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EDITOR-IN-CHIEF Sibo Wei EXECUTIVE Alexander Gustafsson Farzad Khoshnoud John Steinkeller Rasmus Wiman ART DIRECTOR Rui-Xin “Xinga” Li CONTRIBUTORS Jonatan Catalán Ekaterina Diakova Louise Granath Alexander Gustafsson Martin Hedengren Petter Kongslie (Guest writer) Elsa Landberg Samuel Siddique Peter Touma Rasmus Wiman Brian Ye
SALES Ida Laurén Sofia Karlsson WEBMASTER Lukas Kikuchi WEBSITE www.capitalmagazine.se CONTACT firstname.lastname@example.org DISCLAIMER Opinions published in Capital Magazine do not necessarily represent the opinions of the editorial staff or KTHFS PRINTING HOUSE Wikströms tryckeri AB
innevik is one of the most powerful players in the Swedish media landscape. Being the majority owner in such illustrious companies such as MTG, Metro, and Tele2, chances are that we all come in contact with the Kinnevik-sphere each and every day. Earlier this year, the KTH Finance Society had the pleasure to host an event with Kinnevik in which Cristina Stenbeck, Kinnevik’s chairman, attended and spoke about the company. Capital Magazine had the opportunity to talk to her and ask her some questions and we are delighted to present our exclusive interview on page 10. In this issue we have also, in a way, gone back to the roots of KTH Finance Society. Anders Nemeth founded the Society during his time at KTH before moving to New York and starting his career with Oliver Wyman. In January this year, he was named Partner of the financial services practice group of Oliver Wyman in New York. We got the chance to talk to Anders and our interview with him can be found on page 26. I hope you find his journey as inspiring as I did. I am also delighted to present a guest article from Equilibrium Magazine in Norway on the subject of alternatives to traditional stock investing. The article provides some insights from our neighbors’ markets; read all about it on page 23. Lastly, I would like to say a few words on Capital Magazine itself. This is our fourth issue and thus marks the end of the magazines first year of existence. I hope we have been able to provide you, our readers, with interesting content. It has been tremendously fun to see the magazine take shape and develop throughout the year; we have come a long way since our first issue. I would like to say a big thank you to everyone who has contributed to the magazine during our first year. It certainly could not have been done without any of you.
Sibo Wei Editor-in-chief
BANKING UNION FOR EUROPE - A GOOD IDEA?
RELATIONS BETWEEN SWEDISH VENTURE FUNDS - JUST BUSINESS OR SOMETHING MORE?
INTERVIEW WITH CRISTINA STENBECK
INTRODUCTION TO LNG
NORDIC HEDGE AWARDS A REPORT
LIBERATING THE SWEDISH HOUSING MARKET - IS IT TIME TO SET THE RENTAL SECTOR FREE?
COMPANY PROFILE: TOWERS WATSON
ALTERNATIVES TO TRADITIONAL STOCK TRADING
INTERVIEW WITH ANDERS NEMETH
BANKING UNION FOR EUROPE With the Eurozone clearly showing signs of weak recovery and sluggish behavior, there is much discussion about what to do and when to do it. One of the prominent yet bold suggestions is to establish a new banking union within the Eurozone. One of the key rationales behind this profound idea is to aggregate the fragmented Eurozone in order to tackle the contemporary debt crisis more strongly. A proposal for a systems reform is underway and will be presented soon. Troubled banks – more power to the ECB? ne of the key issues in the Eurozone debt crisis is that of the banks and their troubled assets. In the aftermath of the financial crisis of 2008, European banks have been dealing with troublesome assets that have hindered the growth prospects of the Eurozone. Some argue that the creation of a banking union will bridge the gap and strengthen the link between government debt and banks, at least in the short run. In the long run, the overarching aim of a single market would be achieved as a consequence of the banking union and thus create a stronger European market.
One of the objectives of the banking union is to impose new, tougher, financial regulations upon the financial system. The ECB argues that these new regulations will strengthen the European financial system. Another objective is to give the ECB a sole mandatory role over the financial system, banks included. National financial authorities such as FSA in United Kingdom and Finansinspektionen in Sweden will take on a more operational role and as such mitigating risk day by day. In other words, the role of ECB will be enhanced, although discussions with the national financial authorities will be held continuously. Regarding the European Banking Authority (EBA), their role will nonetheless be unchanged1. Control and competitiveness The financial system within the Eurozone plays a vital role in the functioning of various nations and overarching system of the Euro. The banks are very much in the center of this system. New banking regulations and compliance to new rules will make banks unavoidably weaker in the sense that they will not be as autonomous as they are at the moment. Another interesting point regards the autonomy of a new banking union. The objective of autonomy from any political pressure is difficult to reach since the banking union itself is a consequence of a politically motivated agenda. Thus, political objective might impede other aims of the proposed banking union.
The Eurozone banking landscape can be described as fragmented at best. Many banks have complex interconnections with each other and with other countries, which makes it difficult to trace out any dependence to specific Eurozone country. Also, given the importance of the banking industry for any one country, the question of “giving up” power of its banking industry can be questioned as well. For instance, United Kingdom and Germany have very large banking industries which play vital roles in their respective economies. For United Kingdom, the banking industry is believed to be the heart of the country. One could just imagine what would happen if United Kingdom were to “give up” their supervision and authority of the banking industry. The same goes for Germany albeit having a more fragmented banking structure. It is a question of competitiveness and giving up competitiveness. As ECB will get the control banks and their assets, the governments will be left without any say. Thus, it is unimaginable to perceive that countries with large banking industries will surrender their competitiveness. The challenge ahead Many would agree that Eurozone recovery have been sluggish at best. With debt spiraling out of control in many countries, an increase in coordination seems to be a logical way of getting the Eurozone countries back to growth, or at least stabilize the decline. One mechanism for achieving this is to establish a new banking union.. However, in principle, this might be an overarching goal. With ECB in control of more than € 300 worth of assets and more than 200 banks, some of them very large and important ones, this might a tricky hurdle to pass. Most countries, such as United Kingdom, rely heavily upon the banking industry for obvious reasons. Hence, it is hard to believe that countries will be willing to sacrifice such a vital part of their economies. More interestingly, and challenging, is whether if ECB can maintain a clear objective without any politically motivated agenda. Controlling the vast majority of the biggest banks in Europe will be very attractive and exerting political influence over € 300 worth of assets will prove to be a challenge even for the strongest of hearts. Deloitte: “Understanding the new European banking union” - 14/09/2012 1
Writer Samuel Siddique
RELATIONS BETWEEN SWEDISH VENTURE FUNDS INSIGHTS INTO THE SWEDISH VENTURE FUNDS’ MARKET DURING THE CRISIS AND BEFORE Venture capital firms, business incubators, and business angels play an important part in the development of companies on all stages. In some cases, VC is the best and only source of investments for start-ups and early stage companies. Thus, when there are difficulties on the VC market, it will probably affect firms in need for investments, and troubles within already invested companies will become problems for VCs.
Figure 1 The Economic Tendency Indicator and the number of VC funds’ investments
he financial crisis of 2008 left its imprints on almost every industry and market. Firstly, the amount of money at VC funds’ disposal diminished. Secondly, a prolonged crisis led to revenues lowering. The average customer had less buying power, which lead to lower sales, followed by low company valuations. Finally, as investors, VC funds become shareholders of companies, which mean that its profit depends on the equity market. During the 2008 financial crisis, stock prices had a tendency to mainly decline, and the IPO markets suffered. We are going to take an in-depth look only on the Swedish VC funds’ market, to understand its functions, relations and rules.
