positive NPV-projects in the future. Recovering dogs: companies with a high P/E but a low P/B are pany is earning normal returns, the P/B-ratio should be exactly companies that are experiencing a downturn at the moment, but equal to one. Furthermore, what does this formula imply? It implies that that the market are expecting it to somewhat recover from. Falling stars: when a company has a low P/B but a high P/B, the the P/B is determined by the size of the company’s book value of equity, its COE and its expected level of abnormal earnings. The market are expecting it to generate fewer positive NPV-projects, latter being the most interesting. We begin to understand that even though the company is expected to continue to earn abnorwhen a company is trading at a low P/B it normally has its reasons, mal earnings for some time. By including this taxonomy in our analysis when doing a valuanamely that the market expects it to destroy shareholder value in tion we force ourselves to gain valuable insights into the company the foreseeable future. Similarly we can get from the PVA E-formula to the formula for as a business, rather than just a listed stock on the exchange. price-to-earnings. If we divide the formula for PVA E by comprehensive earnings on both sides we will get this formula after some A challenge Most of the readers would already have been associating high manipulating. P/E-ratios to expectations of high growth, but in this article we have mathematically proved the connection. My hope is that by reading this article, students will start to think twice when they read equity research reports that use low valuation multiples as arguments for an investment, without discussing the reason for the mispricing in-depth. Further on I would like to challenge the Notice the important difference between P/E and the P/B. most curious readers to try to derive the EV/EBIT-ratio from the The P/E ratio is determined by the growth in abnormal earnings, definition of the DCF. rather than the absolute level. This will prove useful in our taxonomy. We also note that when the growth in abnormal earnings is

  [ 17 ]

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Unbreakable bubble Current situation of China's property and emerging risk

An Hu, New York University, Columbia Economics Review

Abstract ies. Further, I will then analyze the regulaFrom 2003 to 2013, China's property tions implemented recently to prevent the market has experienced a magnificent bubble from bursting. boom. During these ten years, the prices in major cities such as Beijing, Shanghai Current situation of the and Guangzhou have increased more than Chinese housing market 500 %. Even the second line cities such as Matthew Zhou and his wife spent CN Y Ordos in Inner Mongolia and Wenzhou in (yuan) 1.6million (USD 261,000) to buy a the Zhejiang province have went through two-bedroom apartment last month in a booming market. The real estate market eastern Shanghai after seeing no potential is often regarded as an affirmative industry for long-term returns in China's financial in China. However, since the late 2012, the markets.1 Due to the highly volatile and property prices have started to show an unstable performance of the stock marunstable sign – according to the statistic ket, many investors and potential buyers data compiled during first half year of 2013, have transferred their focus from the stock only one fifth of the aforementioned cit- and bond market to the housing maries have experienced continuous upward ket. From 2003 to 2013, China's property surge in prices. Three fifths have remained market accounted for an average weight stable, whilst the rest have dropped. In of 21.8% of the GDP increase. During the this article, I will discuss why there is a past ten years, the average price of houses bubble in China's property market and in major cities such as Beijing, Shanghai give examples by analysing the change and and Guangzhou have increased more the cause of those changes in some key cit- than 500%, from an average of CN Y 4,989 [ 18 ] 

to CN Y 24,410. Even the second-line cities such as Ordos in Inner Mongolia went through a booming market. Therefore, the real estate market was regarded as an affirmative industry in China. Compared to those intangible assets, which have a high flexibility and less internal value, property have a great advantage due to its stable value. However, this golden lucky star may not exist anymore. With the current momentum of global financial markets and the growing optimism regarding the recovery in both the US and Japan, the dramatic upward surge in housing prices, which are attributed significantly to the inflow of the hot-money from other sectors since the financial crisis 2008, gradually shows lack of strength and even signs of being inverted. Risk and emerging crisis in rising second-tier cities Ordos Ordos used to be called the Dubai 1) Bloomberg News - 2013-09-16


National GDP *

Growth Ordos Growth Rate GDP* Rate


135 820





159 880





184 940





216 310





265 810





314 050


1 600



340 900


2 100



401 200


2 460



473 100


3 220



518 940


3 700





10% 2006




Ordos GDP Growth Rate National GDP Growth Rate

* in 100 Million

Ordos's GDP growth compared to the national GDP growth.

