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FE Readings > Guest Lectures (2020/2021) > Flashcards

Guest Lectures (2020/2021) Flashcards

1
Q

How is Nasdaq Baltic structured?

A

Each country has its stock exchange, however, investors treat them as one market.

Nasdaq Baltics has: 1 Marketplace, 1 Membership, 1 Settlement.

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2
Q

List the main topics that were covered in the Nasdaq Baltics lecture!

A
  1. Corporate Governance model (who does what)
  2. Reasons of non-compliance of Baltic firms
  3. Corporate governance structure in LT
  4. Why corporate governance matters
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3
Q

How does Nasdaq Baltics manage the corporate governance questions?

A

Each of the stock exchanges has issued corporate governance codes and rules and provides guidance for listed companies to ensure successful implementation.

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4
Q

What is Corporate Governance (CG)?

A

CG: a set of relationships between a company’s management, its board, its shareholders and other stakeholders.

CG provides the structure through which the objectives of the company are set, and the means of reaching objectives and monitoring performance are determined.

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5
Q

List 5 bad Corporate Governance examples!

A

1) Changing the shareholders meeting agenda during the shareholders meeting;
2) Disclosing poor information on agenda items and proposing decisions for the shareholders meeting, not providing information on the candidates to elect;
3) No independent board members;
4) No clear dividend policy;
5) No clear remuneration policy for the members of the supervisory board and management board.

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6
Q

Why does no information about the management on the company’s webpage is considered as a bad CR example?

A

Because the company needs to be sure that foreign investors understand how the company is governed. If it is not explicitly stated, the investors are not attracted to the company.

12% of firms have nothing on their webpages while 35% of firms provide only names.

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7
Q

Why does keeping shareholders meeting’s agenda a secret is considered as a bad CR example?

A

Because shareholders are not able to base their decisions on the judgment as they have not received information about topics discussed beforehand.

If, for example, voting on the best representative takes place, they are not able to vote as they do not know which is the best candidate because of a lack of information.

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8
Q

What information is included in the CR code regarding the Independence Criteria?

A

The CR code recommends having ~50% of independent* board members to make sure that the actions are not connected to the interests of the major shareholders and minor shareholders are protected but the company is not harmed.

*not connected to the main shareholder

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9
Q

What will be introduced in 2021?

A

The first Remuneration Report will be published. For now, only the total amount of the board’s remuneration is reported. After 2021, listed companies will be required to introduce a remuneration policy: shareholders will vote on setting the principles of paying to their employees/themselves, etc. Companies will have to follow the policy but Auditors will make sure that the policy and reports match.

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10
Q

What kind of board structures are present in the Baltics?

What are Nasdaq’s suggestions regarding the structure of the board?

A

In LV and EST there are companies with both 1 or 2 boards while LT’s companies have only 1 board.

Nasdaq: in the case of one board, having a SUPERVISORY board is suggested. However, if the company has only one board, it is required to report the reasons behind this decision.

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11
Q

What is the relationship between share prices and CG activities?

A

Positive - when one goes up/down, the other goes up/down/

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12
Q

What is FinTech?

A

Computer programs and other technology used to support or enable banking and financial services.

“We need banking but we don’t need banks.”
The idea is to look at services provided by banks and create better/cheaper/faster/easier ways how to do them.

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13
Q

What are the main components of the financial system?

A
  1. Lending –> Borrowers
  2. Transactions/Payments –> Financial markets & intermediaries
  3. Investing –> Savers
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14
Q

Name 2 countries that take the biggest share of marketplace issued-loans?

A
  1. China

2. U.S.

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15
Q

List 3 forms of FinTech (focus areas)!

A
  1. Lending
  2. Transactions/Payments
  3. Investments
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16
Q

Explain how FinTechs have changed LENDING!

A

Previously: whenever you needed money, you borrowed from the bank
Now: Fintechs provide nonbanking services and there are many crowdlending possibilities.

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17
Q

Explain how FinTechs have changed the way how TRANSFERS/PAYMENTS are done!

A

Previously: you went to the bank -> transfer was made -> the opposite bank takes some time (days) to process the transfer -> in addition, fees exist.
Now: find companies with the opposite wishes

Example: Transfer Way

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18
Q

Explain how FinTechs have changed the way how INVESTMENTS are made!