Figure 2 The Economic Tendency Indicator and the invested amount by VC funds
The Swedish VC funds market within the Swedish economic situation At first sight, the Swedish VC funds’ market does not seem very complex. There are several main players, which are active and normally invest a couple of times per year. The rest of the VC funds are not so active; these invest by most about once a year. An exception to this rule is the first year of a VC fund, when normally the fund makes several investments. However, the VC funds’ industry is a complex mechanism, which has its own rules and peculiarities. Firstly, the relation between Swedish
VC funds and the Swedish economic situation is not so obvious. On the Figures 1 and 2, we can see the Swedish Economic Tendency Indicator and the number of investments and the invested amount for the period 2005- 2012. Surprisingly, VC funds’ behavior does not show instantaneous correlation to the economic situation. A one-year delay is an unpredicted result, since most VC’s seem to be unable to take advantage of what should be lower valuations late in a downturn cycle. However, we can get more detailed insight if we look only at the main players at the market, since the smaller funds will normally just repeat the main trend on the market. As the main players with the focus on the Swedish market, we can point out Industrifonden, Northzone, Creandum, SEB VC, Via Ventures, POD, and Conor. The VC funds invested pattern According to Figure 3, we can draw the main trend of the VC funds. Since 2005 was the first year of existence for some of the funds, and others did not even exist, to define the main pattern is almost impossible. However, since 2006 some changes started to be noticeable. In 2006, half of the examined funds decreased their investments. In 2007 and 2008, the most popular trend was to keep the same number of investments, however, Northzone and Creandum adhered to a different policy. This alliance is interesting, but taking into account that it is in minority, we are going to keep tracking this trend as an alternative. In 2010, no behavior was preferable. On the contrary, in 2011, the majority of the funds had growth in investments, and for most of the funds, the difference between the previous year and the current was significant. The next year after this big increase, most of the funds decreased their investments. Nevertheless, the Creandum and Northzone alliance acted differently,
ENTREPRENEURSHIP & PRIVATE EQUITY 7
and raised their investment numbers. The invested amount shows clearer patterns than the quantity, even if they sometimes differ from the trend within the quantity (Figure 4). In the year 2006 tree out of five funds, existing at that time, decreased their amounts of investments; however, two funds increased their amounts. During the year 2007, we can observe investment growth, when four out of six funds raised their invested amounts. In 2008, these amounts again increased. Nevertheless, this followed by the significant decrease in 2009 and 2010. In the year 2011, four out of seven funds raised their amounts, and it initiated a new wave of investments. However, the growth did not continue for long. Already in 2012, all the funds, except Northzone and Creandum, slightly diminished the amount invested. The patterns of the quantity and the amount of investments are slightly different, especially during the beginning of the crisis. In this case, we can explain it by gradualness of the decrease. Firstly, the funds diminished the money flow within the companies, and then, when the economic situation became really difficult, they dropped the quantity of investments as well.
Figure 3 Quantity of the VC funds’ investments
Figure 4 Amount of the VC funds’ investments
Figure 5 Syndication between VC funds
Summing up all said above, during the first crisis years, VC funds preferred to behave carefully, mainly keeping their quantity of investments, but reducing the invested amounts. In 2009, even the quantities of investments diminished. However, in 2011 there was a new wave of investments, which was followed by the significant increase both in the number and in the amount. However, in 2012 they dropped down slightly again. Perhaps an explanation for decreasing the net amount invested at the depth of the crisis while maintaining the number of investments was in order to largely retain their interest in what they perceived to be “good ideas” while constantly decreasing their risk exposure in most cases. This might also have been done with one eye set on maintaining an image of stability with regards to their investment portfolio. Two patterns of behavior could be observed. The main behavior was to freeze the investment growth and decrease the invested amount little by little. Northzone and Creandum that preferred to exploit the crisis and to invest much more during the 2008 represented another investment line. This behavior is opposite to the behavior of their
8 ENTREPRENEURSHIP & PRIVATE EQUITY
competitors. It is quite logical to suppose that the funds are going to invest less during the “hard times”, then by investing more the fund can, firstly, enhance its market share. Secondly, they can make some profitable, but very risky, investments, when other funds will be “too scared” to invest. However, Northzone and Creandum also change their behavior sometimes matching the behavior of other firms in terms of investment. Syndication One of the most important issues is a cooperation between the main players. I would point out that even these seven VC funds have different strategies and lines of their behavior. As an example, we can observe a diagram of the main VC funds’ syndication only between each other. From this figure (Figure 5), it is obvious that each fund syndicates only with a limited number of other funds. This seems to indicate that trust and long-term relationships are important in forming syndicates. In Figure 5 the lines, which connect different funds, indicate syndication between funds, and the number on every line signifies the year of this partner investment. In some cases, when there are two or more lines under or close to a year number, this is demonstration of multiple co-investments during the year. For example, SEB Venture Capital and Industrifonden in 2012 had four partner investments. The two most active venture funds in Sweden are Industrifonden and Northzone Ventures, almost all co-investments happen with their participation (among considered funds). Their syndication took place only once in 2012 in the company named Widespace. There is another type of the funds like Via Venture Partners and Creandum that are smaller than previous two and collaborate with both big funds. The most interesting point surfaces when it comes to SEB Venture Capital and Conor Venture Partners. Here we can clearly observe two alliances: SEB with Industrifonden, and Northzone with Conor, consequently their behavior probably will be similar, and they can be observed in groups. However, Creandum syndicates more with Northzone than with Industrifonden, because of similarity of their behavior lines. It is hard to claim something about the year 2013; however, by today Northzone and Conor have already done one co-investment in Sticky, while Creandum have done two investments in Nonstop Games and Xeneta.
The rest of the target funds have not done any investments yet. Speaking about the funds cooperation, not only between each other, but also within the whole market, we can point out some patterns too. In 2005, the funds mainly collaborated. For most funds (Industrifonden, Northzone Ventures, Creandum) it was the year of foundation, which is the main cause for syndication. Just during one year before the crisis, every fund had at least one solo investment. However, the situation remained the same even in the first crisis year of 2008; only SEB Venture Capital exlusively co-invested. Some economists claim that the 2008 financial crisis fully reached Europe in 2009. The Swedish venture capital market finally reacted in 2009 and thus, a majority of the funds collaborated. This pattern was repeated in 2010. Only in 2011 had the venture capital market started to recover and the funds began to solo-invest. Preferable Sectors It is true that during some years, some sectors are preferable for VC funds’ investments. In the year 2007, Software was the most popular sector among the target funds. However, in the first crisis year of 2008, Industrifonden and Creandum, for which this sector was preferable apart from the year 2006, changed their main investment flows to other sectors. Northzone on the contrary did almost half of its investments in the companies of “Software” sector. The period from 2008 to 2009 is officially first years of crisis, during this period there were no obviously preferred sectors, and funds preferred to make investments in diversity of sectors, in order to gain sector independence. Since every industry can face difficulties during the crisis, by diversification of their portfolio, VC funds guarantee that at least one of the invested companies is probably going to be in
a better situation than the others. In 2010 and 2011, the most popular investment sectors were “Consumer Electronics and Goods” and “Software” respectively. In 2012, the funds did not have any favorite sector. As we can observe, no sector was popular for investors more than one year consecutively. This happens because VC funds are interested in “trendy things”, which normally change every year. Stages Swedish VC funds have moved to the more mature stages of investments like seed or growth equity; they have found new companies to invest in a later stage. Thus, they are looking not only for start- up companies, but also for mature companies to invest in. Since mature companies already have some customers and the share on the market, it is more probability that they are going to survive during the crisis. Summing up all finding about the Swedish VC funds’ market, I would like to say that peculiarities on this market are more similar to a personal relations than to just making business. On the one hand, the funds have established allies, with which they normally invest. They do not look for new allies, unless they are in a serious peril. On the other hand, when VC funds invest in a company, for some time they become more than just owners, but also a family, which gives not only money, but also help and guidance to a company. As a result of such guidance, we can see many of successfully backed Swedish companies, for example Spotify, iZettle, and Klarna. Writer Ekaterina Diakova Photo Xinga LI
ENTREPRENEURSHIP & PRIVATE EQUITY 9
THE TALE OF KINNEVIK BACKGROUND
INTERVIEW WITH CHAIRMAN CRISTINA STENBECK Few Swedish firms are as mythical as Kinnevik. A history surrounded by power struggles and family conflicts, but also unprecedented success stories. The story of the firm may be familiar to you all at this point. Just after last Christmas, the Swedish state television (SVT) showed a documentary in three parts about Jan Stenbeck – Kinnevik’s former leader who challenged the status quo within telecom and television. The documentary was a huge success with over one million viewers. It is obvious that Kinnevik and the Stenbeck family have mass appeal, even for us younger students who probably do not even remember Jan Stenbeck. But due to the incredible personal history it is easy to forget the excellence of the firm itself – one of Sweden’s most valued and successful investment firms. The early days innevik was founded in 1936 by Wilhelm Klingspor and Robert von Horn, and in the beginning, Hugo Stenbeck was their laywer. The company’s first investment was in the packaging company Korsnäs, which would in the years to come become one of the most important and profitable holdings in the group. Kinnevik then continued investing in a whole range of companies, from a confection business to the iron industry, and also in Sandvik, which was later sold. During the 40’s and 50’s, Hugo Stenbeck gradually increased his ownership in the group, and in 1962, Hugo became the Chairman. The year after, he let his eldest son, Hugo Stenbeck Jr, become the new CEO of the group. When Hugo Stenbeck Jr passed away, his younger brother Jan Stenbeck assumed the helm of the Group.
