Читать книгу Impact Investment - Allman Keith А. - Страница 16

Although the previous analysis on country suitability included many investment related characteristics, economic indicators were notably missing. There are many economic indicators one could look to but two important ones that capture multiple subrisks are business cycle and foreign exchange. Even if a country is suitable for investment, the timing might not be right because of these two factors.

Business Cycle

History has shown economists and businesses that there is a relatively standard pattern in the economy that creates a business cycle. Economies move through periods of growth, contraction, and back to growth. The time of each point in the cycle can vary widely, but this pattern is evident. Figure 2.5 depicts the standard business cycle.

Figure 2.5 The standard business cycle is important for investors to understand.

Countries can exhibit their own unique business cycles or be correlated to other countries that may influence their economies. For this reason, an investor should always gather economic data on the country in mind to understand the business cycle. Sector specific investors must think about their sectors vis-à-vis the business cycles and their expected evolutions. For example, a housing project company may look attractive during the growth phase shown in Figure 2.5 since the economy will be getting better, discretionary spending will be higher, and credit will be loosening. However, during a recession phase credit might tighten up, making mortgages difficult to obtain and consumers focus on savings.

Timing investment with the business cycle can be important given the holding time of many impact investments. Most equity impact investors hold on to their investments for five to seven years, if not longer. Debt investors average from one to three years for their investment horizons. The business cycle at investment and exit can have profound impacts.

An ideal situation would be to identify the early part of the growth phase for an economy. This can be difficult, as statistics that are being shown will be based on the recession phase. However, these statistics are where opportunity can exist. Businesses will generally be down and business valuations may have decreased. Investing at this stage could lead to a low entry price and future increase in performance. For debt investors, it would also be an opportune time, as sales will increase that should cover all or some debt service.

The contrary situation would be investing during a contracting phase. In this situation, the business valuations could still be very high, as they would be reporting data from the expansionary phase. Soon after investment, the economy could begin to shrink, sales could decrease, and credit could tighten. The combination of decreased sales and tighter credit can put a substantial amount of stress on an early stage company. If the company is unable to generate or obtain working capital, it will need more cash from equity or debt investors. Investors in these situations may find themselves funding the company until a growth phase begins.

Debt investors need to pay special attention to the inflationary aspect of the business cycle. If debt investors offer a fixed-rate product, they could introduce the concept of basis risk, defined as a risk caused by a mismatch between fixed and floating interest rates. For instance, if the investor is a local debt fund that pays its investors a floating rate return, but offers fixed rate debt to investees, there could be a mismatch, depending on how the business cycle evolves. If debt was issued to an investee at the bottom of a recession, when interest rates might be very low in order to spur growth, and then the growth phase proceeds quickly where rates start rising, the debt fund will incur margin compression. The yield from the investee will be fixed low and the amount the debt fund must pay its investors will increase. Most funds would invest in hedges, but these can be expensive.

Foreign Exchange Risk

Whether globally or locally based, investors often have to contend with foreign exchange (forex) risk. This is the risk that movements in currency exchange rates may impact the investor directly through a conversion into or out of a currency different than the one the investor is funded in, or indirectly through the invested company's operational exposure to foreign exchange.

Direct forex risk can occur at multiple points in an investors' investment horizon. For equity investors, it can occur at the time of investment and at the time of exit. For debt investors, it can occur at the time of investment, during interest payments, and during principal amortization. Debt investors typically hedge against forex risks, but equity investors have a difficult time. The difficulty for equity investors to hedge foreign exchange risk is caused by the fact that they do not know the duration or how much to hedge against. Equity investors may have to hold their investment for many years until exit, making long-term hedging extremely costly. Also, since an exit amount can vary wildly from investment to investment, the exact amount to hedge for exit is difficult to pinpoint. An equity investor can easily be over or under hedged.

If an equity investor does choose to take on direct currency risk and invest in a currency that is different from its funded currency, then she should research the foreign currency volatility and how future movements might affect returns. To understand this better the following two points of direct forex risk for an equity investor should be analyzed in detail: investment and exit.

Direct forex risk at investment can occur when an investment is agreed upon and analysis done at an exchange rate that changes between the time the funds are actually disbursed. Often, after agreeing on an investment valuation and ownership stake it could take a number of weeks before definitive documentation is negotiated and finalized. During this time, if a foreign currency is volatile, there could be risk of loss.

To understand this further, open the file FX_IRR.xlsx from the website and select the Investment sheet. Starting in C11, there are data on the Brazilian real from August 2013 to the end of October 2013. The Brazilian real was noticeably volatile during this time. The example that has been set up is an equity investor that agreed to invest BRL6 million assuming an investment valuation and ownership percentage set on August 4, 2013, but did not finalize and transmit funds until September 29, 2013. The equity investor would have completed return analyses at the August rate of BRL2.450 to USD, but would have actually invested at the September rate of BRL2.181 to USD. At BRL2.450 to USD the investor would have to convert USD2,449,170 to make the investment; however, after eight weeks the exchange rate has moved such that to invest the same BRL6 million the investor would have to invest USD2,751,511. Immediately, the investor has lost USD302,342. From an IRR perspective, ignoring exit exchange rate risk, if the investor assumed they could exit in 5 years for USD5 million, they would have immediately been down 2.65 percent IRR (i.e., difference between a potential 15.34 percent IRR assuming that was how much was converted, versus a 12.69 percent IRR caused by having to use more USD for investment due to the rate change) because of the exchange rate. Figure 2.6 shows the situation from the worksheet.

Figure 2.6 Between agreement and closure, the BRL appreciated causing a loss to the USD-funded investor.