A

Previously: Regular investing in stocks
Now: FinTechs are trying to disrupt the traditional way of investing.
Ex: Robinhood: fee-free trading –> more user-friendly experience
Alternative where to place money: 2-sided market(both lending and investing)

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19
Q

What are the 2 major concerns of FinTech companies?

A
  1. When going public, the value of the company goes down (a lot of FinTechs do not do this)
  2. The future actions from Big Tech/Social Media companies such as Apple, Facebook, Amazon can harm the business because they already have huge customer base.
    Ex: Siri can send money via PayPal, possibilities of paying via Messenger, etc.
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20
Q

FinTech that focuses only on one product line is called…

A

…Mono Line FinTech. The opposite is BUNDLING (provides more than one service).

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21
Q

Explain the way how Mintos operates. What kind of loans does Mintos offer?

A

Mintos investors invest money in loans while loan originators (companies like mogo) ask for money from Mintos.

Mintos offers mortgage, car loans, invoice financing, business loans, personal loans, agricultural loans.

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22
Q

What are the main advantages of becoming an investor/borrower in FinTech companies?

A 
1. Securitization is not a new idea. Before the financial crisis: nobody understood what they are buying (several loans into one package creating huge value). 
FinTech took this idea and completely reversed it: loans were sliced into several parts, thus, making it possible to every investor to buy a slice from the loan (opening this asset class to more people). 
2. By slicing loans in smaller parts, FinTechs ensure that the risk is spread over many people - different statistical methods are helpful.
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23
Q

What was the MAIN IDEA behind the KPMG guest lecture?

A
  1. The problem that should be solved: in the real-life market value of the company (WACC) is rarely equal to its RAB* (Real Asset Base)
  2. Finding out whether CAPM works in real life or not.

*proxy of investments on what you can get return back

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24
Q

THEORETICALLY: What are the 5 main components of the cost of EQUITY? What is included in each of the components?

A

1) RISK-FREE=r (real rate, inflation, currency risk)
2) COUNTRY RISK (war, natural catastrophe, political risk, etc.)
3) MARKET EQUITY RISK= premium (market structure, the strength of competition, commodity prices, etc.)
4) LISTED FIRM RISK= BETA (sector, operating risks, exposure to market risks, etc.)
5) SPECIFIC FIRM RISK = ALPHA (size, market position, substitute products, barriers to entry, etc.)

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25
Q

What is general consensus on equity risk premium on practice?

A

between 5.5% and 7.0%

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26
Q

What is the general suggestion for estimating Beta in practice?

A

In general, suggests using 2/3 of actual beta

calculation data and 1/3 of unity beta (1.0).

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27
Q

THEORETICALLY: What are the 3 main components of the cost of DEBT?

A
  1. Risk-free rate + Country risk + Currency premium
  2. Interest tax shield
  3. Credit margin
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28
Q

KPMG guest lecturer argued that you can calculate CAPM (revenues) in the real-life if you…

A

… 1)calculate your expenses next year, 2) know your depreciation next year, 3) know your allowed profit, 4)know allowed revenue tariff (ex: the amount of gas delivered).

!!! All of the CAMP points are presented in the law (Anete commented that it is a huge development compared to the period 10 years back).

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29
Q

What were the 3 tips regarding the risk-free rate?

A
  1. look at the L.R. bond (risk-free) rate as it is safer because of no re-investment risk.
  2. always check the currency risk of the bond.
  3. look at the unique risk-free rate for all eurozone countries in the SEB bank page.
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30
Q

What were the 4 tips regarding the country risk premium?

A
  1. BOND PAIRING: find bonds with very close maturity and compare benchmark country and country of your interest.
  2. calculate the SPREAD (it will show raking: AAA+/AA-).
  3. If CURRENCIES DIFFER, you have to subtract INFLATION differential from the spread (0% differential in the eurozone).
  4. use Damoradan website for such information
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31
Q

Which of the CAPM components is considered the most subjective and why?

A

It is equity risk premium as there is no consensus regarding the time period for which historical data should be analyzed. (consensus: 5.5%-7%; for the last 10 years: 4.83% vs 50 years: 3.53%)

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32
Q

Describe the BETA estimation steps!

A

Compare the particular company/industry with the benchmark by running a regression and finding covariance between them.

  1. Find companies that are the same
  2. How stock prices have reacted 12/24/36 m. (the one with the highest R^2)
  3. Derives Betas for comparable companies.
  4. Unlever Betas according to the capital structure of each company.
  5. As time goes by, Betas tends to 1 (risky companies become less risky and vice versa). Thus, the suggestion of using 2/3 calculated Beta + 1/3 of unity Beta(=1).
33
Q

Why practitioners do not like estimating alphas?

