This interview with Tim Dattels, a partner at global private equity firm TPG Capital LP and an expert on investing in Asia, is reprinted with permission from Rotman Management, the magazine of the University of Toronto’s Rotman School of Management. It has been edited and condensed.
What key challenges are the Asian markets currently facing?
It’s important to recognize that not all of the markets in Asia are in ‘developing’ mode. They include Japan, which is the third-largest economy in the world, and shrinking; China, which is still compounding at strong rates but is a highly-sophisticated market (and, I would argue, deserves lower risk premiums than Europe in some cases); more classic developing markets such as Indonesia and India; and frontier markets, like Myanmar. The Asian markets are very multifaceted, but they do share some things in common. For one, there is no shortage of capital in Asia, so private equity investors need to be matched with management talent and connectivity to help enterprises scale, or to make the transition from family ownership or government control.
Is private equity well accepted in Asia?
Private equity models were well underway before all the global firms arrived. The overseas Chinese networks have well-developed models of tightly-controlled assets and alignment of equity interests, coupled with streamlined and focused decision making. I personally believe that short-term pressure to show results is a Western phenomenon; quarterly reporting has never driven Eastern philosophy, where families and enterprises are focused on generational timeframes and beyond, with a sharp eye on building tangible assets. For a private equity firm, control is difficult and rare in an absolute sense. In a way, it has to be earned by adding management expertise, and structurally, with minority protection.
How did the global financial crisis affect your work?
The crisis had far more impact in the U.S. and European markets than in Asia. There were some major concerns over trade flows and capital flows, but they didn’t materialize. The crisis did not affect the optimism that you still feel in Asia.
The former CEO of Coca-Cola has called India, “the most fascinating country I’ve ever worked in; and the most frustrating.” What has your experience been?
There is no doubt that India is a fascinating place. There is an enormous amount of energy in the country, with something like 560,000,000 people under the age of 25. In a way, India is just getting started; it’s only part-way through a massive demographic boom. Whereas China’s demographics are – because of the one-child policy – very different: the first quarter of 2013 was the first quarter that there were less people entering the work force than leaving the work force. So, China faces a very interesting demographic challenge, while India has this enormous working class.
The second interesting thing about India is that debt securities and trading levels are priced at a more efficient (higher) level. As a result, Indian companies are quite efficient, with high ROEs. The companies in the technical manufacturing sector are particularly well run.
Having said this, there are a couple of challenges in India that do make it frustrating. One is that there is a massive ‘promoter class’ of managers and owners in the businesses already – and there are already more public companies in India than there are in the United States. These individuals can be quite aggressive, and it makes for ‘interesting’ negotiations, shall we say.
The second thing is, there is a little bit of ‘the tyranny of democracy’. In China, you may not like the answer you get from the government, but you can get an answer and you can rely on that answer and go ahead and make decisions that suit your investment profile. In India, you get multiple answers, so it’s very hard to rely on anything and base long-term investment decisions on it. But the entrepreneurial class is so significant in India; the country is growing so fast, with so much dynamism, that despite the government, it is rolling along.
What advice do you have for investors who are interested in increasing their interests in Asian companies?
My own view is that in general, the equity markets in China are mispriced. The Chinese economy has been compounding well north of eight per cent for the past several years, and yet its equity markets have been among the poorest performing. Part of the issue is the lack of quality investment-class companies, but this is changing rapidly, as a whole culture and generation of entrepreneurs is being energized.
While there are monumental challenges for the new administration in China – including environmental degradation, urban migration and political reform – the next five to ten years look promising, until the demographics begin to turn over. I would advise looking for platform companies that show the ability to scale, not just within their domestic markets, but regionally, as well.
In addition, the ASEAN countries, led by Indonesia, are promising, particularly as they develop a common market goal by 2015 to create the ninth-largest global trading block. They represent a young, dynamic working class and a lower cost structure than China’s. Asian markets are all quite concentrated, ownership-wise, and many domestic markets are thin. So any investor must be prepared both for market volatility and currency volatility.
Tim Dattels is a partner at TPG Capital LP (formerly Texas Pacific Group), one of the largest global private equity investment firms. Since 1999, he has been a member of the dean’s advisory group at the Rotman School of Management.
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