Under the title Confronting the Crisis: Economic Perspectives, the annual CIIF symposium served as a forum for debate on the current economic situation and to present the main studies undertaken by the center over the past year. The aim was to present options for the future that offer the greatest guarantees. The topics chosen were: the health of venture capital, the profitability of pension funds, and reliable methods for risk measurement. The event was attended by more than 200 experts, researchers and executives.

Necessary Structural Reforms

 
The instability of the financial system and its repercussions on the global economy were the topics for the round table moderated by Prof. Juan José Toribio. The speakers concurred that the crisis would last longer than initially predicted but that it also represents an exceptional opportunity to implement all the structural reforms needed by our economy.

José Luis Escrivá, director of the BBVA Department of Economic Research, emphasized that we are presently at historic highs in regard to the perception of risk and that the financial situation remains highly tense, which further increases risks for the global economy: “Never have we confronted a crisis with such high levels of private-sector debt (for both families and companies). In this case, our hopes are centered on tax policy,” Escrivá explained.

Ángel Laborda, head of the Economics and Statistics Bureau at the savings bank foundation FUNCAS, noted that, “Crises do exist: they are endogenous and are governed by the fact that we are a market economy,” Laborda laid emphasis on the internal factors that have fostered the crisis inside Spain: “Over-investment in housing, cyclical recession based on imbalances in supply and demand, and high labor costs per unit produced inherent in our economic model have partly caused the crisis in our country.”

The head of the FUNCAS Economics and Statistics Bureau also examined the main Spanish economic indicators. “We are undergoing a contraction in economic activity, a sharp downward adjustment in spending and investment, a drop in GDP growth forecasts and a rising unemployment rate,” he stated.

How to Confront the Private Equity Shakedown

Private equity is in the middle of the perfect storm driven by various factors. The debt bubble has burst, corporate earnings have dropped and institutional investors are reducing their private equity allocation. This lack of confidence is, according to Prof. Heinrich Liechtenstein, is one of the reasons why “20% of venture capital firms will disappear in three years.”

The companies surviving will be those that had managed their resources properly prior to the crisis and those with cash flow will come out on top. “Companies that had good margins will be consolidated, and will take over the funds of others and improve their market position,” says Liechtenstein.

His analysis is based on a study of the credit spreads of 328 companies with venture capital participation, which also predicts the appearance of new players in the market that will be more focused on operating value creation and in margin improvement. In any case, he explained, Spain would not be seriously affected by this shakedown, since the country is relatively new to this sector.

Gain-Loss Spread: A New and Intuitive Measure of Risk
Prof. Javier Estrada then analyzed the characteristics of a new method of risk measurement: the Gain-Loss Spread (GLS), an extremely useful alternative in a context where it is essential for investors to be aware of the risk involved in a product.

According to Estrada, the GLS has major advantages over other risk measurements, since it includes downside, probability and the magnitude of the losses: “It is a more intuitive measure of risk than the standard deviation, but is highly correlated to it. It provides a better illustration of returns than beta and the standard deviation.” Estrada also emphasized the usefulness of this tool in portfolio selection, since it enables to distinguish between high-risk and low-risk portfolios.

Low Returns for Pension Funds

Over the past few years, the average return of the pension funds has been considerably lower than inflation and than the return of Government Bonds of all maturities. This was shown by Professor Pablo Fernández in the results of his research on pension and investment funds in Spain.

“None of the pension funds from the individual system with 15 years of history produced a higher return than that of the 10-year Spanish Government Bond. Only 12 out of the 587 schemes with 10 years of history and 2 of the 1,520 schemes with 5 years of history had a higher return than the Madrid Stock Exchange Index,” noted Fernández. In addition, he pinpointed high fees as one of the causes of the disappointing overall result of the funds and stated that this performance “in no way justifies a tax preference in their favor.”

Referring to investment funds, Fernández indicated that here too results have been anything but favorable: “In the period from 1991-2008, these funds lost 102 billion euros from their investors. The total fees and costs incurred over this period amounted to 36 billion euros.” Lastly, he spoke about the financial crisis, calling for common sense and understanding when investing, and transparency and responsibility from the fund managers.