[ccebook.cn]The World in 2010

days of easy pickings for hedge funds and their sponsor banks which traded credit-derivative insurance and
other exotic debt instruments are over. But leverage will return and the securitisation market will be open for
business, albeit in a more sober form. This will change the financial landscape in several ways.
First, reduced leverage and tighter credit will herald the end of the private-equity model of the past 20 years.
This was epitomised by KKR’s “Barbarians at the Gate” takeover of RJR Nabisco, the food-to-tobacco
conglomerate which was stripped down and sold off. Private equity will shift to older models of long-term
funding for small and medium-sized businesses epitomised by 3i and Alchemy Capital (albeit without the
charismatic Jon Moulton).
Second, large private-equity players such as Blackstone, KKR and Carlyle, though
bloodied, will continue to engage in leverage, provided they have committed capital.
Those raising capital will still find it hard, even if lending picks up. Meanwhile, liquid
hedge funds such as Citadel will muscle in on private equity’s patch.
Copyright © 2009 The Economist Newspaper and The Economist Group. All rights reserved.
Private equity will
shift to older
models of longterm
funding
Third, expect a shift to private wealth managers at the expense of supermarket
banks which stuffed clients with poorly performing funds (courtesy of Bernard Madoff) and AIG bonds. The
shift will offer opportunities for the private Swiss banks (despite no let-up in the American-led campaign to
water down Swiss confidentiality), established families such as the Flemings and even hedge funds such as
GLG arguing that they can manage money better.
Risk will continue to be redefined in 2010. One of the effects of the financial crisis was to kick-start the
corporate-bond market to help companies refinance. The demand for “risk mitigation” will gain pace, with
more focus on clearing mechanisms, independent valuations and certainty in settlement to stop rogue traders.
And here we come to the bitter-sweet irony. Having spent the past couple of years worrying about derivatives
as “financial weapons of mass destruction”, regulators (and investors such as Warren Buffett) will have to
accept that these hedging instruments are here to stay.
Governments will hedge against inflation, still a risk after the fiscal and monetary expansion to combat the
crisis. Pension funds will hedge against longevity, increasingly important in planning for an ageing population.
A return to normality in 2010? Not quite. More like a return to sensible risk management.
Lionel Barber: editor-in-chief, Financial Times
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