J.P. Morgan Asia Private Equity Conference

NICOLAS AGUZIN: Good afternoon, everyone, and welcome to the Private Equity Conference from J.P. Morgan. Today, we have a very special guest with us, Weijian Shan, a good friend for many, many years. And just to go a little bit over his background, Shan, you know that you and I, we have a lot of things in common. 

WEIJIAN SHAN: Yes. 

NICOLAS AGUZIN: OK, we've been together in Philadelphia at the same time. So I was at the University of Pennsylvania at Wharton. Of course, I was a student, Shan was a professor there. And then he joined J.P. Morgan in 1993, I believe it was. 

WEIJIAN SHAN: That's right. 

NICOLAS AGUZIN: And I was at J.P. Morgan as well at that time. 

WEIJIAN SHAN: Yes. 

NICOLAS AGUZIN: So a lot of things in common-- now I'm in Hong Kong, you're in Hong Kong, both of us doing business deals all over the place. So a lot of things in common, and it's great to be sharing this scenario with you right now and trying to talk a little bit about all the things you've done. Shan has had a very diverse background doing a lot of things. Of course, at the beginning-- and if you want to know more about the early days, you have to read his book Out of the Gobi whereby he described how he was trying to be a farmer in Gobi. That didn't go that well. 

But in any case, lots of interesting background and experiences, but then he was also a professor at the University of Pennsylvania, the Wharton School. He was also then a banker. And then he was a private equity guy. And lately, you've been an author as well. I mean, an author-- you've done a lot of things, explored a lot of areas. And his latest book, Money Games, we have it right here-- amazing. I still haven't seen a hard copy. I saw it over digital media, but I haven't seen the hard copy, so it's very nice. So Shan, I'll start with your author days, which is right now, and talking a little bit about this lovely book, Money Games. Tell us a little bit about what inspired you to write this book. What's behind it? 

WEIJIAN SHAN: Well, I think private equity is very much talked about. Private equity industry now is very big. In the United States, there are more companies controlled by private equity than in the public market. Do you know that? It's a very large force. So private equity is very often talked about. It moves a lot of capital around. Very often, transactions involve iconic companies, and yet it is very little understood. 

There are some books about private equity-- for example, many people have read Barbarians at the Gate, which is a best seller which was made into an HBO movie. But the book was written just one year after the transaction was completed in 1988 by a reporter from the Financial Times. And the book deals with only the deal-making part of the transaction. Very few people know that KKR bought RJR Nabisco for $25 billion, which was the largest transaction at that time. 

But after that, they held the investment for 15 years. And after 15 years, they invested altogether $3 billion in equity capital, $22 billion were borrowed. After 15 years, they lost about $750 million. So it was not a very successful investment. There is no book talking about the entire private equity process-- that is you buy a company, you turn it around or improve the operation of the target company, and then you exit, sometimes at a profit, sometimes at a loss. 

Henry Kravis of KKR is very fond of saying, any idiot can buy a business. It is what happens afterwards that really matters. So my book is supposed to fill that void. It is an insider's story about how a private equity transaction unfolded from beginning to the end-- from negotiation to investment to improving the value of the company to eventual exit. So this is a complete story like no other book has that. 

NICOLAS AGUZIN: Well, you have an amazing amount in the book. It's just remarkable that when you read it, you can go day by day, hour by hour. How did you keep such detailed records of everything that happened? It's just incredible looking at it. 

WEIJIAN SHAN: Well, first of all, I remember a lot of things. It was a very significant transaction. What we bought was what used to be the largest bank in Korea. So the subtitle of the book is "How American Deal Makers Saved Korea's Most Iconic Bank," what used to be the largest bank in Korea. And it was a milestone transaction, because it was first time that South Korea ever sold control of Nationwide Bank to foreign investors. And it was at an extraordinary time which, actually, to some extent felt like the echo of today. 

