This summer, in Aspen, you said last year was Alice in Wonderland. What about this year?.
This is the year we will realize that it’s not about the landing. Around the world, one of the questions that seem to be dominating, particularly the European and US press, is if it will be a hard landing, soft landing, recession, or no recession. As a long-term investor, and this is not my first cycle. And it's not about the landing, it's about where the journey starts and where you are when the plane pulls up and the door opens. We are going through a period of time that I think of as a great reset, because where we came from is very different than where we are landing. As an investor, you think about where we were for the last decade or more– a period of low inflation, globalization, margins across the world going up, geopolitics had a certain common flavour. And then the storm over the last two years, blew through. And on the other side of that storm, in the area that we found ourselves in is quite different. Inflation is again, on the minds of the West. Margins, which had been going down for decades, under globalization have turned the other way. The idea of globalization has turned to regionalization. And a period of time where assets generally moved up together, has now evolved into a world of dispersion of economies and asset classes. This is a time where investors can really differentiate themselves and prove themselves. The analogy I used at the time wasn’t Alice in Wonderland, it was Dorothy and the Wizard of Oz. In narratology, there's a number of devices that turn up over and over again, and one of the devices is the storm. So the storm shows up in Ulysses, it shows up in Gulliver's Travels and shows up in Harry Potter. And it often takes characters from one world they've been in to another, most notably Dorothy and the Wizard of Oz and the tornado. And I think that, as investors, we've seen this storm blow through our understanding of the world of last few years, and we're landing in a quite different place.
Is it that stark?
I think it's quite stark actually. If you think, particularly for the last 10 years, since the global financial crises, we've had a quite consistent bull market run with quite consistent interest rates. It was a period of time where almost all asset classes moved together, which is not normally the case. And the market had one of the great positive runs for over a long period of time.
One of the sharpest changes has been in globalization that seems to be moving into some kind of a reverse gear. To what extent do you see this decoupling of supply chains, China plus one strategy play out?
The pendulum was swinging for almost 40 years towards globalization. If you look at global trade as a percent of global GDP, it peaked a few years ago at 58%. It's down to 52%. And we're beginning to see the concept of onshoring being talked about more than the concept of offshoring. Global perspectives have increasingly been re-expressed as regional perspectives, I think it's actually a really interesting moment for the regional view of Asia, we've come to spend a lot of time talking about NAFTA, the EU, but if you look at regional trade, in Asia, its three times of NAFTA.
At the same, the Ideas Festival at Aspen you said there are three chapters in these difficult times, we've crossed the first one, or at least was being close to being complete. to crossing, In November are we at Chapter 2 or three?The first act is where we started in 2021. It was a very odd place, a very odd year. The second act of the play, is the resetting in multiples. If you look at what's happened, the changes in interest rates have reset asset prices. The third chapter, in my view, will be resetting earnings. When we look at Price/Earnings, we’ve seen prices move a lot, but analysts still have the S&P earnings up next year. And yet, if you look at Western CEOs, they are overwhelmingly talking about a recession. We know a little better about price now but the question of what happens to earnings, I think is still much on my mind, and I think that could be the third chapter.
So you don't think whatever the earnings people are talking about haven't yet turned over yet and we will see more pain in the next few quarters?
We look for early signals of it -- over the last decade it was difficult to make hires in San Francisco, now there are very significant layoffs of some of the area’s largest employers. Beyond the early signals, we look at pattern recognition -- we know that in the past few recessions, earnings have gone down on average of about 20%. So we have the world thinking there’s going to be recession, yet earnings projections have not reflected that. And that disconnect, to me, is an interesting question at this moment.
There's a tendency for people to try to express certainty in moments like this, one of the things I've learned in my career is there are moments where you don't know, and you set yourself up for uncertainty as opposed to choose exactly which outcome you think will prevail. It is important to be comfortable saying “I don’t know.” There has been so much focus on the Fed that they maybe haven't yet processed the results of the second and third order effects.
But despite this period of turbulence, you made a rather bold move of taking TPG public.