Jan Stenbeck at the helm Jan Stenbeck mostly succeeded with his investments, and he would later become famous for his bold way of doing business. In 1987, Jan managed to broadcast the first commercial television channel in Sweden. In the 80’s, he also invested a significant amount of capital in the telecom industry, which would later become closely associated with Kinnevik for many decades to come. In 1989, the company Comvik GSM, owned by Kinnevik, obtained a license to a new communications system – the mobile telephone standard GSM. And so it went on and on, Kinnevik continued to invest in media and communications-related companies with high risk but with excellent growth prospects. During Jan Stenbeck’s
time at the helm, Kinnevik experienced tremendous growth, and several companies that we still see today, such as Comviq, Tele2, Millicom and Modern Times Group (MTG), were founded. Something few people today actually know is that Jan Stenbeck was also involved in founding Vodafone, yet the Vodafone shares were sold early to fund other newer ventures around the globe, primarily in Latin America and Africa. Even though Kinnevik made a lot of high risk investments, the company was always backed by the stable cash flows of Korsnäs – which consistently outperformed its competitors. The daughter takes over In August 2002, Jan Stenbeck suddenly died, and a series of existing Directors succeeded him. In 2004, Pehr G Gyllenhammar stepped up as the new Chairman of the group and Jan Stenbeck’s daughter Cristina Stenbeck, only 27 years old at the time, became vice Chairman and the Stenbeck family representative. In 2006, current CEO Mia Brunell Livfors assumed her position, replacing Vigo Carlund who had been a loyal veteran to the group for over 37 years. Finally, in 2007, Cristina Stenbeck took the role that her father once held and became the new Chairman of Kinnevik. Some voices have said that she has been rather conservative when investing compared to her father – but one could not be more wrong. During her time as the leader of the group, Millicom has become the leading mobile player and provider of broadband and cable television in Central and South America, Tele2 has simultaneously continued its expansion in several countries, with one of the most spectacular ventures being their successful building of a challenger operator across Russia, the Baltics and Eastern Europe. Just after our interview with Cristina, during the spring of 2013, Tele2’s Russian operations were successfully divested, and the group continues to prove its strength in building successful businesses, not least of which in Sweden. During recent years, a significant expansion has been made into online businesses and e-commerce, and Kinnevik is now seeing convergence of several of their industries as part of the digital revolution. E-commerce is one of the fastest growing global trends in the world and Kinnevik has become Europe’s most prominent investor in this space in less than five years. New business – new challenges Besides the more traditional holdings, such as Korsnäs and the agricultural company Black Earth farming, Kinnevik has a clear focus on technology and online business today. For Tele2 and MTG,
INTERVIEW / CRISTINA STENBECK 11
Internet distribution or “over the top” television and content distribution has become more important. Practically every mobile phone is connected to the data network today, and for MTG, one would not be surprised if every TV show were broadcasted via the Internet, namely Viaplay in the future. Kinnevik has also made significant investments in e-commerce and online classifieds. For example, the group has a 35 percent stake in one of Europe’s largest online shoe retailer Zalando and a 25 percent stake in Swedish CDON Group. A few years ago, Kinnevik also invested in Avito, which is a Russian counterpart to the Swedish classifieds provider Blocket. Kinnevik owns over 30% of Avito, and from the beginning of year 2012 to the start of 2013, the value of the Russian company increased from about SEK 1 billion to about SEK 3.7 billion. In 2010, Kinnevik invested about SEK 20 million in a small European online deal company, MyCityDeal. On the other side of the Atlantic there was a counterpart called Groupon, which later bought MyCityDeal, and through the deal, Kinnevik held just over 1 percent of the company. When Groupon in late 2011 was listed on the US Nasdaq stock exchange, it was valued at about USD 12.7 billion. As Kinnevik invests in strategic stakes where it can influence and drive the operational agenda in an on-going manner, in June 2012, the small stake was sold for about USD 82 million, corresponding to SEK 569 million which represented a sizeable return for Kinnevik’s opportunism.
It is easy to see parallels with the business today and when Jan Stenbeck managed the group: fast growing companies with a worldwide focus. Cristina Stenbeck has managed the legacy with pride, even though global competition has increased a massive financial crises encroached on the businesses and technology continued to disrupt the traditional landscape. Cristina Stenbeck visited KTH earlier this year were she held a presentation about the companies within the Kinnevik group to an audience of 200 students. Afterwards, Cristina mingled with the students and answered questions. Capital Magazine had the opportunity to ask her some questions regarding Kinnevik and her achievements as Chairman.
Would you like to share some of your experiences as a young business leader? What kind of advice would you give students who want to become great leaders like yourself? I am at ease at asking questions, leading and taking decisions as an owner. I can be effective because I travel to all of our markets regularly, meet and connect and engage at all levels to elicit the information and find the appropriate person to close the loop and bring our projects to a successful close. Business is about joining the dots in the most efficient way. I always try to lead from the front. Hire more people, bust bottlenecks in order to select the best. Through doing this every year people quickly realise that the Group is a long-term place to work and belong but no one is irreplaceable. The best carry on. very disciplined in pursuing these ideas of recruitment, training and self-selection. To truly lead global business you have to build partnerships and be prepared to give and take. Every day has elements of push and pull, but I know I am not pleased if by 9am I have been already been forced into a compromise based on people’s own limitations. I like to identify ways to go further than our own businesses, own geographic footprint, own balance sheets and that is often through partnerships. Since you stepped in as Chairman of Kinnevik the company has been more successful on broadly every level. What is it that has made Kinnevik this successful and how do you look at the company’s future?
I have learnt that resilience and commitment are fundamental to the sustainability of Kinnevik”
ou were 27 years old when you stepped in as Vice Chairman of Kinnevik, and 30 when you became Chairman. What was it like being that young with that much responsibility? Having the support of shareholders is fundamental to my job. I focused on the minority shareholders I did not know personally as I did on the companies, their management teams and even sizeable customers, nurturing and tweaking the established businesses as well as finding the new e-commerce businesses that are today transforming Kinnevik. Some businesses will succeed and become market
12 INTERVIEW / CRISTINA STENBECK
leaders and a few may fail, but I have learnt that resilience and commitment are fundamental to the sustainability of Kinnevik.
My priority as Chairman has been to build a larger, simpler and more valuable Kinnevik with a strong track record in investing in emerging markets and making new investments to embrace and develop over the long term. Our portfolio of Companies is well positioned to give Kinnevik a healthy balance of capital growth and cash flow. Kinnevik strives to optimize its holdings and build for the future. After receiving dividends, Kinnevik will be debt free and we have many ideas about how to continue its transformation. The future is bright and very busy.
