Lectures VIII
Lectures VIII
Lectures VIII
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Lecture overview
2
Q’s
Questions at the end of the lecture
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Development of the shadow banking
system
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Recall from Slide set #2
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Mutual funds and Exchange-traded funds
(ETFs)
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Mutual funds
Why do they exist?
• Mutual funds (MF) pool the resources of many small
investors under a professional money manager, and use
the proceedings to invest in securities
• There are several benefits of mutual funds
- Liquidity intermediation: investors can quickly convert
investments to cash while still allowing the MF to invest for the
long term
- Denomination intermediation: investors can participate in
securities offerings that would normally require larger capital
- Diversification
- Cost advantages: MF can negotiate lower transaction fees
- Managerial expertise: investors rely on professional money
managers
8
Mutual funds
Structure
• Investment (fund management) companies usually offer
a number of different types of mutual funds
- Investors can often move investments among these funds
without penalty (subscription/redemption fee)
• The shareholder (owners) of the MFs are investors
• Funds typically pay their expenses out of fund assets,
rather than by imposing separate fees and charges
directly on investors (investors are paying them
indirectly)
• Most relevant fees: Subscription (Sales loads) fees,
Redemption fees, Management fees
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Financial Times 13
UCITS
• UCITS or ‘undertakings for the collective investment in transferable
securities’ are investment funds regulated at European Union level. They
account for around 75% of all collective investments in Europe. The
legislative instrument covering these funds is Directive 2014/91/EU.
• Due to the intense regulatory process to have a fund approved as UCITS
compliant by a regulator, the UCITS label serves as a stamp of quality and
reliability for investors.
• From 1 July 2011 all UCITS are required to publish a Key Investor
Information Document ("KIID").
• The AIFMD (Alternative Investment Fund Managers Directive) allows for
qualifying investor and retail investor funds to be established under its
rules. For the latter, the investor protection provisions are similar to those of
UCITS but the investment restrictions are less stringent.
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Assets under management (AUM) in Europe
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Exchange-traded funds
vs. mutual funds
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Total net assets and number of ETFs
Billions of dollars, year-end
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Investment Company Institute 2022 Fact Book
European active mutual funds lose out
on €8bn in revenues
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Financial Times, Dec 20, 2023
Hedge funds
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What is a hedge fund?
–25
A word from the inside
“They are supposed to make money all the time, and when they fail at
this, their investors redeem and go to someone else who has recently
been making money. Every three or four years they deliver a one-in-a-
hundred year flood. They are generally run for rich people in Geneva,
Switzerland, by rich people in Greenwich, Connecticut.”
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2016 Documentary “Betting on Zero”.
It investigates the allegation that Herbalife is a
pyramid scheme, and follows Bill Ackman’s
shorting on Herbalife.
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Meme stocks
r/WallStreetBets
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Venture capital & private equity funds
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Venture capital & private equity funds
• Often Venture Capital is treated as a separate asset
class
• Private equity investors tend to target fairly mature
companies, which may be under-performing or under-
valued, with the goal of improving their profitability and
selling them for a return on their investment (capital
gain)
• Venture investors target early-stage and expanding
companies (often pre-revenue) with fast-growth
potential, with the objective of nurturing and growing
them quickly, then selling them in M&A deals or taking
them public.
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Risk adjustment in private equity returns*
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37
Kahle & Stultz (2017). Is the US public corporation in trouble?
Journal of Economic Perspectives 31/3.
Spa Holdings 3 Oy announces a voluntary
recommended public cash tender offer for all the
shares in Ahlstrom-Munksjö Oyj
• Why go private?
41
Why do they exist?
• Asymmetric information
– For example: new security issuances, M&As, renegotiation of
loans to distressed firms
– Investment banks emerged as intermediaries in information
sensitive transactions
– Investment banks bring together
• Investors and analysts who want to sell information
• Investors and corporate security issuers who want to purchase
information
– Firms use a reputable investment bank as an advisor and
intermediary
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Case: IPOs
• Most issuers issue only relatively seldom. Therefore, the
investment bank typically has a substantial informational
advantage about the state of the market. What prevents
the investment bank from underpricing the issue
excessively?
• Firms go public only once. What prevents them from
following a "hit and run" strategy, i.e. overprice
excessively their IPO?
• Answer: Investment banks put their reputation on stake
when pricing the offerings. What happens if an
investment bank underprices or overprices too much?
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Spa Holdings 3 Oy announces a voluntary
recommended public cash tender offer for all the
shares in Ahlstrom-Munksjö Oyj
ADVISERS
The Offeror has appointed PJT Partners (UK) Limited and Goldman Sachs
International as financial advisers, Nordea Bank Abp as financial adviser and
arranger outside of the United States, Pöyry Capital Limited as financial
advisor and Hannes Snellman Attorneys Ltd, Roschier, Attorneys Ltd and
Kirkland & Ellis International LLP as legal advisers in connection with the
Tender Offer.
Ahlstrom-Munksjö has appointed UBS Europe SE as financial adviser and
White & Case LLP and Cleary Gottlieb Steen & Hamilton LLP as legal advisers
in connection with the Tender Offer.