Yes, we went public in January. The markets were still open at that point. We were one of the few IPOs this year and we are proud of our performance since going public. But for me, an IPO is a financing event. And financing events are only a piece of the long-term history of a firm like ours. So it's a shift in ownership. But in no way was the shift in strategy or shift in who we are. As I said, there is a great reset taking place. We've actually been setting ourselves up for this period of time for a while. If you look at the last part of the cycle we've just been through, it got pretty heated. And during that period of time, we were actually net sellers, we are one of the few net sellers in the private equity industry over the last few years. And we are now sitting with the largest dry powder, in our history, because we believe this period of time is when the most interesting investments occur. And we've been positioned ourselves in the sectors that we think are going to be the most interesting during that period. So during the last decade, it was a bit of a risk on, risk off decade. If you think about the last decade as when risk. The next decade will be which risk. And among the more complex world, picking sectors and areas like climate change, for example, or healthcare, where the sectoral dynamics will actually put some wind at your back, even when the seas are choppy, is ever more important. As a firm, we've always been sector driven.
You mean sensitive to climate change?
If you're uncertain about some of the changes going on in the world, you need to figure out which neighbourhoods to go into, Coming out of COVID, particularly here in Asia, we have seen big increases in healthcare spending as the world understood the need to build more resilient healthcare infrastructure and more solutions. We have been among the largest investors in healthcare around the world around. We are quite active here in India. And it's an area that has very strong trends and hydraulics within the industry. And , it's also an area where knowledge matters. We like areas where knowledge matters. We've never defined ourselves as being the largest of firms, but we want to be among the most interesting. So you look at it what we've done here in India, in healthcare, from hospitals to Mother and Child centers, to digital pharmacies, eye care, these are areas that have been very successful for us. And that success has been mimicked around the world. The second area is technology. We've done four IPOs in India in the last 12 months, some of which were in the technology sector. We continue to believe the ability of technology to shape industries and shape our world. Third area is climate where we raised one of the largest private equity climate funds. We've obviously been active in the climate sector here in India and around the world. We have perhaps north of $120 trillion to spend on the transition. Solving the climate problem is one of society's greatest challenges. It's also, in my view, one of the top four or five great investment opportunity that I’ve seen over 30 years.
You talked about climate and I have a few questions on that. You have the TPG Rise Climate Fund. How different is it from the Impact Fund, which is the Rise Fund. And other such energy transition or climate funds that several of your peers KKR, Blackstone, Brookfield have?
Most approach it from the infrastructure fund perspective. We have approached it by creating impact driven private equity funds and have since created a leading impact investing platform. We started in 2016 by asking ourselves why impact investing never scaled up? Why returns are lower in impact investing than elsewhere? We looked back over our long history at TPG and found the deals that would have been impact investments actually had market rate returns or higher.
But how do balance both? Returns and create impact simultaneously?
First you have to ask, what is an impact company? An impact company, under our definition, is different from ESG. ESG is doing whatever you do better. An impact company is collinear, meaning the more products and services is able to sell the greater its social or environmental impact. For example: an education company or a health care access company -- the faster you grow it, the more its impact grows. If you find companies that have excellent unit economics and deliver income from products or services, the more impact they create and the greater their potential for return. In 2016, the average fund was $125 million, our first one was $2.1 billion. We were able to take impact out of the venture area and into the growth equity area. We learned that if you really want to have global scale impact, you have to take a company and scale it in size, it's not about the idea.
Secondly, we embedded Rise within a major investment firm and built it on the chassis of TPG.
Third, we deliberately made Rise concessionary. In the early days of private impact investing, investors would often accept a lower return, in order to do good. We didn't see that as necessary. There's no need to get boxed in, we believed you can generate good returns, and build great impact companies. We also recognized that impact companies want impact capital, so we built a distinctive brand for Rise in the market. We are now raising our third Rise Fund, and others firms have joined us with large scale impact funds, which is important if we want to solve these global issues. During the course of our work, around 2018 there was a fundamental change in the quality and scale of climate deals.
Essentially, four things happened all at once, within a two-year period of time. First, the net Zero pledges. Second, what I’ll call the Greta Thunberg effect, meaning Climate consumerism -- people started to care about the carbon footprint of what they bought. Third, investors began to pay attention -- pension funds and public market investors began to ask about a company’s carbon footprint. If you're a company, and your CEO is committed to decarbonization, and your customer demands it and your investors are asking about it, then things begin to happen. And the fourth thing to occur, the technology changed so rapidly that made wind, solar and EV totally cost competitive. Suddenly the market began to spike and what was missing was a large part of the market to finance that.