What do I mean? Now we're in the economic recession-- pandemic-induced economic recession. All the major economies are down. And in '97-'98, it was the Asian financial crisis when in one day, the stock market in Hong Kong dropped. You think in one day how much can the stock market drop in terms of percentage. Do you remember? 

NICOLAS AGUZIN: 16%. 

WEIJIAN SHAN: 16% on October 23 in 1997-- in one day. And that was the middle of financial crisis in Asia. By the end of the year, Korea's stock market dropped 49%. And its currency, the yuan, dropped 65.9% against US dollars. So the entire economy was decimated by the financial crisis and economic crisis-- the worst since after the war. Korea's foreign exchange reserves, they were losing the reserves, dwindled to $8.9 billion. 

Now my company, PAG, manages $40 billion-- not big amount, about $40 billion. Korea was the 10th-largest economy in the world at that time. Today, it's still the 10th-largest. Its entire foreign exchange reserves was less than $9 billion. So Korea was about to go into default on its foreign obligations. So that's when IMF and World Bank came in and offered a $58 billion rescue package, the largest ever in history for IMF, provided-- there is one condition-- that Korea had to sell the two failed and nationalized banks to foreign investors in order to bring in not only foreign capital, but also credit culture, risk management, and international best practice of how to manage banks. 

So that's where we came in. That's where and when we came in and spent a lot of time negotiating to buy this bank. And since so much taxpayers money was used-- billions of dollars to bail out these banks-- there was key interest in the market for this particular transaction. The media reported that every day. And therefore, it's very easy for me to just look into the daily media reports to remember all the events that happened during that period of time. 

NICOLAS AGUZIN: But after all your explanation, I remember the phrase in your book where the quote was, "who would want to buy a failed bank in a failed economy in the worst crisis that the country has ever experienced?" 

WEIJIAN SHAN: Yes. 

NICOLAS AGUZIN: So what were you guys thinking? 

WEIJIAN SHAN: That was my first reaction. That was my first reaction when I received this teaser from Morgan Stanley, which was hired by the Korean government to auction off these two banks. Literally nobody was interested, because it was a failed bank in a failed economy in the worst time in the economy. And my partner, Dan Carol, suggested that we send this teaser to David Bonderman, the senior partner of DBG, who, back in late 1980s, while he was at Bass Brothers, acquired American Savings Bank during America's savings and loan crisis. So he knew how to do bank deals. And he also pioneered the good bank, bad bank model. 

So we sent it to him, and the next day, a fax came back from him, and the fax read, the history of life shows if the deal is structured in the right way, this is as good a time to buy a bank as any other. That was the start of our journey to negotiate the transaction with the Korean government. Almost next day, I flew to Seoul from New York City to start negotiations to buy this bank. 

NICOLAS AGUZIN: And you faced a little bit of competition from HSBC-- some of it strategic. You recount a little bit that story. I'd just like for everyone to understand, anyone that is interested in private equity, in M&A, I just think it's a fascinating reading because there's so much detail of all the considerations around competition, how to face their counterparts, how to deal with intermediaries, how to manage all the large groups. So it's very, very interesting. 

WEIJIAN SHAN: Yes. And David Bonderman is very experienced. And he was very experienced. So I consulted with him-- I myself and our team consulted with him on a daily basis. And I would write a memo every day, sometimes more than one memo, and my memos are very detailed, sometimes describing the atmosphere in the room-- the emotional reaction from this side, that side. And therefore, when I started to write the book, there were boxes of materials in the memos to help refresh my memory. 

NICOLAS AGUZIN: I actually read one of the memos that you have included in the book that said, I hope you don't get too tired of me. Because you were asking a lot of staff-- a lot of trips, a lot of commitment. And this was a transaction that lasted well over a year. And it's just-- and when we say the transaction, this is an important point. That's to get this transaction done. 

WEIJIAN SHAN: Correct. 

NICOLAS AGUZIN: The interesting story is that around the end of December '99, you're like, I am signing this definitive agreement. And then you call David Bonderman and he said, OK, now the work starts. You have been working for like a year and a half. You haven't seen the light. He said, now the work starts. 

