Overview of the Development of Capital Markets
Topics to Address
Purpose
Players
Instruments
Trends in Capital Market Development
2
Purpose of Capital Markets
Efficient Allocation of Savings
Diversification of Risk
Catalyst for Productive Economic Growth
3
Key Players in a Capital Markets Transactions
Issuer (MFI) Exchange Underwriter
Rating Agency Investor Regulator
4
Intermediaries Facilitate Capital Flows
Institutions Seeking Intermediaries Investors with
Capital Facilitating the Flow of Capital Capital
Principal Institutional
Investing Investment
Public Investors
(Merchant Management Pension Funds
Banking)
Companies Mutual Funds
Endowments & Foundations
Insurance Companies
Debt
Private Equity Funds
Capital Hedge Funds
Private Financing & Markets
Companies & Advisory Sales & Retail Investors
Funds (Investment Trading High Net Worth
Banking) Equity Small Ticket Retail
Capital
Markets
Governments &
Governments &
Agencies
Investment Research Agencies
5
Key Players in Capital Markets Transactions
A legal entity that develops, registers and sells securities for the purpose of financing its operations
Issuers are legally responsible for the obligations of the issue and for reporting financial conditions,
Issuer material developments and any other operational activities as required by the regulations of their
jurisdictions
The most common types of securities issued are bonds (notes, debentures, bills) and common and
preferred stocks
A company or other entity (investment bank, commercial bank or other financial institution)
that administers the issuance and distribution of securities from a corporation or other issuer
Underwriter
An underwriter works closely with the issuer to determine the offering price of the securities, buys
them from the issuer, and sells them to investors via the underwriter's distribution network
A company that assesses the credit-worthiness of corporations and countries and assigns credit
Rating Agency ratings. This company also provides a transaction rating of the finance structure
The credit rating is a financial indicator to potential investors of debt securities such as bonds
An exchange organization which provides facilities for brokers to trade company stocks and other
securities
Exchange
Exchanges also provide facilities for the issue and redemption of securities, as well as other
financial instruments and capital events including the payment of income and dividends
Banks, Mutual Funds, Pension Funds, Insurance Companies, Asset Managers, Governments, and
Investors
Individual Investors
A regulator provides supervision which subjects financial institutions and issuers to certain
Regulator
requirements, restrictions and guidelines that aim to maintain the integrity of the financial system
6
Capital Markets Instruments Defined
Vehicles Definitions
Stocks Shares of ownership in a company
Money Markets Short-term debt issued by corporations or governments
U.S. Treasuries (UST) Debt issued by U.S. government
Debt Corporate Debt Debt issued by corporations
Asset Backed Debt created by an underlying pool of assets, such as mortgages
Municipal Securities Debt issued by state and city governments
REITs (Real Estate Investment
Shares in a company that invests in real estate
Trusts)
Contract whose value depends on the fluctuations in price by another asset, such as
Derivatives
stocks, currencies, commodities, or interest rates
Mutual Funds Shares in a portfolio of stocks and/or bonds and other securities
Private Equity Funds Shares in a portfolio that buys stakes in privately held companies
Shares in a portfolio that actively buys and sells stocks, bonds, and other
Hedge Funds
investments
7
Stocks
Ownership and Market Size: Definition:
Shares of ownership in a company
Other
Pension Funds Individual
20%
2%
Investors Purpose:
33% Capital growth
Insurers Major U.S. Markets:
7%
New York Stock Exchange
Mutual Funds Non-U.S. NASDAQ
25% Investors American Stock Exchange
13%
$18.2 Trillion Major International Markets:
London Stock Exchange
Tokyo Stock Exchange
Euronext
Indices and Returns (1996-2005):
S&P 500 15.6%
Dow Jones Industrial Average 16.2%
8
Bonds: Money Market
Ownership and Market Size: Definition:
Short-term debt issued by
corporations or governments
Other
21%
Individual Purpose:
Investors Income from short-term liquid
48%
investment
Pension Funds
25%
Major U.S. Markets:
Insurers
Over the counter
6%
$2.0 Trillion Major International Markets:
Over the counter
Indices and Returns (1996-2005):
Lipper Money Market Fund Index 3.3%
9
Bonds: U.S. Treasuries
Ownership and Market Size: Definition:
Individual
Debt issued by the U.S. government
Investors
Other 9%
29% Purpose:
Income from interest; highest credit
quality; not subject to state taxes
Pension Funds Non-U.S.