What are the main things that you consider distinguishes Kinnevik from other Swedish investment companies? More than 90% of our assets are in mobile communications, media and online across more than 80 markets. We have a unique focus on emerging markets with more than 50% of our sales derived from Latin America, Eastern Europe and Africa.
The combination of fast-growing industries and in growth markets creates a unique portfolio, which we believe will yield good returns for our shareholders. Over the last 30 years, the Kinnevik shares have given an annualised total return of 20%. Kinnevik has been a sound investment during my lifetime. We are moreover high-octane entrepreneurs and experienced general managers motivated to find good business opportunities in places that are perceived to be complicated; we are the most international and entrepreneurial Group. We are competitive and we want to win. Shareholders are attracted to Kinnevik because, as owners, we look after investors’ capital and also make things happen ourselves.
We are competitive and we want to win”
What do you think of SVT’s documentary about Jan Stenbeck? I marvel at the attention my father’s life continues to attract. The documentary shows that even beyond the businesses his character and social contribution broke down barriers and forged new frontiers in Swedish history. Within the Group our focus, as was his, is on the next horizon. Interview & writers Alexander Gustafsson & Martin Hedengren Photo Brian Ye
INTERVIEW / CRISTINA STENBECK 13
The dependency upon traditional energy sources such as oil and other fossil fuels will inherently be governed by market supply and demand. This in turn implies that production and consumption will have to adjust to endogenous forces such as production capabilities as well as exogenous forces such as market demand in regards of global economic recovery in order to maximize its use to the fullest. The production and subsequent transportation of energy sources must be done in a proper manner in order to achieve its intended purpose. To this end, Liquefied Natural Gas (LNG) is a revolutionary way to transport natural gas across the globe.
asically, LNG is natural gas that is has been cooled down from to below -160 C1 whereby it becomes liquid and thus decreases in volume by approximately 600 times. This is a major advantage for the energy production companies as they can then easily store and transport gas to major cities and other production facilities such as power plants around the world. It is believed to be a cost efficient production technique as well. Critics of LNG argue that transportation is very costly due to the fact that LNG requires specialized vehicles for storage and transportation and thereby do not justify the production process at all.
The market for LNG Market conditions for LNG seem to be rather stable as it follows the overall demand pattern for natural gas. Many industries such as transportation, heavy industries, and power plants are recipients of LNG. Also, the production technique of LNG expands the market for LNG producers as it can be transported to recipients far away from the production plant. This enables producers to produce and export greater amount of LNG to cities and other sources dependent upon natural gas. According to estimations, the supply of LNG is believed to increase over the coming years due to emerging markets demand and increased construction of LNG production facilities all over the world. The market demand for natural gas is believed to grow over the coming years with LNG being part of that growth. According to estimates, Asian countries will drive demand for LNG for a considerable time to come.. The biggest sources of demand in the future are believed to India and China due to their respective strategies of “gasification” that is to increase the usage of natural gas instead of other energy sources2.
Impediments to LNG growth Although the demand for LNG is projected to be strong, there are still some concerns about the growth of LNG. One such concern is the slowdown in the global economy which has obstructed the Asian markets as they are very much intertwined with their American and European counterparts. Weaker than expected demand from Asian markets, in particular China, could seriously hinder the growth of LNG. Another source of risk is the perception of national energy politics. Lastly, other sources of natural gas, such as shale gas, could also affect the demand for LNG. Another concern is regarding the production techniques as LNG requires specialized production facilities. Although efficient in production, the requirements of highly specialized transportation vessels and storage facilities, implies that the capital expenditure can be quite high and thus needs to be on par with world demand in order to avoid any costly endeavours by the production companies. This is easier said than done. With growing concern about the global carbon footprint, and sea transportation being a major polluter, the efficiency of LNG can thus simply be overshadowed by the negative effects. The future prospects of LNG The future of LNG hinges upon meeting a volatile demand. Large scale projects both in Asia, North America and in the rest of the world will be heavily dependent upon the global economy with Asia being the biggest risk and opportunity. On the production supply side, the large scale projects are very costly and with high storage costs, that might eradicate any profits. On the demand side there might be a weaker than expected demand from Asian countries in the future that will be monitored intensively as it accounts for almost 70% of the world demand. Needless to say, any demand shocks in Asia will inevitably have profound effect on the growth of LNG. Shell.com: “What is LNG?”
Ernst & Young: “Global LNG - Will new demand and new supply mean new pricing?” 2
Writer Samuel Siddique Photo Tor Even Mathisen, Flickr
ENERGY & COMMODITIES 15
NORDIC HEDGE AWARDS a report
On April 24th the first Nordic Hedge Award, hosted by Kamran Ghalitschi at hedgefonder. nu, took place in Stockholm. During this evening, winners in seven different categories were presented. Capital Magazine had the honor to visit this award and get an insight into the Nordic hedge fund industry as well as interviewing three of the finalists in the category “Best Nordic Equity Focused Hedge Fund” on what made their funds stand out. Outlook of the Nordic hedge fund industry he three financial hubs globally for hedge funds are located in New York, London, and Connecticut. Total assets under management for the industry today is around US$ 2.2 trillion, beating the previous record set in 2007. Surprisingly, the Nordic region has quite many hedge funds, around 300. However, the sizes of those hedge funds are often small except for Brummer & Partners, the 26th largest hedge fund in the world and Cevian, the 62nd largest hedge fund in the world. Before the price ceremony started, the outlook for the Nordic Hedge fund Industry was discussed. It was argued that some of the reasons for the great number of hedge funds in the Nordic region were due to the wellfunctioning equity market and options market. Moreover, Nordic hedge fund managers often have very low correlation with other hedge funds, thereby adding value for an investor seeking diversification. But on the topic: What can be done to further develop the Nordic Hedge Fund Industry? It was argued that Nordic Hedge Fund managers generally are good investors but fail to build strong firms. Further, successful managers go to large hedge funds rather than starting their own firm. Thus, this makes it difficult to retain the best managers in the Nordic region.
After the price ceremony, Capital Magazine had the chance to interview with the three finalists in the category of “Best Nordic Equity Focused Hedge Fund”. What all three funds had in common was their stellar performance up to date. However, I was curious: what made these three to stand out? Ola Wessel-Aas and Andreas Petterøe, portfolio managers at Taiga Fund When I asked Ola and Andreas what they believe to be their edge, they mentioned their strong focus on downside risk and flexible mandate in comparison to, for instance, mutual funds. They look for long positions where downside can reasonably be estimated and upside is substantial,
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preferring cash to investments that lack strong risk/reward characteristics. This leads to a natural rebalancing of equity exposure – selling shares when share prices discount overly optimistic expectations and buying shares when valuations are more modest. Focusing on downside protection, a lot of effort goes into understanding the aggregate risk in each investment with the most important factors being financial leverage, operational gearing, cyclicality and earnings visibility. The risk of financial distress should be minimal. A key characteristic of a portfolio company is that it should be able to remain profitable despite some macroeconomic headwind. Moreover, valuation has to be reasonable relative to near term earnings and cash flow. Only when this is established, they determine the upside based on industry characteristics, management track record, cash conversion/ dividend potential and growth. In the five years since the fund started in May 2008, investors have experienced an annual return of 16.5 percent with a volatility of 11.8 percent. Gregard Mikkelborg, Sales director at Sector Asset Management Sector Zen is a long/short equity fund investing in the Japanese equity market. When looking at the Japanese market, the de-rating of Japan happened during the first 10 years following the burst of the bubble in 1989. Thereafter, until the recent rally, Japan has performed in line with the rest of the world. According to Gregard, investors have been overly pessimistic. This has contributed to many Japanese investors and international investors being underweight the Japanese market. Japanese investors have preferred to have the proceeds on a bank account or in Japanese bonds whereas international investors have shunned away from the Japanese market. This has contributed to lesser interest and thereby coverage of small and mid-cap companies; so basically Japan is under-researched, undervalued and underowned. To illustrate the potential opportunities, Gregard mentioned that more than 50 percent of the stocks trade below book value. Therefore it has been working well for the portfolio manager, Trond Hermansen, to use the principles of Benjamin Graham to find attractive opportunities. Often he uses the net-net metric to decide whether a company is undervalued. This metric values net current assets by calculating discounted current assets and then deducting total liabilities. During the last five years, this strategy seems to have performed really well and the fund is up 79 percent in contrast to the benchmark index which is down 35 percent. This illustrates the possibility to achieve returns in an overall bear-market.