WEIJIAN SHAN: Right. That's the same sentiment as expressed by Henry Kravis to say that any idiot can buy a business, but what matters to the business afterwards is really what matters. It is true. We spent the next five years turning around that bank and improve its risk management, triple these assets, brought down the bad loan ratio, NPL ratio, and eventually sold it for a very good profit, which I will not disclose. You can read it in the book. But it was my experience of how private equity really adds value. It's not buying something cheap and selling something dear. It's how you create value, how you improve the operation of the company. 

NICOLAS AGUZIN: I mean, I see three stages, right? the regional acquisition-- that's a year and a half. This is a little longer than usual, but it was a complicated one with governments involved and everything. Then you have the actually turning around the bank, managing, and making sure that you get the right people in there, all the stories around CEOs and getting the right people to lead the company. And then it's the exit. And the exit has a lot of stories. So I won't tell that much, people can read it. But tell us a little bit about the importance of each of the-- well, the first one you talked about, the second one management as well. How about exits? 

WEIJIAN SHAN: Well, it's very important for a private equity business that you have an exit strategy. Sooner or later, you will have to return money to your limited bonders or your investors. And the best way to exit is, of course, to sell the entire bank to a strategic investor. That's how you would extract so called a toll-- premium, the best value. And therefore, in our deal with the Korean government, we negotiated the right to drag low on their shares, so that we could not only sell our own shares, but also shares held by the Korean government. 

But the best way to extract value, to maximize value of that exit is to get some potential interested parties to get into a horse race, a competitive process. And we started out actually having exclusive discussion with one bank, which I will not name at this particular point. 

NICOLAS AGUZIN: We can see it from here. 

WEIJIAN SHAN: That's in the book. 

NICOLAS AGUZIN: We can see both from here I think. 

WEIJIAN SHAN: Right. And then another bank entered the fray, and eventually they competed with each other. And of course, we sold it to the highest bidder. And it was a fascinating process of trying to get the two banks to compete with each other in order for us to achieve the best exit for our investors, including the Korean government, which was very focused on maximizing value to get the value. Because on behalf of taxpayers, the Korean government injected billions of dollars into this bank. And they wanted to recover as much as possible. 

NICOLAS AGUZIN: Great. Well I'll let everyone read the book. I won't say anymore, just because otherwise we're saying too much. But not every deal is like Korea First Bank. And some are better than others or worse. Can you give us a little bit of your thoughts in terms of process deal sourcing, selecting the right deals? What do you typically look for? 

WEIJIAN SHAN: I think you're absolutely right that private equity is also a high risk business. Sometimes you make a lot of money and people talk about it. Sometimes you may lose money. But we as a buyout firm try not to lose money, because each deal, we invest hundreds of millions of dollars, and sometimes billions of dollars. So one loss would be devastating. From our point of view, when we make investments, we first do macro underwriting. For example, our strategy in China is very different from our strategy in India. 

In China, we would invest in businesses which cater to private consumption, but we don't invest in export businesses. And that is because China's labor cost has been rising very rapidly-- about 11%, double-digit, a year for the past 10 years. And currency has been appreciating in value, so the costs and the inputs have been rising. 

But China has grown on the back of so much investments, representing about 45% of GDP, higher than any other country at any time in history. So there is a lot of overcapacity. So the prices of finished products have been flat or even falling. So for export business, the margin is squeezed thinner and thinner. And this was even before trade wars. With trade war, it becomes even more difficult. 

So in China, we only invest in businesses which cater to domestic consumption, private consumption. In India, we do the opposite, because India's rupee is rather weak. And sometimes, you will have to take into account a 4% or 5% depreciation a year-- sometimes even more. So if you invest for domestic market, one depreciation may wipe out a large part of your capital. Hedging is extremely difficult. So in India, it makes sense to invest in businesses which export, which do the outsourcing. So they receive hard currency as income, and their cost is in rupee. If there is devaluation, you actually benefit from it. 