A

Because it is very subjective as Alpha depends on several aspects such as forecasting risks (too optimistic about FCF), small company risks (not true) –> Alpha is considered as a “rubbish bin” of your calculations.

34
Q

What was the main conclusion after the KPMG lecture?

A

If CAPM exists, RAB would be equal to Market Value, but it is not true as INVESTORS BELIEVE THAT THERE ARE MORE RISKS THAN CAPM SUGGESTS, thus, practitioners adjust the risk returns.

However, CAPM is still widely used.

35
Q

What are the 2 approaches towards studying the financial crisis?

A
  1. Economic History

2. Study Data

36
Q

What is the Financial Crisis?

A

The financial crisis involves a banking crisis ( including non-bank lenders) and it leads to losses and defaults which in turn reduces the capacity of the banks to lend money and to produce liquidity.

This in turn reduces growth and welfare in society.

37
Q

Describe the main idea of the case study discussed during the lecture!

A

Bear Stearns - investment bank.
Did not take deposits from the general public, could not borrow from the Fed and was lightly regulated.
31% mortgage paper, liquidity risk: highest in the industry, depended on repos.

JP Morgan Chase - commercial bank.
Took deposits from the general public, borrowed from the Fed and were under full regulation.
”Fortress Balance sheet”, 12 months of cash in the balance sheet, A ratings. Costs: -5% RoE compared to other firms.

In March 2008 Bear Stearns collapsed and was bought by JP Morgan Chase with support of Government funds
The case tells the story of how this happened.

38
Q

What were the main actions that happened during March 14-16 2008?

A
  • Bear-Stearns: all it´s cash reserves of €18 billion in the last week were lost.
  • On March 14 (Fri) the Federal Reserve Bank of NY announced that it would provide Bear Stearns with funding up to 28 days using JP Morgan Chase as a conduit
  • On March 16 (Sun), Bear´s board accepted JPMC´s offer to purchase Bear for €2 per share with significant government assistance.
39
Q

What were the arguments for and against saving Bear?

A

FOR:
• It was too interconnected to fail (huge amounts of repos, they were a prime broker)
• Bankruptcy could have spread panic in the financial system (fragile situation).
• Bear had large volumes of mortgage debt. Forced selling could have started a free fall in the markets
AGAINST:
• Moral hazard (of other investment banks) - lack of incentive to guard against risk where one is protected from its consequences

40
Q

What happened after the acquisition?

A

People thought that the US was 75 to 80% through the financial crisis.
However, by the end of 2008: Federal Reserve has increased its balance sheet from $700Bn to $2250Bn due to various lending programs. The worldwide recession is a fact. :)

41
Q

What is the lesson after this crisis?

A
  1. Illustrates the interconnectedness of the system.
  2. Lessons for reregulation.
  3. Need for transparency.
42
Q

According to “Livonia Partners”, what is private equity?

A

Broad definition: any investments into a private company.

Narrow definition: private equity and funds:

  • typically structured as partnerships
  • separation between limited and general partners
  • capital is called when necessary
  • limited fund life, typically 10 years, first 5 years for investment
  • investing in non-public companies with control/influence
43
Q

According to “Livonia Partners”, what are the differences between a private equity fund and venture capital?

A

They are very similar structurally, however, it is easier to think of VC as a subset of private equity.
Differences relate to types of investments and how they are managed.
E.g., private equity firm can work with many companies at once, while VC can take up only abut 5-6.

44
Q

According to the guest lecture of “Livonia Partners”, what are the different flavors of private equity?

A
  • buyout funds
  • growth funds
  • venture capital
  • infrastructure
  • turnaround funds
45
Q

According to the guest lecture of “Livonia Partners”, who are fund investors?

A
  1. most local pension funds (Swed, Citadele, Luminor, etc.)
  2. global and local development institutions (major sponsors of private equity funds, giving up to 20m per fund, e.g., altum)
  3. some foreign investors (underrepresented in the Baltics, but in the last couple of years, our region is becoming more attractive)
46
Q

According to “Livonia Partners”, what are the 4 pillars that drive the value of their investment?