The three finalists in the category Best Nordic Equity Focused Hedge Fund where Rhenman Partners ended up being the final winners (closest to the camera). Source: Nordic Hedge Awards
Carl Grevelius, founding partner at Rhenman Partners Rhenman Partners is a global long/short equity healthcare fund that was formed in 2009. Before this, the portfolio manager, Henrik Rhenman, was the Chief Investment Officer for the healthcare funds at Carnegie. He has proved to be a successful investor and the track record at Carnegie was a remarkable 800 percent return in less than 10 years. The current fund is up 98 percent since inception. I was intrigued by this stellar performance and asked Carl how this had been possible. According to Carl, this has to do with Henrik Rhenman’s more than 20 year experience in this field but also their scientific advisory board. The latter works as a risk assessment tool where professors in relevant academic disciplines meet every quarter and discuss the potential investments. This has given Rhenman Partners a scientific edge where the competitive landscape has become easier to understand. I asked Carl what the milestones have been for Rhenman Partners since inception (June, 2009). He mentioned having a solid track record for three years and assets under management of SEK 1 billion, which they reached recently. The reason for this is that these are often minimum requirements from institutional investors investing in hedge funds. Thus, there seems to exist a
“snowball effect” where bigger hedge funds become even bigger due to institutional constraints. Opportunities exist In summary, the Nordic region seems to be an attractive place for many hedge funds. For students interested in breaking into the hedge fund industry, there is a universe of hedge funds in the region which probably are interested in finding talented students. As one manager pointed out: “a graduate is more adaptable than a person with experience in finance. This makes the student seem attractive from our point of view”. Writer Rasmus Wiman Photo Nordic Hedge Awards
SPECIAL REPORT 17
Is it time to set the rental sector free?
LIBERATING THE SWEDISH HOUSING MARKET Since 1st of February 2013, new legislation gives owners the right to get expenditures paid when subletting their apartment. This has more or less opened up for free market value pricing. A hypothetical scenario of a person owning a 2 bedroom apartment in Stockholm, with a market value of SEK 6 million and a monthly fee of 4500, would be able to sublet it for SEK 22 000. The legislation is an attempt to create more incentive for people to sublet, and thereby lessening the strain on the rental sector. Regardless if this attempt will have any effect at all, the idea to fix a broken rental system by reducing rent control on sublets in the cooperatively owned sector might, by some, be seen as treating a broken leg with half an Aspirin. In 2010, the average waiting period for renting a 2 bedroom apartment through the public sector in Kungsholmen, Stockholm, (population: 60 000, apartments: 40 000) was 33 years. All this invites to ask the question: “Is it time to once and for all set the rental sector free?” Or at the very least start a discussion on possible improvements.
egardless of one’s views on rent systems, it’s hard to argue that today’s system works. Subsidies in 1987 counted for 4 per cent of Sweden’s GDP; in 2003 this number had dropped to 0.7 per cent according to a report from ”Sveriges Byggindustrier”. This would be a huge improvement, should the 0.7 per cent be able to accomplish the same amount of utility in the Swedish housing market as the 4 per cent previously had. However, while the money previously had been primarily used for subsidising new constructions, nowadays subsidising expenditure come mainly from benefits like -ROT-deduction and interest deduction; benefits that mainly affects high income homeowners. The same report from Sveriges Byggindustrier showed how new housing construction had gone from 38 700 units during the years 1991-1995, to 12 450 units during the years 1996-2000, a severe decrease. An almost paradoxical phenomenon in today’s market comes from the pooling system. The less a municipal housing company spend on constructing new housing, the less they need to charge tenants, especially since the public sector aims to show a neutral net result. So when the public sector build less, the rent levels will lower over time, forcing the private sector to follow and thereby lowering
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what little incentive the private sector might have had to invest in new housing projects. There are other less obvious issues. For example there is the unavoidable inefficiency problem from the public sector. A previous study by Bengt Turner in 1983 showed how rent per squre meter and year, ranged from SEK 125 to 245. An estimated 30 per cent of this difference could be explained by age of the stock. However, this still leaves a huge difference, and it’s unlikely that the public sector have seen any vast efficiency improvements since. Another example is the inflexibility the housing shortage leads to, both for Swedish people that want to move to other parts of the country because of job opportunities, and for people coming from other countries. The shortage of housing has been identified as the single greatest threat to Stockholm’s ability to compete internationally. The reasons for lack of change are multiple. The three most obvious fears are wealth based segregation, rents skyrocketing and politics. Segregation is possibly the foremost argument. There exists a widespread belief that firstly; housing segregation due to differences in wealth is wrong or bad, and secondly; a deregulated market will inevitably lead to a more segregated housing market. The first belief is primarily a moral issue, to find a right answer is very likely impossible. One has to weigh the benefits against the costs and at the same time consider the morality. The second belief is a very intuitive reasoning. However when one looks at the statistics, the numbers tell a different story. When residents living in the outer areas of Stockholm like Spånga and Kista had an average income of SEK 170 000 per person and year in 2005, more attractive areas in the city centre like Gamla stan and Djurgården had an average income of respectively SEK 275 000 and SEK 428 000 per person and year. Obviously there already exist a correlation between residential areas and income. The reasons for this are likely a mixture of a black market and the selectiveness of landlords. In a market where landlords have small margins, incentive to be selective of tenants with better solvency is high. But, at the end of the day, in any market, those with wealth will have it easier to find housing. The result is a subsidy of high income households living in attractive locations, while at the same time some parts of the country have a higher rent level than they would have had in a more market based system. It is unlikely that a less regulated market would be less segregated; however it is far from certain that it would be more segregated.
The second argument is that a more market based system would lead to large increases to rent levels, especially in places like Stockholm, Göteborg and Malmö. Barbro Engman, Chairman of the Tenants’ Association, estimated in an article to DN in 2008 that a deregulated market could lead to 50 000 households being forced to move, counting just these three cities. Likely it would most strongly affect senior citizens, but also low-income families, students and young people. This is, once again, a moral dilemma. Most Swedish people would probably agree that no one wants to see their fellow citizens homeless, that a roof over ones head is almost a citizenly right. However the alternative to not deregulate rent control does not have to be an overnight removal of the present system. It could be done gradually over time as in the 70s, cushioned partly by subsidising. The third reason is politics. It would be close to political suicide in Sweden today to even propose a discussion of removing rent control. Even though national economists have been almost unanimous for years about the drawbacks of rent control far exceeding the benefits, the average citizen seem to have an almost zealous determination to dismiss any notion of change. One can almost see parallels to the recent healthcare reforms in the USA where people, despite of what experts said, refused to even listen to argument because of preconceived notions and fears of what might happen. Although the current system is a broken, misguided attempt of social equality, that in reality benefits the well-endowed and creates an inflexible and fiscally irresponsible housing market. The likelihood of seeing significant changes any time soon are slim in my opinion. The fear of possible negative outcomes, warranted and unwarranted, has crippled the discussion and made sure politicians stay as far away from any mentioning of deregulation as possible. It is a complex problem, and no one wants it to get any worse, but it is a naive notion to think that the problem will somehow just go away, if only given enough time. If left as it is, the situation will only continue to become more and more severe. Some sort of deregulation needs to be done. Specifically what type of changes should be done is something that needs careful planning as it is a difficult, complex and important issue. I will say this though; it is unlikely any minor changes will solve the problem. Writer Jonatan Catalán Photo Filippo1983, Flickr
1942 - Sweden introduced a rent control system called “hyresregleringslagen”. It was in response to the country having a very low housing construction during the war, combined with previous experience from the First World War, when the average income had dropped after the war ended. To counter a possible shortage of housing leading to increased rent, thereby forcing a massive part of the population to move from their homes, the government introduced a system where the legal rent level was set on individual houses based on expenditure costs. 1960s – At the middle of the 60s the problems with the rent control system had become all to apparent as the rising inflation had created a market where new apartments (often located outside cities’ central parts) became increasingly expensive while older more centrally located houses had very low rents. To fix the problem politicians terminated rent control and instead introduced “Bruksvärdeshyra”. It was more of an official termination of the phrase ”rent control” than of the actual rent control since the new system was just another, softer, version of rent control. This system was then gradually implemented over about a 10 year period. In the new system the rent of housing would be decided by negotiations between the Tenants’ Association and landlords, where rent levels on similar apartments owned by municipal housing companies would act as a form of rent ceiling. Also the new system worked as a property pool where expenditure from all houses would be distributed between tenants. This have had two noteworthy practical effects: firstly, the municipal housing companies with older stocks have had significantly lower average rent then those with newer stocks; secondly, there have been cases where population moving from less attractive regions to more attractive ones, thereby creating vacancy in the less attractive regions. Vacant homes with expenditures are then being pooled out on the remaining rental sector in the region, thereby raising cost of living in less attractive parts of the country. Since the 1970s this is largely how the Swedish rental system has been regulated, with some minor changes over the years.