NICOLAS AGUZIN: It's a natural hedge. So essentially if something happens and costs go down, you're still exporting, you're still doing well. 

WEIJIAN SHAN: Yes. You are actually better off if there is a devaluation. So at the macro level, you have to understand where to put your dollars-- in two markets in different sectors, different businesses. Then you will have to invest in businesses which have a sustainable, competitive advantage, or a moat-- something entry barrier that would protect you from competition. Unfortunately in this world, including Asia, there's too much capital. So if you're profitable, everybody wants to do the same thing. If you don't have an entry barrier, your profitability will be eroded very quickly. 

So entry barrier in terms of IP, in terms of technology, in terms of market share, in terms of license for a bank-- all of those entry barriers are critically important. The third thing is, especially Asia, the name of the game is to be able to scale. See, we invested in the company. And now today, it's called Tencent Music and Entertainment. It used to be China Music Corporation while we were the majority shareholder. And we're still the second-largest shareholder. We invested $100 million, and it turned into billions of dollars in capital gains. 

Now, that business has $800 million monthly active users. Only in a country like China or the United States can you have that kind of scale. So in a large market like China or the United States, if the business model, if a profit model is successful, you can replicate that very quickly throughout the country, and therefore you can scale up. The same business, if you do it in Singapore or in Hong Kong, you will never get anywhere, right, because the market size is too small. So I would say macro underwriting focusing on the right sectors like consumer in China, export in India, then entry barriers and then scalability are the most critical criteria that we look for a while making an investment. 

NICOLAS AGUZIN: How about minority versus control? 

WEIJIAN SHAN: We strongly prefer control. 

NICOLAS AGUZIN: But TME, you were minority. 

WEIJIAN SHAN: We used to be. 

NICOLAS AGUZIN: The largest minority. 

WEIJIAN SHAN: No. We used to be more than 50%. 

NICOLAS AGUZIN: Oh, OK. 

WEIJIAN SHAN: But for a startup company, a technology company, in fact, control is not so effective. If you don't trust the founders, the technology guys, then control is meaningless. For a bank, if it doesn't work out, he'll replace the management. But for a technology company, you'll replace all the technicians and all the signers and then you don't have a business to run anymore. So even though we were more than 50% shareholder, we relied on the funders to grow the business. And shortly after we invested, Tencent came in at three times our cost, and then eventually we merged with Tencent's QQ Music to become what it is today. 

NICOLAS AGUZIN: No, great transaction. 

WEIJIAN SHAN: Now they are the controlling shareholders. Now we have to exit. 

NICOLAS AGUZIN: Very good, very good. Well, that's the other point-- I mean, having control gives you many more options in terms of exit in addition to changing the management for an exit, like the Korean First Bank. You have the opportunity of selling control, getting the control premium, and all those things. 

WEIJIAN SHAN: Yes, because any investment, things can go wrong. And usually, things go wrong. You underwrite very nicely, you find from time to time in reality, things go wrong. If you're a minority passive investor, there's nothing you can do about-- visiting or taking a ride. But if you are a controlling shareholder, you can fix things. And that's the beauty of a control. 

And control will also allow you to control exit. If you're a passive shareholder, it's like taking a bus. You get off when the bus stops if you're a minority shareholder. But if you're a majority shareholder, if you're a controlling shareholder, you are the bus driver. You can stop at any time. You can take any exit. And so control is strongly preferred. And in our case, most of our deals are control deals. 

Sometimes we do minority, but we have to be able to structure a deal in such a way that our downside is very well protected, because you are taking a ride-- you trust the controlling shareholder to deliver the kind of return that you need. So we need the downside protection. If he's not willing to give it to me, I'm not going to invest. 

NICOLAS AGUZIN: Now let's switch a little bit to COVID-19 and the current environment. So what are the implications for private equity? And what are the sectors that you're focusing on or the opportunities that you're looking at? 