A
  1. Experienced management (better to have a shitty product and a good team than vice versa)
  2. Global ambitions (companies pursuing international growth, clear expansion strategy, skilled sales teams for markets)
  3. Livonia value-add (guiding management in strategy execution, identifying fields of improvement, previous experience & network)
  4. Robust financials (diversified earnings, strong margin, responsible capital structure)
47
Q

According to “Livonia Partners”, what are the three deal origination pillars?

A
  1. Team’s professional network (direct approach: friends, acquaintances approach Livonia directly. Best source of deals because of no competition and reputation building)
  2. Investment banks (help entrepreneurs to sell their business/attract financing/assist w acquisition)
  3. Industry screening (team screens all Baltic enterprises and finds those they want to invest in - most potential).
48
Q

According to “Livonia Partners”, why does it happen that out of 100 potential deals only 1-2 go through?

A

There are several rounds of due diligence (screening for suspicious stuff), and the target may not like the proposal of LP.

49
Q

According to “Livonia Partners”, what are the stages of dues diligence?

A
  • market overview (what is its potential)
  • company analysis (financial statements)
  • management team and business plan review (how competent they are)
  • legal, tax, environmental, technical due diligence
50
Q

According to “Livonia Partners”, what are the two final negotiation stages and why are they important?

A

Share purchase agreement and shareholder agreement. These stages are very important because the contract must state how exactly LP can sell its shares in 5 years.

51
Q

According to “Livonia Partners”, what is the private equity value-add? (5)

A
  1. Operational improvements
  2. Market consolidation
  3. Financial structuring
  4. Distressed/turnaround investments
  5. Growth investments
52
Q

According to “Livonia Partners”, what was the driver of private equity in the past, and what is it now?

A

In the past - financial engineering.

Now - operational improvement.

53
Q

According to “Livonia Partners”, what are the different valuation methods that can be used? (5)

A
  1. Transaction earning multiples
  2. Trading earning multiples
  3. Discounted earnings (DCF)
  4. Book value of assets
  5. Industry-specific KPIs
54
Q

According to “Livonia Partners”, what are the questions that should be considered when calibrating multiples for valuation?

A
  • how much competition is there for the deal?
  • how easy will it be to exit the investment?
  • are there any synergies you can get with your other portfolio companies?
  • how much of the purchase price can be financed with debt?
  • how much confidence do you have in the company’s future growth?
  • how large is CAPEX compared to EBITDA?
    etc.
55
Q

According to Juris Grišins (CAPITALIA), what is the main concern of the lender?

A

When considering giving a loan to the company lender primarily is concerned about the safety of the business, not its potential. Hence, the lender has a very different approach towards how it views the company compared to an equity investor (e.g., venture capital fund).

56
Q

According to Juris Grišins (CAPITALIA), what are the three stages of lending?

A
  1. Invest
  2. Hold
  3. Exit
57
Q

Describe the investment stage from the perspective of CAPITALIA.

A

In the investment stage, you need to make a decision whether to invest and how to invest.

  • Highly automatic (running different forecasts)
  • standardized procedure
  • investment committee is involved
58
Q

Describe the holding stage from the perspective of CAPITALIA.

A

Managing the investment.

  • finding any signs when the company may do poorly
  • checking that there are no negative signs
59
Q

Describe the exiting stage from the perspective of CAPITALIA.

A

Get your income and investment bank.
2 ways:
1) loan amortization: works like mortgage - the debtor pays out principal and interest every year, and at the end, there is nothing left to repay
2) bullet loan: principal is paid at the end

60
Q

According to Juris Grišins (CAPITALIA), what are the decision factors when evaluating the potential investment?

A
  1. Historical financials
  2. Industry (traction, risk, transparency)
  3. Collateral available for the loan
  4. Company (size, governance, management, operations)
  5. Story & value (why is the financing needed in the first place, and whether its justifiable)
61
Q

According to Juris Grišins (CAPITALIA), what is a good collateral? Bad?

A

A good collateral is an apartment in the bedroom community of the city.
A bad collateral is a new apartment in the city center or other very rich neighborhood.

62
Q

According to Juris Grišins (CAPITALIA), what are the steps of financial analysis?

A
  1. Cash flow (quality & sustainability)
  2. Leverage (ability to repay debt)
  3. Margins (& fluctuation)
  4. Reliability (check for red flags)
63
Q

According to Juris Grišins (CAPITALIA), what can be the red flags when evaluating the company’s financial performance? How to look for them?