Source: China's National Bureau of Statistics website

of northern China, and is overwhelmed and is much higher than the national averwith wealth, packed with public infra- age of 16%. structure and located near to precious natHowever, the urban center of Ordos ural resources in a region plagued by wa- City, known as ‘Kangbashi New Area’, ter-supply troubles. In 2003, the Chinese has been a ghost town for almost five government started awarding coal rights years. The reason for this significant tranto mining and real estate development sition between the momentous prospercompanies that agreed to build houses, of- ity and rapid recession is the collapse of fices and roads. The plan was to prepare a the game of private lending. During the thinly populated section of Ordos called past years, there is a trend emerging in the Kangbashi for up to 1 million people. capital market of Ordos- private lending. During the build-up between 2003 and Although this financing method has lots last year – a period marked by high coal of benefit such as low transaction costs prices – Ordos recorded blistering growth. and high flexibility, one unavoidable setThe city’s GDP rose 15 percent year-on-year back is that this lending contract is unseto CN Y 322bn in 2011.2 cured, and is primarily based on the trust Interpreting the table and graphs above, between partners or simple contracts that Ordos's GDP grows with a CAGR of 35% are not regulated by law. Therefore, if any 2) Report on excessive investment in real estate market in the western area by Chinese Academy of Social Sciences 3) 2013 Jan-Jun national statistic data on real estate development & sales by Chinese Academy of Social Sciences

one part of the capital chain struggles, it may cause the whole financial system to collapse. The financial crisis of 2008 has disrupted the private funding chain in the counties, and then seriously threatened the operation of many private enterprises and the probability of completion of ongoing projects. According to a report released by the Chinese Academy of Social Sciences earlier of this year, nearly 80% of construction projects have been suspended.3 The projects have been troubled by a private-debt crisis as many debtors have fled from the municipality. This phenomenon is not restricted to a single case only, but also exists extensively in second and third-tier cities. These cities were characterized by rapid economic   [ 19 ]

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•• No less than 60% lump sum payment for the second house. •• Loan rate must be greater than 1.1 times benchmark interest rate.


•• Suspension on housing loans for the third house. •• Ratio of the loan for first house increase to 30%.


•• No less than 50% lump sum payment for the second house. •• Suspension on housing loans for those who can't provide more than one year local tax certificate.


•• No less than 40% lump sum payment for the second house. •• Regulations on state-owned enterprises property.

growth. These cities include Wenzhou, Zhe Jiang Province; Shenmu, Shanxi Province; Guiyang, Guizhou Province. Current regulation in first-tier cities Unlike the fragile economic structure in second or third-tier cities which always end up with a catastrophic collapse, firsttier cities always experience a more stable cool-down adjustment made by the central government. According to the regulations, Guangzhou, the provincial capital, will provide land for residential use of up to 5.95 square kilometers this year, up 1.47 sq km compared with the average during the past five years. Those without permanent residence permit in the city will be permitted to buy houses if they have continually paid tax or social security fees for one year or longer, two years before they buy a house.4 In Beijing, single adults with the capital's permanent residence permit are allowed to buy only one apartment, as opposed to two previously. Meanwhile, banks in Shanghai will be banned from giving loans to residents who [ 20 ] 

own two apartments and are attempting is not the first time that the government to buy more. The city will strictly follow has opted to use policy to control property the 20 percent tax policy and increase the prices. Under the more intense regulation, down payment and mortgage rates for sec- and the lower expectation of the growth of ond-home purchases, depending on mar- economy, the housing prices have already ket conditions. slowed down during the first half year of This regulation announced in early 2013 2013. It might also signalise that the turning point is arriving.