So seeing that happen within Rise, we understood that the size of the capital needed for climate was going to overtake the other areas, so we created a sister fun, Rise Climate. Hank Paulson, former Secretary of the Treasury, joined me as the Executive Chairman. We created what was a first of its kind of this scale in the private equity area, and not only do we have many of the top institutions of the world join us as investors, but 28 of the major corporations in the world joined us as investors because they had to meet their own climate goals.
In this climate spectrum, how do you model risk. Is it the infrastructure risk, or is the technology risks that you factor in?
Our particular part of the market is to take technologies that are viable and scale them. As companies emerge from VC, there is a desert in the market is the fund that would write a $300 million cheque to take an idea and turn it into a physical reality. I find a lot of similarities, but also a number of really important differences between the tech revolution and the climate revolution. Each of them will affect all businesses, and will shift how we live in important ways. Each of them is going to see a disproportionate amount of the investment activity driven by specialized tools and capital. Just like venture capital played an important part in the tech revolution, climate focused capital will play an important part in this revolution.
What's very different is that the climate revolution is a physical revolution. In the tech revolution, someone built the internet for you. And he just had an idea to send it out for free over the rails of the internet, we have to build physical assets, we need to throw away our computer science book and pick up our organic chemistry book. We need to think about major projects, delivering physical assets across broad geographies. So the skill sets of this particular type of investing share many of the growth opportunities that we saw in technology, but they're different in terms of how we deploy them. Our job at Rise Climate is to help support the engine of taking physical assets and scaling them and thinking in a different way. We need to remember it's not Moore's law, it's the experience curve.
What are those oppurtunities in India? Tatas of course was the headline transaction.
Within India, we've done a number of social investments in India within Rise that we are proud of. We’ve also done Fourth Partner Energy which is bringing green energy into what was a pretty complicated grid in India. Luckily things have gotten better as we are helping solve that issue. It's a massively positive company in terms of its carbon avoidance. With
But we've looked at many other opportunities and I expect to see much more investing amongst in this area. One of the things that is quite positive is that the government has gotten behind this issue. In the US, we just had Biden’s climate bill. And why is that important? It creates incentives that are a minimum of $350 billion. Most people say that they could be quite higher, because they're not capped. And that will accelerate $3 trillion of spending. Why is that important, because often the US as a technology, US will push something down the technology curve, which will then move out to the world. The EU is also committed about $300 billion to green energy.
To bring down its dependency on Russia?
That’s one place that higher prices have been good, because it reduces the green premium. The green revolution is now also a question of energy security, which is particularly important for India. There has been no better case for it. Regionalization in some ways will also potentially accelerate some of the spending for the green economy.
Has the speed of innovation and technology in India surprised you?
As you know, many years ago, one of the mysteries of India for international investors was the
In India off late you've been big on large conglomerates.
, Tatas, UPL, Shriram Group. Is that a conscious call?I think you're only seeing a piece of what we're doing and those tend to get more attention. It is indicative of a general trend, which is if you can partner with good partners, to do interesting things, you can create good returns. I would look at , Dodla Dairy, Lenskart, AHH – these are really interesting smaller companies that we are really proud of. I think the big ones sometimes get more noticed because they're more mature and often the investment size is a little larger. I wouldn’t overread in one direction. We have many tools in our toolbox to find success with companies of all sizes. Private equity as an asset class has been able to overperform because of its ability to use tools like corporate spin outs and financing to help companies or assets grow. That toolkit explains why a lot of investors around the world are increasing their exposure to PE.
TPG is not just a financial investor, it helps to bring change and innovation to the companies that we invest in. So it's not that we're investing in these companies to simply bring money, we're also usually helping them go through an evolution themselves.
You're among the first global PE groups to go really deep into consumer tech. 1st a dream run and then came the bloodbath. And some of the portfolio companies are facing serious headwinds. How are you dealing with this reset?
There are certainly moments in time when you go through cyclical changes. Many of our companies are still doing quite well today versus where we started. We want to be judged on a long arc, not at a particular moment. If you look at where growth has been particularly difficult, it's in the non-revenue and you don't see us in that part of the growth investing world. I'm proud with how our portfolio has been holding up.
Is there a number that you could put to future investments in India see over three or five years?
We've done four IPOs in the last year, we've done almost $3.5 billion in the last two years of investments. I think you can see as many IPOs out of our portfolio in the year ahead. If anything India picking up share in our investment activity.