A

Examples: heavy fake cash (no cash in reality, it disappeared somewhere), huge inventory in BS when there is none in reality.

How to spot red flags: compare financial ratios to the benchmark indices in the industry.

64
Q

According to Juris Grišins (CAPITALIA), what is the outlook on investments from the venture capitalist’s perspective?

A

Venture capitalist invests in the future and hence has very future-oriented mindset when evaluating investment in the companies.
A great VC needs to understand the global/local/regional tendencies of the industry, see where it will go.

65
Q

According to Juris Grišins (CAPITALIA), are the stages of VC lending different?

A

They are the same (invest, hold, exit), but there are differences:

  • investing stage is longer (more at stake)
  • holding stage -> bringing new clients to the company you invest in (to grow their business)
  • 2 ways to exit:
    1) IPO (best way)
    2) sell shares to a big company
  • worst case scenario of exit: sell shares to the company’s managers
66
Q

According to Juris Grišins (CAPITALIA), what are the decision factors for VC?

A
  1. Management
  2. Industry
  3. Product (how far it is developed)
  4. Financials (results to date, forecasts, valuation)
  5. Company
67
Q

What advice did Juris Grišins (CAPITALIA) give about the investing mindset?

A
  • invest long term (ask yourself: would you be happy to hold a stock for 10 years?)
  • don’t buy the hottest stock in the hottest industry
  • follow the investment circle
68
Q

According to Juris Grišins (CAPITALIA), what is a very good result for VC at the end of the project?

A

Double your investment - amazing job.

69
Q

Describe the investment circle introduced by Juris Grišins (CAPITALIA).

A
  1. Learn (make a write-up why you bought that stock, decide what would be the situation when you would be willing to sell that stock)
  2. Save (save some % of your salary)
  3. Analyze & invest
70
Q

What immediate options of investing did Juris Grišins (CAPITALIA) recommend?

A
  • Baltic stock (we can analyze them)
  • ETFs (choose one index, e.g., iShares)
  • Second pension tier (choose index with lowest commission)
  • Third pension tier (the state is giving some of your taxes back - only choose if you can get index fund with commission of around 0.5%)
  • Crowdfunding (remember the mentality of a loan manager)
71
Q

What are:

  • Moody’s Investors Service
  • Moody’s Local
  • Moody’s Analytics?
A

Moody’s Investors Service provides investors with a comprehensive view of global debt markets through credit ratings and research.

Moody’s Local offers domestic credit ratings in Latin America using experienced teams of local analysts and customized methodologies.

Moody’s Analytics provides data, analytics, and insights to equip leaders of financial, non-financial, and government organizations with effective tools to understand a range of risks.

72
Q

What is the definition of a derivative, according to Alex Ilkun (Moody’s)?

A

An arrangement or product (such as a future, option, or warrant) whose value derives from and is dependent on the value of an underlying asset, such as a commodity, currency, or security.
Derivatives are used as a risk mitigation tool.

73
Q

According to Alex Ilkun (Moody’s), what are the four types of risk mitigation?

A
  • accept
  • avoid
  • reduce
  • transfer
74
Q

According to Alex Ilkun (Moody’s), what are the limitation of risk transfer using derivatives?

A 
Risk is transferred, but not reduced (or eliminated).
Additionally, other risks may arise:
- counterparty (credit) risk
- operational risk
- liquidity risk
- legal risk
75
Q

List the derivatives that are used to address:

1) forex risks
2) interest rate risks
3) both of the above?

A

1) Forex risks - forward, option contracts
2) Interest rate risks - interest rate swaps, T-locks
3) both - cross-currency swaps

76
Q

Which derivatives are used to address:

1) credit risks
2) price risks
3) equity risks?

A

1) credit risks -> credit default swaps (CDS)
2) price risks -> commodities futures
3) equity risks -> index-linked funds, share derivatives

77
Q

What are T-locks?

A

T-locks is a measure of risk transfer when you lock in the current risk for the future.

78
Q

Explain the “Fortress Balance Sheet”

A

“Fortress Balance Sheet” strategy - liquidity and capital levels that exceed not only regulatory requirements but also those maintained by major competitors.

Liquidity strategy with fours basic components:

  • Large amounts of cash capital (normally ~ 12 months of cash, in late 2007 almost 10 years);
  • Term financing (to match assets with liabilities);
  • Stress testing to understand where improbable but very large losses could appear;
  • Liquidity reserves for assets that became illiquid.

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