As a major fiscal income resource of both the local and central governments, the future of real estate market of China is vital due to the influence of recent announced regulations and effects of the collapse in second and third-tier cities.

Conclusion As a major fiscal income resource of both the local and central governments, the future of real estate market of China is vital due to the influence of recent announced regulations and effects of the collapse in second and third-tier cities. As 2012 to 2013 is a transition year for the Chinese central power, it may be the beginning of a new economic development goal. Currently, the Chinese economy is at the junction between a soft landing and a hard one. Although both ways may not cause a significant influence on current real estate markets, especially on the housing prices in the largest cities in the short term, time and market performance will judge whether we are on the right track to a next wave of prosperity. 4) Guangzhou Government Website

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Careers in

Bain & Company Interview with Lars Jacob Bø

Amaar Malik

Could you tell me about your background and time in Bain & work with the biggest funds in the world, and in the Nordics, we Company? work on approximately 2/3 of all transactions above 500mn NOK. I joined Bain & Company in 2006 and my mandate was to open What is the culture at Bain? the office here in Oslo. I have been in Bain since then. I have been The culture of Bain is a culture of performance. A culture working across all industries and quite a lot internationally. My where very clever people work together around very difficult focus has been the Nordics, the UK and South Africa, where we problems. It is a culture where people want to solve problems and have clients. My main topics have been banking and oil & gas. help clients. The culture is supportive and our people like to work My formal position is senior partner and I am head of both the in teams. You will find very few sharp elbows at Bain, as the team Norwegian operations and the Nordic financial services group. performance matter. At Bain, we reward building the client and Who are Bain and what do you do? the team. We help big companies and investors create value. We are What differentiate you from your two main competitors? brought in when there is a very difficult problem to solve and our Somehow, I have credibility to compare at least one of them as I clients need particular help. That could be issues regarding strat- have worked with one of them for 14 years. I have deep respect for egy, organisation, functional topics and performance improve- both of them. If anything, Bain is an inch more practical and we ment such as growth and cost reductions. Often companies do are less academic compared to Mc Kinsey. Part of the reason is not find the competence internally to solve these important and that we have grown up with the private equity industry, which difficult topics. We are also hired when companies would like has been quite impatient of seeing more analysis in case we alto have an external perspective. In addition, we also work with ready know the answer. We are more concerned about things happrivate equity companies and investors, and help them make in- pening rather than leaving a report in the shelf. To that end, we vestments. Bain is probably the de facto the have been forward leaning, and early out market leader as advisors to the private eqwith new and creative reward models Lars Jacob Bø uity business. Together with Bain Capital, where we put fees at risk and connect the we have been very close to the develop- •• Education: Engineering, NTNU. MBA rewards up against results. We call it reINSEAD. ment of the industry. We have a special result-based fee-agreements and more than ••Work experience. DNV, McKinsey, Bain. lationship to the industry, and we serve all 50 % of what we do is on that type of agreesorts of private equity companies. Mainly, ••Current position: Senior partner, and ments. We have been very concerned head of Norwegian operations and the we cover mature companies or growth about this particular issue – having pracNordic financial services group. companies across industries and it is less tical solutions that work. common that we work with venture. We [ 22 ] 

[ 23 ]

PHOTO: Bain & Company

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We work in teams and we work with the clients. Lars Jacob Bø