But how does India stack up versus other emerging markets How is it compared to China or Brazil?
It's hard to say what metric to use. I will tell you it's picking up share. We are putting more money here than China in the last few years where we've been underweight China relative to the market. There have been other times we sat out India from 2012-2014. One of the things about investing in this region is that there's times when you lean in or you don't lean in. And this is a period of time where we've been leaning into India. I would expect it to continue to pick up share, because as I travel around the world, this is certainly one of the best performing markets in the region. It's a period of time where the government has been stable and rules have been becoming clearer. Tax rates have come down, government investment has gone up, particularly in infrastructure. There's always challenges in any market, but generally, what you see with the amount of activity we've had --- IPOs, investments, etc tells you that we think it's a really interesting moment.
What are the challenges that you face in Indian economy?
There hasn't been as much liquidity on exit. The local markets were generally a little more shallow. But thankfully that’s gotten better. And secondly, many of the best assets are owned by the family businesses. I sometimes say that we were not one of the first private equity firms in Asia because several family investment groups across Asia, essentially look a lot like private equity firms themselves. So we'd be competing with some of the great investors in the world, in Asia, on their home turf. So it's a competitive market.
What about ease of doing business?
I'd say the early days in India the rules were less clear. That has gotten better. The role of promoters was kind of a new term when I first came across it years ago, but that too has become a little clearer. On the long journey of how markets develop, the direction of travel has been very positive, particularly in recent years.
Columnist Ruchi Sharma wrote when a term like Metaverse escaped from science fiction and appeared in the real world, it belies the fast that physical world and physical goods are still important and are in demand.
Companies have made big bets on a a non-revenue generating world. But one of the things that I've always told our team is that it's really important to stay curious and to watch these kinds of things as they never move in a straight line. A professor of mine told me a long time ago, we put a man on the moon before we put wheels on suitcases. Technology does not move in a logical straight line. [CA1] [A2]
You talked about earnings and stuff, and obviously I sense that it’s largely US and Europe centric and more public market centric. So therefore, would private markets be a safer haven now compared to public market investment?
In a momentum market where you’re risk on, risk off, the public markets are relatively advantaged, because it’s easy to get in and out. So, I actually think the public markets were advantaged relative to the private markets over the last decade. It doesn’t mean that private markets didn’t or couldn’t overperform, but relative to other decades it was harder to overperform because for much of the last decade, the best thing you could have done is buy the FAANG stocks or Alibaba and be done, and that’s not a particularly conducive market for the private market. It is much more attractive to invest in climate in the private markets. India is doing pretty well and we are investing in private markets here. Healthcare in the private markets is also more attractive than the public markets. I think this is a period of time where the private markets – relative to the last 10 years – is a place you want to invest.
Is there any 1-2 entrepreneurs in India who have really wowed you? Like he’s the next Mukesh Ambani in the making?
I’m going to pass on that one (laughs)...
Okay, not Mukesh Ambani, but someone who has really impressed you. Let’s now draw comparisons.
The reason I’m going to pass on the question is that I think we have a number of them in our portfolio. I’ve been very impressed by a generation of entrepreneurs who are challenging themselves and the country to think differently about what the future structure of the business could look like.
The conversations that you hear around the world, do you see India’s name coming up much more these days?
Take Apple’s ear pods as an example. It’s a $25 billion business for Apple alone, and they’re moving a bunch of it here. That a good signal. Butit’s not just that. In a world of work from home, people are more comfortable with dispersed workforces which will be a new shot in the arm for much of the outsourcing that has been done in India. So, if you think about India’s strengths in knowledge-based industries, this is I think a pretty interesting trend. The government situation here has been stable, the rules are clearer.
So, I think I hear India coming out more and more as a destination for capital. If you look at where growth is across South-east Asia and India, it is some of the most interesting growth that we’re seeing. The point is: India is picking up share in the discussion and it’s not just China v/s India, it’s India on her own stead. When we started coming to Asia, the story was Asia out. Asia was going to be the workshop of the world and India never got it figured out other than IT services. The next wave of Asia was Asia consumption and China hit that too. So, for the last 10 years, everyone was focused on that. And, now in a world of regionalization, the theme is actually inter-Asia. We think India has that moment and it’s at that inflection point of consumption.
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This is the time when the most interesting investments occur: Jim Coulter, TPG Capital - Economic Times
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