Article sources: Bengt Turner, 1988: “Economic and Political Aspects of Negotiated Rents in the Swedish Housing Market” Ilian Drea Persson, 2010: “Ekonomisk bostadsmarknaden: hyresregleringens roll”
Sveriges Byggindustrier, 2004: ”Bostadsbyggande och bostadspolitik. En jämförelse mellan Sverige och Finland” Barbro Engman, DN, 2008: ”Drygt 50 000 hushåll kan tvingas flytta” Christer Jansson, DN, 2005: ”Hyresregleringen gynnar de rika”
SPECIAL REPORT 19
20 COMPANY PROFILE
TOWERS WATSON Towers Watson is a consulting firm with offices all over the world. Capital Magazine had the opportunity to visit their Stockholm office and learn more about the company.
owers Watson is a leading global professional services company that helps organisations improve performance through effective people, risk and financial management. Its 14,000 associates share a common set of values and a singular focus: putting their clients first. They are obviously doing something very right, because in March 2012 the company was named in Fortune Magazine’s list of the world’s most admired companies and were ranked number one in the professional services industry. Clarity Through Perspective The world may be smaller, but operating in it successfully is harder than ever. The very connections that have created a global marketplace have also increased the risks and complications inherent in every business decision and action. In this environment, the way forward is rarely clear and the margin of error is narrowing. Towers Watson focuses on giving its clients the clarity to make the right decisions and take the right actions. The organisation’s approach is grounded in perspective — the kind that comes from deep experience working on a wide range of people, financial and risk issues. That experience and knowledge enables them to help clients improve business performance while meeting the needs of their customers, shareholders and employees. And it does this by taking a perspective that begins at eye level — with a clear understanding of their client’s organisation, the way they work, their goals and their challenges. By connecting the big picture and their picture, Towers Watson helps achieve real results. Towers Watson’s Focus Towers Watson offers practical, tailored solutions to clients, focused into four business areas, or “Segments”: Benefits; Risk and Financial Services; Talent and Rewards; and Exchange Solutions. Three of these four business areas are represented in the Stockholm office. Benefits The complexity, costs and risks associated with employee benefits pose an increasing threat to business performance. An enterprise-wide strategy for managing benefits gives
organisations the framework to develop programmes that work in concert to help attract and retain top talent in a cost-effective manner — so they can offer benefits that give them a competitive edge while meeting the needs of their employees. Consultants in Towers Watson’s Benefits business provide a wide range of consulting services, including: Retirement – combining expertise in retirement and investment consulting to support organisations in designing, managing, administering and communicating all types of retirement plans; and Health and Group Benefits – providing advice on the strategy, design, financing, delivery, on-going management and communication of health and group benefit programmes. In Towers Watson’s Stockholm office most benefits consulting is delivered through consultants in the firm’s International Consulting Group (ICG). ICG consultants are focused specifically on managing the challenges of multinational clients, advising them on global, local and cross-border issues. This team also helps companies develop and implement benefits strategies that are consistent across the globe. Risk and Financial Services As companies struggle to improve business performance, they want to combine risk management with their overall financial management framework. Towers Watson understands the crucial link between risk, capital and value, irrespective of whether they are talking to an insurer concerned about capital management, a CFO trying to manage value creation, or an investment committee seeking to balance risk and return. Consultants in the firm’s Risk and Financial Services business work with organisation on: Insurance Consulting – offering innovative consulting services that help insurers manage risk and capital, improve business performance and create competitive advantage; Investment – helping clients manage investment complexity, establishing risk tolerance and improving governance; Reinsurance – combining creative risk transfer solutions with full-service insurance consulting and financial modelling software; Financial Modelling Software – bringing together actuarial knowhow, industry knowledge and software expertise to help clients measure value, manage risk and safeguard solvency; and Risk Management – addressing the risks that affect an organisation’s ability to achieve strategic goals and add shareholder value.
COMPANY PROFILE 21
Talent and Rewards Towers Watson helps clients to align their talent and rewards strategy with their business strategy to achieve long-term success. Consultants combine data, analytics and experience to pinpoint the talent and workforce needs that are vital to their clients overall performance. They develop strategies and design and implement programmes that address these needs, drive higher performance and ensure the right return on their clients’ investment in people. Backed by industry-leading technology, global workforce data, research and insights, they can help organisations quickly transform ideas into action.
recruit there are many opportunities open to you, which might include working on a secondment in another office in one of the 37 countries the company operates in worldwide. In addition, graduates joining can expect exposure to clients and projects at an early stage of their career. This is particularly common in the Stockholm office, especially since it is a slightly smaller office. In essence you get the best of both worlds, the benefit of working for a large international company with all the opportunities that brings but with that small company feel where you get to know and socialise with everyone in the office.
Consultants in the firm’s Talent and Rewards business work with clients in a number of areas including: Executive Compensation –helping organisations make sound decisions about how and how much to pay senior executives; Talent Management – developing integrated programmes and processes to engage and develop leaders and employees; Employee Rewards – ensuring pay and other reward programmes are cost effective and deliver the right behaviours and performance; Communication and Change – combining expertise in change management, organisational effectiveness and communication to drive employee engagement and performance; Employee Surveys – designing and administering employee surveys, and developing practical insights about improving employee engagement, shaping a high-performance culture and achieving optimal return on talent investments; Global Data Services – providing organisations with quality data for effective decision making from market compensation surveys.
Becoming a Junior Consultant Towers Watson has diverse service offerings, complex and challenging assignments, a broad network of colleagues and large geographic footprint. Who would not want to work there?
A Consulting Career at Towers Watson When Towers Watson is looking to acquire new talent to the company, it is not just the academic qualifications that they value. Equally important is what makes you, you. What have you done to push and develop yourself? How do you get on with other people and can you work truly collaboratively? Do you have the social-skills to build and maintain the relationships that consultants will have to foster?
You will work for a number of specific clients of varying sizes and different people will work on different client teams, meaning you will work with a range of people on different challenges day-in day-out. You will be involved in regular project meetings which will help you to understand the overall project and where your work fits into it as well as for you to report your progress and raise issues. Depending on the project and client you may also get involved in communicating with clients at the client’s office, working directly alongside them and attending important meetings or calls.