Working at Bain ing our tools and methodologies. We try to build capabilities with How are you organised? the clients as we move along. It has a huge impact if we can work We are organised around the geographical offices. In addition, with the client over a longer period. We would very much like to we have industry practices and functional practices. The industry work with the client and solve a particular problem, and over time practices consist of networks of people that are organised around help them move towards an overall objective, as well as helping industries such as banking, financial insurance, oil etc. The func- them build capabilities internally. This will help them learn from tional practices include marketing, strategy, organisation, IT, the areas that we are good at, namely strategy, performance imtechnology etc. Below the formal organisation, which are the of- provement and organisation. fices, we have an informal organisation. The informal organisaIn the past few years there have been turmoil in the global econtion is competence networks centred on industry practices and omy. As private equity can be a very cyclical industry: have you expefunctional practices. rienced any kind of difference in their approach or risk aversion that At your Oslo offices, what are the three main industries you work in any meaningful has changed the way you work with them? with and the three main services you provide? Private equity can be a boom-and-bust industry. In 2009, very The main industries are oil & gas, private equity and consumer few deals were made. However, some of the portfolios ran into goods. For private equity clients we provide commercial due dili- problems and we were brought in to help. There is a hedge, somegence, which is an assessment of companies they are considering how, in this which ensures that private equity companies will alto buy. For oil & gas and consumer goods, we provide perfor- ways demand some of our services. The type of services we do demance improvement and strategy advice. pend a lot on the macroeconomic environment. When the global How do you work? financial crisis hit in 2008, many companies understood that they We work in teams and we work with the clients. Typically, we had to cut costs. Hence, much of the work we did in 2008 and create a joint Bain and client team. Thus, people from Bain and 2009 was cost reduction. In 2006 and 2007, however, companies people from the client work together. We have a very integrated were looking for growth. The services we provided was around cooperation around helping the client and solving the problem. new growth, expansion etc. We like to work with the client rather than work for them. How has the consultancy industry changed in the past few years? How is a team formed? We are always trying to adapt and calibrate the way we work. We agree with the client that in a particular project we will Having said that, the demand of knowledge has gone up. We have usually need a partner, a manager and some consultants. Then, more insightful and demanding clients now than we had when I we look internally in terms of who have the competence and who started. The bar for competition has gone up. However, the model is available. We talk to our people and look at whether it makes is pretty much the same. During the last twenty years, there are sense to them from a career point of view in terms of specialisa- increasingly more situations where you have more request for tion and interests, and then we decide. In Oslo, we currently have quotes (R FQs) and formal bake-offs for projects. In the 1990s, it many Swedes and Danes, and we do also staff Norwegians to in- was much more of a relationship business. ternational projects. It is about finding the right people. What piece of general advice would you give companies going forApart from strategy and performance improvement, how do you ward? add value to your clients businesses? Each business is different and each business has its own parWe add value also through competence building and by shar- ticular challenges. In general terms, there is a need for busi[ 24 ] 

Being a consultant at Bain is a little like participating in a pie-eating competition. When you win, you will get even more pie. We will put you even higher in terms of demands and put you on a new training trajectory. Lars Jacob Bø

nesses to continue to operate in a fast-changing environment. The How flexible are you in terms of continuous education for your emstatus quo approach is not going to be possible. Business leaders ployees? will need to anticipate opportunities and challenges as well as We have several people from the Oslo offices that are currently moving faster than competitors do. Businesses also need to focus being sponsored by us and studying MBAs mainly in the US. on hiring the best talent. To keep up the speed, momentum and Our employees apply individually, and we are happy to write ambition is the best advice I can give. For a CEO of a business it recommendations. I have written many recommendations myself. is about being prepared for all scenarios and being able to take Once a candidate is accepted, it is possible to apply for a sponsoradvantage of opportunities when they arise. It is about flexibility, ship from Bain. We will pay your fees, and then there is an obligaa performance culture, having the best people and having ambi- tion in terms of how long you need to work here. tions of really making a difference. Mainly, the people I have been writing recommendation for How much do you invest in your employees in terms of training are applicants for INSEA D, Harvard, Stanford and Wharton. Our and career development? people apply for the top-notch business schools. We invest a lot. Our employees are our assets. For an oil comHow does this leadership education add value to your clients? pany the assets are the platforms, my asset has two legs and two In many situations, people want to build a network and step arms. That is really the asset of an advisory firm. We take care of off the bandwagon. I do not see a huge difference in everybody refining those assets, making sure that they are developed. We upon completion of the programme. Some people grow a lot. This spend a lot of time on training. Probably every year, a consultant programme is particularly relevant for people that come from at Bain will spend a week somewhere in the world attending a for- non-traditional education backgrounds such as the sciences and mal training programme. On every project, a consultant has an the arts. These people often get the most value-add from such an assigned mentor to coach and train. We have an apprenticeship experience. model where the junior learns from the seniors, and it is a system We support talented people in terms of realising their personal that is built around learning. It is almost like drinking from a fire ambitions. For many people this consist of going to a business hose. You cannot escape, as you will be part of a system that is ex- school and being a part of that learning process and environment. tremely effective at making you learn. We will give you feedback, People that are Harvard MBAs do not necessarily make partner and ensure that you train at things you are not good at on a daily quicker than others do, but the process itself can be very enrichbasis. Being a consultant at Bain is a little like participating in a ing. By being supportive to talented people, we get commitment pie-eating competition. When you win, you will get even more in return. pie. We will put you even higher in terms of demands and put you Since most of the management consulting firms have a pyramid caon a new training trajectory. It is an extremely intensive learning reer ladder, what is your employee turnover ratio like? environment. I am not completely sure. I believe our turnover is approx. 15Our people get formal feedback after every project as well as a 20 %, which means that the average career at Bain is ca. 5 years. It semi-annual review. The semi-annual review consists of the part- is difficult to estimate, as some people quit within 5 years. Then ners in the office spending a whole day going through each indi- there are people like me who stay in the industry for more than vidual in the office to review and assess how we can develop each 10 years. individual further to become a successful consultant. Many people want to be part of our learning environment   [ 25 ]

