Key Takeaways
- Traditional single-asset class, regional approaches to emerging markets often yield poor capital deployment.
- Opportunity in emerging markets lies where others are not investing, requiring a flexible, benchmark-agnostic approach.
- Understanding global economic factors and country-specific conditions is critical for successful emerging market investing.
- Diversification across asset classes, regions, and investment styles is essential for surviving volatile emerging market cycles.
- Currency management, using options and forwards, is a vital component of mitigating risk in emerging market investments.
- China has shifted from a primary emerging market investment to a 'trade' due to policy unpredictability.
- A strong local presence and understanding of cultural nuances are crucial for private investing in emerging markets.
- The emerging markets investment landscape needs integrated, multi-asset class firms to unlock significant capital pools.
- The Rohatyn Group aims to grow to $50-150 billion in assets within five years to make a larger positive impact.
Deep Dive
- Nick Rohatyn's worldview was shaped by his international upbringing and family history, including his grandfather, New York Times foreign correspondent Clarence Streit, and his father, financier Felix Rohatyn.
- He considered finance at Brown University, leveraging a talent for numbers identified during a Unilever internship.
- Rohatyn joined Morgan Guarantee Trust Company in February 1982, attracted by an eight-month academic training program.
- At JPMorgan, he worked on interest rate and currency swaps, executing the first interest rate swap in 1983.
- He spent four years in Japan from the mid-1980s, building the business from five to 100 people and gaining significant experience.
- A key career lesson for Rohatyn was identifying opportunities where others were not, leading him to focus on emerging markets.
- He recognized the emerging markets problem of LDC finance in 1988, transforming a small loan-swapping group into a comprehensive capital markets operation.
- This business grew from 8 people in 1988 to 600 across 15 countries by 1995, benefiting from the emergence of Brady Bonds.
- He departed JPMorgan to build a firm dedicated to emerging markets, free from large institutions' siloed structures.
- The Rohatyn Group (TRG) launched its comprehensive Global Opportunity Fund in March 2003, encompassing equities, FX, fixed income, and illiquid strategies.
- The guest criticizes the problems with common emerging market benchmarks, noting they often lead to concentrated exposures.
- Traditional equity benchmarks like MSCI Global are heavily weighted towards specific countries, including Korea, China, India, and Brazil.
- Fixed income benchmarks, such as the GBIEM, focus solely on government bonds, neglecting larger markets like swaps and forwards.
- GBIEM also exhibits inconsistent duration across countries and uses a dollar-based return measurement for non-dollar denominated bonds, introducing currency volatility.
- The guest advocates for a benchmark-agnostic approach to navigate the structural differences and illiquidity of many emerging market corporate bond issues.
- The Rohatyn Group's founding philosophy emphasized a multi-asset, horizontal approach, differing from single-asset class specialists preferred by some endowment managers.
- This approach was reinforced by observations from the 2008 financial crisis, highlighting the need to offer tailored solutions.
- The firm aims to balance investor demand for specific strategies with its long-term vision of a multi-asset emerging markets firm.
- A significant market opportunity exists in emerging markets asset management due to a lack of firms capable of providing comprehensive allocation advice across asset classes, regions, and styles.
- TRG seeks to fill this gap, moving beyond the prevalence of mono-asset, single-country or regional investment vehicles in private markets.
- The guest proposes a 'horizontal' investment approach across emerging markets, treating each of the top 20-25 investable countries as a 'three-body problem' involving equities, local currency debt, and hard currency debt.
- By consistently selecting the best-performing asset class within a country, even with a success rate slightly over 50%, better long-term absolute returns can be achieved.
- This strategy requires deep team experience in identifying country-specific macroeconomic cycles and selecting promising asset classes.
- Decision-making operates on an 'all for one' philosophy, where a single manager makes final decisions, but all team members share results, encouraging cross-regional advocacy.
- Risk management relies on scenario analysis of historical crises (e.g., 1998 or 2008) rather than standard deviation, emphasizing currency liquidity as a critical factor.
- The 2008 crisis drove investor preference towards larger managers, leading TRG to adopt acquisitions as a growth strategy over organic hiring.
- TRG acquired Citigroup's $4.3 billion emerging markets private equity business (CVCI) in 2013, establishing it as a global private equity firm.
- Cultural challenges from integrating large bank-originated firms were addressed by emphasizing clear leadership structures.
- In 2017, TRG acquired JP Morgan's $800 million infrastructure private equity business in India, integrating it under TRG's management.
- TRG's non-negotiable principles include operating as a single integrated platform, augmenting investment teams, and engaging in GP replacements for underperforming funds, completing approximately 10-11 acquisitions since the financial crisis.
- TRG's integration strategy involves consistent messaging, distributed responsibility, a collegial executive committee, and widespread equity distribution to over half the firm.
- The firm emphasizes diversification across asset classes, regions, and investment styles as crucial for surviving emerging market cycles, noting monoline firms face high failure risk.
- TRG currently operates three business lines: public markets, private markets, and forestry/agriculture.
- Public markets include listed equities, fixed income, local currency debt, FX, and inflation-linked bond strategies, with plans for a multi-asset class EM long-only strategy.
- Private market investments span private credit, private equity, infrastructure, and renewables, with significant presence in Latin America and Central/Eastern Europe.
- China is not a primary investment focus for TRG due to its highly competitive market, estimated at 10,000 private equity firms, and a history where GDP growth did not translate to equity returns.
- Historically, China acted as a 'magnet' for capital, drawing 90% of private capital to Asia, with 90% of that directed specifically to China.
- This concentration, where 81% of EM private investing money flowed to one country, is no longer the case.
- Policy unpredictability has shifted China from a 'darling' to an 'uninvestable' market, now considered a 'trade' rather than an 'investment'.
- The guest asserts that focusing on large economies like China and India to support them is a mistake when the goal is to make money, underscoring the need for diversification.
- The primary opportunity in emerging markets involves developing multi-asset class strategies across public and private markets to unlock large capital pools.
- The private emerging markets investment landscape is fragmented, with small managers and limited capacity for large institutional investors to deploy significant capital.
- No firm currently offers the comprehensive strategy and scale required for integrated, multi-asset class investment across emerging markets.
- The guest expresses hope for the industry to evolve, offering more comprehensive solutions for emerging markets investors, noting the disparity in multi-asset class funds between developed and emerging markets.
- He envisions growing The Rohatyn Group to $50-150 billion in emerging markets assets within five years to exert a greater positive influence.