6% Investors
47%
Insurers Major U.S. Markets:
3% Mutual Funds
6% Over the counter
$4.7 Trillion
Indices and Returns (1996-2005):
Lehman Brothers Intermediate Term 5.5%
Government Index
10
Bonds: Corporate Debt
Ownership and Market Size: Definition:
Pension Funds Debt issued by corporations
6%
Fannie Mae and Individual
Freddie Mac Other Investors Purpose:
5% 7% 10% Higher income from interest given
Non-U.S.
Banks Investors
credit quality less than U.S. Treasuries
9% 26%
Major U.S. Markets:
Insurers
Over the counter
Mutual Funds
25% 12%
Major International Markets
$8.3 Trillion Over the counter
London Stock Exchange
Indices and Returns (1996-2005):
Lehman Brothers Aggregate Bond 6.2%
Index
11
Bonds: Asset Backed
Ownership and Market Size: Definition:
Bonds created by an underlying pool
Individual of assets such as mortgages
Other Investors
Non-U.S.
15% 10%
Pension Funds Investors Purpose:
9% 15%
Higher income from interest given
credit quality less than U.S. Treasuries
Mutual Funds
Fannie Mae and
8%
Freddie Mac
15% Banks Insurers
Major U.S. Markets:
20% 8%
Over the counter
Major International Markets
$6.3 Trillion Over the counter
Indices and Returns (1996-2005):
Lehman Brothers Aggregate Bond 6.2%
Index
12
Bonds: Municipal Securities
Ownership and Market Size: Definition:
Fannie Mae and Debt issued by state and local
Freddie Mac governments
2%
Other
Banks
5% Individual
Insurers
7%
Investors Purpose:
15% 38% Higher income from interest given
lower credit quality; interest
payments untaxed
Mutual Funds
33% Major U.S. Markets:
Over the counter
$2.2 Trillion
Major International Markets
Indices and Returns (1996-2005): Over the counter
Lehman Brothers Municipal Bond 5.7%
Index
13
REITs (Real Estate Investment Trusts)
Ownership and Market Size: Definition:
Shares in a company that invests in real
• Individuals estate
• Mutual Funds
Purpose:
• Pension Funds Liquid vehicle to invest in real estate
$581 Billion Major U.S. Markets:
American Stock Exchange
NASDAQ
New York Stock Exchange
Major International Markets
London Stock Exchange
Indices and Returns (1996-2005): Tokyo Stock Exchange
NAREIT U.S. Real Estate Index 6.5%
14
Derivatives
Ownership and Market Size: Definition:
Contract whose value depends on the
Individuals fluctuations in price by another asset,
Hedge Funds such as stocks, currencies,
Commercial Banks commodities, or interest rates
Investment Banks Purpose:
Insurance Companies Manage risk from price fluctuations in
stocks, currencies, commodities, or
interest rates
Major U.S. Markets:
Chicago Board of Exchange
Indices and Returns (1996-2005): Chicago Mercantile Exchange
Over the counter
NA
Major International Markets
Euronext
International Securities Exchange
15
Funds: Mutual Funds
Ownership and Market Size: Definition:
Shares in a portfolio of stocks and/or
bonds and other securities
Other
4%
Pension Funds
21%
Purpose:
Professional management and
diversification
Insurers
2%
Individual
Investors
73%
$6.0 Trillion
Indices and Returns (1996-2005):
NA
16
Funds: Private Equity
Ownership and Market Size: Definition:
Shares in a portfolio that buys stakes in
privately held companies
Endowment Funds
High Net Worth Individuals Purpose:
Pension Funds Capital growth driven by fund managers
ability to influence strategy and
$330 Billion* operational improvements
Indices and Returns (1996-2005):
Thomson Venture Economics Private 12.3%
Equity Performance Index
*Estimate - total amount invested, 1996-2005, from PricewaterhouseCoopers/National
17Venture Capital Association Moneytree Report
Funds: Hedge Funds
Ownership and Market Size: Definition:
Shares in a portfolio that actively
Pension Funds buys and sells stocks, bonds, and
7%
other investments
Foundations
Endowments Individual
7% Investors
44%
Purpose:
Returns that are not correlated with
Fund of Funds the performance of the stock market
28%
Corporations
14%
$1.2 Trillion
Indices and Returns (1996-2005):
CSFB Tremont Hedge Fund 20.8%
Index
18
Scale of Global Capital Markets
$250
$214
$200
($ in Trillions)
$150 $140
$133
$116
$93 $91 $95
$100
$64
$50
$12
$0
1980 1995 2000 2001 2002 2003 2004 2005 2010E
Year
19 Source: McKinsey Global Institute
Relative Value of Global Capital Markets to Global GDP
250
338%
200
316%
($ in Trillions)
150
292%
100 218%
50 109%
0
1980 1995 2000 2005 2010F
Year
GDP GCM
20 Source: McKinsey Global Institute
Indices of Global Stock Performance
350
300
250
200
150
100
50
0
Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06
S&P 500 Dow Jones FTSE 100 Nikkei DAX
21Source: Haver Analytics
Global Capital Markets by Region
100% = 48% 32% 8% 1% 20% 6% 1%
US Europe Asia
Eastern
Eurozone UK Europe Japan China India
CAGR (1993-2004) 8.8% 10.4% 10.9% 20.7% 4.7% 14.2% 13.2%
GCM Relative to GDP 4.1x 3.5x 3.5x 1.1x 4.2x 3.1x 1.8x
Source: McKinsey Global Institute; Reflects data as of 2004. Numbers may not add to 100%
22 due to rounding.
Global Capital Markets Growth by Asset Class
228 CAGR
1993 - 2004
27% 8.0%
136 16% 7.5%
118
29%
96
30% 27%
26% 17% 10.3%
69
17%
53 15%
29% 25%
32% 19% 21% 26%
30% 9.8%
20% 23%
22% 38%
29% 27% 29%
27%
GCM 9.0%
23 Source: McKinsey Global Institute
Future Directions:
Emergence of New Financial Market Centers
Number of Domestic Listed Companies
3,000 12,000
China
Hong Kong, China
11,000
2,500 Korea, Rep.
Singapore
United Kingdom 10,000
USA (RHS)
2,000
Foreign Markets
9,000
USA
1,500 8,000
7,000
1,000
6,000
500
5,000
0 4,000
1988 1990 1992 1994 1996 1998 2000 2002 2004
24 Source: World Bank
Future Directions:
Greater Cross-Border Investment
60%
U.S. Treasuries
50%
Global Ownership (% of Total)
Agency & GSE-Backed Securities
Corporate Bonds
40% U.S. Equity
30%
20%
10%
0%
Mar- Mar- Mar- Mar- Mar- Mar- Mar- Mar- Mar- Mar- Mar- Mar- Mar- Mar-
80 82 84 86 88 90 92 94 96 98 00 02 04 06
25Source: Federal Reserve Flow of Funds via Haver Analytics
Future Directions:
Drivers of Innovation – Search for Excess Return
Hedge Fund Assets ($bn) Financial Sponsor Capital ($bn)
$1,007
$973 $20
$820 $13
$626 $315
$539
$456 $491
$367 $374
1989 1995 2005
1997 1998 1999 2000 2001 2002 2003 2004 1Q05
GS Commodities Index Credit Derivatives Outstanding ($bn)
8,000 $5,442
7,000
Closing Prices
$3,779
6,000
5,000 $2,192
$1,971
4,000 $1,522
$1,025
3,000 $560
$270
2,000
Oct-00 Jan-02 May-03 Aug-04 Nov-05 1997 1998 1999 2000 2001 2002 2003 2004
26 Sources: Hedge Fund Research, ISDA, public market data.