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for some years. Our employees are very attractive in the labour market and some of our people start working with our clients. In addition, there are some people that realise this career path is not for them. There is high pressure and high demands. We work a lot as our clients expect a lot and we need to deliver. What are the three main skills your employees develop at Bain? First, our employees learn how to approach problems by breaking them into pieces. Second, they learn how to work with people in teams and provide feedback as well as training and coaching others. Thirdly, they learn how to have dialogues and discussions with the top management of companies as well as conveying their ideas in a compelling manner. Our people acquire a huge spectrum of skillsets.

cated in the future and is not just something that is done to fill up space on a CV. As the competition for a position at Bain is fierce, what would you like to see on a CV to be impressed? I would like to see a person that stands out from the crowd. Clearly, if a candidate have grades that are not great, I would expect to be convinced in some other way. Grades are important and are one of the few indicators we have of intelligence, discipline and ambitions. In addition, I would like to see people who stand out in some way and have an inner fire that drive them to perform well and achieve something. I look for people who have demonstrated that they can be among the top percentiles in something. Whether it is academia, sports or other activities. It gives me an indication of extraordinary people who can perform excellently. Graduate recruitment The overall package has to be extraordinary. What kind of educational backgrounds do you prefer? What are the main skills you are looking for in an inAt Bain, most of our people are either educated terview process? in business, technology or engineering. I am not I assess candidates along several dimensions. too interested in candidates’ specialisation at One is the ability to solve problems and relies school. I am more interested in their ambisolely on the intellect. I look for people who tions, leadership and ability to learn. A very are able to structure problems and break talented individual that has gone through them into pieces as well as thinking quickly medical training and has become a good docand clearly. The other part is the leadership tor has proven an ability to learn dimension. We look for people difficult things. That is what interthat can be leaders rather than folests us. The main thing is to possess lowers and like to take the role of the willingness, drive, intellect and driving something forward, pick Source: Bain & Company leadership to succeed here at Bain. up something on their own and An education is therefore more an indication of a perbe trusted with it. The third point is fit. We want to see sonality and ability to learn. I therefore do not rule out any type people who can fit in our culture that requires commitment and of education. I am happy to work with lawyers, doctors, political teamwork. scientists, economists etc. Essentially, it is also about the personality of the candidate. We How can a student demonstrate ambitions, leadership and drive? want to see people that will be listened to and have a presence. The first thing we look at is the CV. Some people take initiative What is the selection process like for Associate Consultants (ACs) and do many extracurricular activities at school, whilst others and Associate Consultant Interns (ACIs)? perform well in areas such as athletics. This gives us some clues There is an application process. We review the applications and about the candidate’s ability to organise, multitask and create invite the most suited candidates for an interview. However, most something. The other thing is that we have seven or eight inter- people are not called in for interviews. In the interviews, the canviews for everyone we employ. At the interview, we determine didate will meet some of our consultants, and if successful, the both the content of the CV and the underlying reasons of what a next stage will consist of interviews with managers and partners. candidate has done. This gives us comfort that this can be repliHow is the process from an internship to a full-time offer? [ 26 ] 