So, ultimately, the pure facts you have learnt during your studies may not be as important as the skills you have developed. What have you done to enhance all those important skills? Have you spent the summer doing an internship in a similar field? Do you have something besides your studies that will allow you not only to develop those skills, but enable you also to show them off? It goes without saying that there are academic requirements when you apply for a job at Towers Watson. For all roles, you must have a minimum of a bachelor’s degree. However, the type of degree varies across the different business areas, and where some require a numerate/scientific discipline, other areas might be looking for degrees such as business, law or management degrees. Language skills in both Swedish and English are also important for anyone wanting to work in the Stockholm office. The Towers Watson Culture Towers Watson is a large, global organisation and as a new
22 COMPANY PROFILE
As a largely project based business, no two days are the same! As a graduate at Towers Watson you will start to experience this straight away, and see this continue as your career develops. New graduates are offered a varied and exciting career; the firm is big enough to allow a great deal of scope to new graduates to choose their own path. Students who join tend to have a wide variety of backgrounds and experience. There is a common theme though, they all have a flair for numbers and the ability to analyse and interpret detailed and often complex information.
This is why consultants demonstrate great flexibility, good consulting and communication skills, the ability to plan work effectively and a strong desire to solve challenging problems. Being able to communicate your technical work to others who may not be familiar or involved is another key foundation for every consultant. Everybody is unique, and that is a fact that Towers Watson captures by understanding that their employees want to take their careers in different directions and develop at their own pace. Writer Elsa Landberg Photo Brian Ye
TRADITIONAL STOCK TRADING Approximately a quarter of all stock trading in Norwegian shares is now using alternative marketplaces. Cost, efficiency, infrastructure, latency and anonymity are the main advantages of trading through such marketplaces. The increasingly competitive nature has contributed to a higher degree of fragmentation in trading. A typical agent may trade the same security on many different platforms as the broker seeks to avoid moving markets when carrying out big volume transactions.
egulatory authorities are losing track of financial markets as markets are becoming fragmented. Traditionally, big volume transactions were carried out under regulated and transparent terms. Proliferation of alternative trading markets, however, has impaired market efficiency and raised issues concerned with transparency. In recent years, less than half of the total trading in Norwegian equities has been carried out on the Oslo Stock Exchange, while as much as 25 % of the trades have been carried out in the dark. “Technological development and new regulations have been the main drivers of the growth in alternative marketplaces we have seen in recent years. It had not been basis for all the new platforms without a rapid development in technology» – says Per Eikrem, press contact and Senior Vice President Corporate Communications at Oslo Stock Exchange. Algorithm based trading Algorithmic trading is carried out by the usage of computers in order to place orders on stocks and other securities. The software’s settings dictate the circumstances that must be present for an order to be executed. These settings may include absolute values that refer to time, price, or quantity. Once this pre-programmed criterion is fulfilled, the algorithm will place the order automatically. Due to the technological development, the increase in use of algorithms has been a natural development in the global markets. The European Markets in Financial Instruments Directive (MiFID) was implemented in 2007 and lead to increased competition in securities trading. As a result, a number of establishments of new electronic marketplaces were created. The shares of the largest and most liquid companies on the Oslo Stock Exchange are now traded on several markets in Europe, most of which are located in London. This internationalization has enabled algorithms to function simultaneously on multiple marketplaces, and thus take advantage of time delays and mispricing on different market places for the same security. There are many reasons why algorithmic trading has become more widespread. The most important ones, however, is the mathematical accuracy and cost-efficiency such pre-programmed algorithms offer. Furthermore, this service also offers investors more options in terms of risk diversification of trades. Some people argue that the rise in pre-programmed algorithmic trading is a natural development as the increased sophistication in computer software’s has led to automation in several other industries as well. Furthermore, supporters of algorithmic trading have also highlighted the fact that their presence promotes efficiency by exploiting market imperfections and shortterm fluctuations in valuation. “It is also challenging for firms to offer” best execution “for their customers as this requires that they must have lightning fast technology that can follow the order books (algorithms) of multiple markets simultaneously. This has resulted in significant investments in networks and
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technology, while their revenues have been under pressure due to increased competition “- is Eikrem`s verdict on the current situation. High Frequency Trading (HFT) differ from traditional algorithmic trading as these algorithms perform a very large number of orders and transactions in a short time. There may be several thousand orders admissions, changes and transactions within seconds. These algorithms’ main goal is to make small low-risk profits several thousand times a day. “Even the exchanges’ revenues have declined as a result of the increased competition and lower volumes in the markets after the financial crisis of 2008,” - says Eikrem OTC Over-the-Counter (OTC) market is an alternative to stock trading as it encompasses trading in unlisted companies. Trade is conducted among investors who meet directly for trading. This market has five players: companies, investors, brokers, regulators and trade systems. The OTC market is not as strictly regulated as an exchange, which allows smaller companies to attract capital easier in this market. Unlisted companies that make their entry here is often in their early stages, and the risk is higher than for companies listed on exchanges. In addition to small business start-ups, one may also find companies that have fallen out of the exchange. Investors in the OTC market wants returns proportionate to the risk, so that the return is often higher than on the exchange. Contracts and negotiations take place directly in the market, so anonymity is not a top priority here, but the lack of reporting on trade has created concerns for governments. “European governments are now working on a new Directive (MiFID II), which among other things will address the imperfections of MiFID. This includes the opportunity to monitor trades as well as shifting the trades towards regulated exchanges”, Eikrem comments. Alternative Trading Systems (ATS) In recent years, the number of trades that has taken place outside regulated exchanges has risen, which has forced many exchanges to merge in order to recapitalize on their market share. The U.S. stock market has undergone a significant growth and innovation in trading platforms in recent years. Electronic markets have grown rapidly and become more diverse. The willingness to trade securities without the help of intermediaries has increased. The biggest factors driving these changes have been new technology, new infrastructure, new investors, new laws, new regulations and new products. A distinction is often made between two fragmented markets: Electronic Communications Networks (ECN) and Alternative Trading Systems (ATS). ECN is bid and offer run, while ATS as Crossing Networks and Dark Pools, order-driven. The way they compete with other exchanges is to offer lower latency and fees. The difference between ATS and the stock market is that the ATS creates additional value
for investors by providing anonymous trading, reduced transaction costs and access to new markets globally. The first alternative system, crossing network, was developed in 1987 and marked the beginning of the ATS revolution. Crossing Networks Crossing networks are markets outside the exchange developed by institutional investors Buyers and sellers are directly connected with each other and large orders intersected. This multinational trading platform matches buy and sell orders, for example, to the last transaction price in another large market. Buy and sell limit order are held until there is a match. There is no price discovery as this market relies on other market prices. This attracts large institutions because they can execute large orders without moving the public market prices. If a large order is sent to an exchange, the order can be split up into smaller parts so that the price is influenced along the way.