Normally, we extend an offer after the internship. For both the intern and the firm, it is a good opportunity to learn about each other. We always have an assessment at the end of an internship and discuss whether we will give an offer or not. How are interns staffed on projects? We will assign people, and ensure that the interns have the right set of people who can oversee them and take care of them. We do always try to facilitate wishes from interns. Do you have any kind of formal minimum requirements? As a rule, we would like to see people studying towards, or having completed, a master’s degree. We do exceptions where people with a bachelor’s degree are given an offer but that is seldom. In terms of grades, we look for people among the top 10-20 %. Failing to obtain such a GPA will not necessarily disqualify an applicant, but I will require a very good explanation as to why this is. What are the main duties and responsibilities of ACs and ACIs? Typically, the AC is assigned to a team and the team delegates the work. The work could be everything from market analysis, product analysis or model development. It can vary, but it will normally be analytical desktop work. I think we have three or four interns each year. More than 50 % of those will get an offer and most of them will start. What is the career ladder at Bain like? Associate Consultant Intern (summer internship), Associate Consultant, Senior Associate Consultant, Consultant, Case Team Leader, Manager, Principal, Partner, and Director/Senior Partner. As a partner, the employee will also get a stake of the company. The total time spent going from an AC to a partner usually takes 8-10 years. What kind of skills and qualifications do the people who succeed at Bain possess? It depends on what makes you excited as an individual. Fundamentally, our people like advisory work and helping our clients succeed. I must admit I feel like a bumblebee at times, flying from flower to flower. This is because I work only on the most important and exciting problems of big companies. I do more strategy in a year than the top management of a company do within 5 years. I am only brought in when there is a difficult problem and I am always challenged in terms of solving the more tough questions.

Certain people like the idea of being challenged to go into different situations in different companies and learn from this broad experience. People that stay at Bain are people who enjoy the advisory role, concerning both client relationships and the breadth of experiences. At what stage do your employees specialise? At some point, you should specialise in something. We do not want people to be too narrow, as we would like to see people work across different types of problems and industries before they specialise. We do not encourage people to specialise before they become managers. What piece of advice would you give to students who are considering a career at Bain? The first advice is to study hard. It is important to be true to your own ambitions. If you want to join the consulting industry, you need to demonstrate unique capabilities. Think about how you can demonstrate your uniqueness to us. Grades are a hygiene factor, but could also be a distinctive factor. We want to see people who can come in and help the biggest companies to solve their most challenging problems, which means that you need to be good and quick on your feet in terms of thinking. You need to convince me that you can do that, and I believe that grades are the best indicator that we have. The second advice is to do things besides the curriculum. We like people who do not shy away from leadership positions. We would like to see someone that is involved as a part of the community and contributes. We prefer a well-rounded personality rather than just a student. In terms of getting an opportunity to work here, I think it is important to perform well in an interview process. It is always wise to do some practise and understand what the industry is about. At the interview, it is important to be yourself. You can never convince us that you are anything else. If what you are is not good enough, it is fine. It does not mean that you do not have any talents. Finally, what has motivated you to stay in the management consulting industry for all these years? The three main things have been the relationships with clients, the opportunity to work with so many interesting things and ultimately the people at Bain.   [ 27 ]

Equilibrium Magazine Issue 3  
Equilibrium Magazine Issue 3  

Student-run Magazine in economics and finance