fewer opportunities to improve prices, which may lead to the dispersion and the execution of orders becoming more expensive. A trend among some exchanges has been that they have developed dark pools themselves in order to not lose market share to the ATS, which is regarded as a major threat. “There is still a very small share of the total trades that are executed through dark pools. We also have the functionality of the trading system of the Oslo Stock Exchange that is equivalent with dark pools”, Eikrem concludes. Writer Petter Kongslie, Norwegian University of Life Siences Photo Thomas J. O’Halloran
Dark Pools Dark pools are private crossing networks with the difference being that investors are offered anonymity. There are no bids and offers involved, and they do not need to publish the order handling rules to the public, nor provide trading volume or the number of orders that are traded internally. Vendors cannot see listed prices, but they can place orders. Once the order is executed, it must be reported to the market. Investors who participate in dark pools are always at risk, both in terms of orders that are not carried out and sensitive inside information which may be leaked. If an investor does not get rid of his order, it can be passed on to a stock exchange to be executed. If an investor places purchase orders in dark pools that are not executed, it will mean that there are more buyers than sellers for that particular security. This leads to an increase in the price of the security. Trading in dark pools is therefore best suited for high liquid securities. This is because we find the most likely buyers and sellers with low price volatility. The other risk is that information might be leaked from operators that govern trade in dark pools. There is nothing to suggest that they will never use the information to their advantage, which implies that investors must blindly assume that everything is correct. “Users are not necessarily superior to the new platforms, but they have more options to utilize. A typical agent (broker) may trade the same paper on many different platforms”, Eikrem comments. The SEC has recently charged a dark pool operator Pipeline Trading Systems (PTS). The charge is that they have not been honest with their customers about how they execute orders. This case will possibly allow the SEC to look back at previous regulations in such markets. It may cause new laws that the markets have to deal with in order to ensure that there is no confusion about what information should be made public. Dark pools have evolved a lot over the years and are now using systems that contribute to high frequency trading (HFT). Investors who have access to dark pools can now execute trades extremely fast. This implies that liquidity and transparency in the traditional market is reduced to smaller investors. A reduction of liquidity may result in
GUEST ARTICLE 25
ANDERS NEMETH The founder of KTH Finance Society who decided to pursue a career in New York In January 2013, Anders Németh was named a Partner of the Financial Services practice group of Oliver Wyman in New York after having been with the firm for only six years. He got an offer to join Oliver Wyman’s New York office right after he graduated from KTH and the Stockholm School of Economics (SSE). Anders was also the founder of KTH Finance Society, making this a highly anticipated interview for Capital Magazine. The other side of the Atlantic any of us dream about a career in the Big Apple. Being the financial hub of the world, New York attracts millions of people around the globe looking for a breakthrough in their careers. The competition might scare some, but Anders’ experiences tell otherwise.
“I did nothing complicated to get here. I applied for a position at our New York office, did the interviews, and got an offer. All you need is drive and a little bit of luck.” It is still quite an unusual sight to see a Swede at an accredited firm like Oliver Wyman in New York. Anders admits that competition is tough. Most companies spend most of their time and resources on their American “target schools”. However, as he himself exemplifies, it’s not impossible to make it to New York. “My tip for students who really want to work here is to not give up and to be relentless in their pursuit of what they want to accomplish. Many people seem to believe it’s impossible to land a job here, but it’s not as hard as one might think. It’s about being proactive and driven. If you know someone who works at a big bank in Sweden or Europe, contact him or her. If you don’t know anyone, do some research and cold call some recruiting departments. With an education from a good institution like KTH or SSE, all you need is for someone to read your resume and pay attention to it. At the end of the day, if we interview someone we like, it doesn’t matter where they come from—we will find a way to get them started.” Not everyone will make it to New York, but that does not mean that one cannot pursue an international career. Anders recommends that those people focus on firms that offer internal transfers and rotational programs. “There are a lot of opportunities out there for those who would like to eventually spend some time abroad. If I hadn’t joined my firm in New York, I probably would’ve started at the Stockholm office and then taken advantage of one of our rotational or transfer programs. They have an extraordinary team in Stockholm that is very successful and growing rapidly. It would certainly have been time very well spent.”
26 INTERVIEW / ANDERS NEMETH
Getting the best of both worlds Anders wrapped up his studies at the M.Sc. in Engineering Physics program at KTH and the M.Sc. in Economics and Business studies at SSE in 2006. When it was time to search for a job, Anders was torn between pursuing a career in the banking or the consulting industry. He came across Oliver Wyman, which he feels offers the best of both worlds. “Oliver Wyman is a really strong brand in the U.S., especially within Financial Services. At the point of applying for a job, however, I did not really realize that, and quite frankly it wasn’t that important to me at the time. What was more important was the ability to specialize early and to be in an environment where it pays off to work hard and be successful. Oliver Wyman provides the opportunity to specialize from day one and it has a very strong emphasis on meritocracy. If you do well, you can progress very quickly. Our average Partner track is around eight or nine years, which is shorter than most other consultancies. At the end of the day, however, what convinced me to join was the people I met during the interview process; it just felt right.” After working at Oliver Wyman for only six years, Anders was named a Partner of the firm in the area of Financial Services where he specializes in Finance & Risk and Retail & Business Banking. Financial Services is an area in which Anders got to use the quantitative skills he gained during his time at KTH. “If you are an engineer from a technical school and want to be able to use the quantitative tools you have picked up along the way, there is a lot of room for doing so in Financial Services. Banks use very intricate models with advanced mathematics behind them. As I went through the stages of being a consultant, I did certain projects that were highly quantitative. Nowadays the focus has obviously shifted, but it is as interesting as ever. I spend my time having ongoing dialogues with the senior executives at some of the largest and most complex financial institutions in the world.” Persistence is key Anders showed proof of his persistence during his school time. While at KTH, he founded KTH Finance Society, which taught him the value of being persistent in his work and not giving up. “I joined the board my first year at KTH and it was then called ‘KTHs Aktiesällskap’ (KTH Stock Society) and we were based in what was called ‘Baracken’, which was about as nice as it sounds. We had computer software called Ecovision to follow the markets, which was pretty fancy at the time, but it was extremely focused on trading. When I joined, I noticed I was not the only one interested in areas broader than just the stock market and trading.” The vision he had for Aktiesällskapet was that it would work as a link between the technical focus of KTH and the financial industry as a whole. Anders had some of the other members buy into his vision and they were on their way in building the largest student association at KTH. “I took over as chairman the following year and we went back to the drawing board. We looked at all of it and said: ‘Let’s really
change all of it and build a vision that is much more expansive.’ We focused a lot on recruiting the right people to the board and found some great individuals who joined the year after that. The creation of KTHFS was a true team effort that would not have been possible without the extraordinary individuals who served with me on the Board. We were hungry and had a vision. We did not want to settle for something small. We wanted to build the biggest and best student organization at KTH. In hindsight, maybe we were a bit naïve about some things, but it was full throttle. We tried to pursue as much as we could. We also redesigned everything, and it was actually my sister who designed the logo that’s still in use today.” The naivety clearly served them well. In order to get a bigger and nicer room, they went to the Student Union that at that time controlled KTHs organizations. The Union would not offer them a better place, so they started looking at other options and managed to get a meeting with the President of KTH. “We went straight to the President and talked passionately about why we wanted to do this and what we needed in order to accomplish our goals. It resulted in him offering us space in one of the nicest places at KTH.” Fulfilling the vision Another part of their grand vision was to travel to New York with some members to visit big banks and financial institutions. In order to do so, they had to raise money to cover their expenses for the trip. “We started pretty early to aggressively reach out to companies and pitch our ideas to see if they wanted to sponsor the organization. Another way we tried to raise the money was by organizing a fairly large seminar on 3G, which back then was way ahead in the future. We had a few big names in the industry come and speak at that event and had industry participants paid to attend. That event alone helped us raise something like SEK 150 000. After establishing a solid base of funding, we kicked off the year with visiting a number of banks, consulting firms, and the New York Stock Exchange in New York. Then we kept rolling from there.” The development of KTH Finance Society went on with “full throttle” and eventually it grew into the largest student association at KTH. The road was one Anders remembers with nostalgia. “It was a great experience. It taught me the value of finding the right people to work with and gaining their trust and inspiring them to work with you to achieve a common goal. It also taught me the value of being tenacious, to keep pushing things, that everything can be solved. It also gave me a first taste of effective decision making. I had a great time. We had a lot of fun and built friendships that have lasted until today.” Writer Peter Touma Photo Vita Generalova
INTERVIEW / ANDERS NEMETH 27
nordic m&a and PriVate eQuitY Forum 2013 12 June 2013 the grand, stockholm Mergermarket is pleased to host its sixth annual Nordic M&A and Private Equity Forum taking place in Stockholm. Join an audience of corporate M&A professionals, private equity investors, investment bankers and corporate finance advisers to discuss the current market trends and future deal expectations in the Nordic region. This year’s forum will particularly focus on inbound cross-border activity, what makes the Nordic market an attractive region for investment as well as the growth opportunities and challenges for family businesses in this region.
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