WEIJIAN SHAN: Well, two things-- one is on the portfolio side. When you have economic crises, the first thing that you do is to make sure that your portfolio companies are kept intact. They will survive. And fortunately in Asia, by and large, we are very lowly leveraged, very lowly geared. So there's not a risk of running out of cash. 

Now, in the Western markets, in the United States and Europe, you see a number of private equity companies got into trouble with their portfolio companies in retail, in airlines, and some other businesses because there's too much leverage. And therefore when the cash flow stops, you cannot sustain yourself. Fortunately in Asia, by and large, our companies are very safe, because, especially in China, you can't borrow. So your net cash position with most of the portfolio companies, which used to be a bane for us-- we wanted to get more leverage, but we couldn't-- and now it turns out to be a blessing in the crisis. 

And then in the crisis typically is a good time to buy. But you have to know what to buy. Some of these sectors are probably permanently impaired, like hospitality, airlines, hotels, entertainment probably-- or it will take them too long to come back. So even though their valuation is way down, you may not want to invest. But some other sectors have shown a changed world-- changed consumer behavior. 

For example, e-commerce-- all the retail shops are decimated, especially by the pandemic. Nobody goes to shops anymore. But e-commerce, Amazons of the world are doing extremely well. And your profit is up and all that. And it seems to me that technology companies, internet companies are the way of the future. It's not so easy to invest in those companies as a private equity investor, because either a technology company is unproven, and therefore it's too risky for us to invest, or if it is proven, it's unaffordable, it's too expensive. And to find the right opportunities will be tough. 

But those companies which can survive this pandemic-induced recession and emerge stronger against the competition would have a future. So now the valuation is way down-- not on the property market, but the the private market-- and many companies need capital. So it's a good opportunity to invest. Having said that, however, the private equity side of PAG, my firm, invested about $2 billion last year-- more than $2 billion last year. 

PAG has $40 billion under management split into real estate investment, have some return, and private equity. So private equity is part of our business. So for private equity, we invested about $2 billion last year. And this year, it's only slightly more than $1 billion. So our investment pace has slowed. Because if you can't travel, it also hinders your pace, although we have a very robust pipeline. 

NICOLAS AGUZIN: Right, right, right. Well, one of the things that you mentioned that is very important, of course, is the management and the leadership of the companies where you invest. That's a critical part. I want to ask two questions. One, about your leadership style-- what's your leadership style? And then less about in general-- leadership qualities that you admire and respect and you like. 

WEIJIAN SHAN: Well, you and I have this discussion of how you manage your business. And I must say that I was very impressed. I thought that you have a very good way of managing the business. I don't consider myself to be a good leader, but I trust that if people consider themselves to be owners, they can do things very well, especially in the private equity business. Private equity is not a large team sport. It's not football, it's not soccer. 

It's like golf. Everybody will have to be able to pull his own weight. And therefore, in my view, a sense of ownership is critically important. If you consider this to be your home, then you will do it well. Even if you don't understand it, you will try to learn. So in our year end review process, we evaluate everybody 360 degrees by the peers on 10 attributes. 

The first one is his sense of ownership-- his or her sense of ownership. It's very abstract. But your peers know, and they can reach you on a scale of 1 to 10. And if you have very strong sense of ownership, you get a 10. If you don't, then you may get 2 or 3. And that to us is critically important. For example, my secretary tells me what to do. as opposed to me telling her. Of course, sometimes I tell her what to do, but more often, she tells me what to do, because she owns this thing. She wants to make sure that I deliver what I need to deliver. 

And in our investment committee, all decisions are made on unanimous basis, which means everybody has veto, which means if anything goes wrong, we don't point fingers. It's your deal or your deal. No, we all own this deal. So if you have that system, sometimes decision making process can be complicated, because everybody will have to be on board. Every person has a veto. But then everybody owns that deal. So when something goes wrong, it's our responsibility. We'll have to fix it. We fix it for investors. And we own it. So I think that sense of ownership is the hallmark of PAG's culture. 

NICOLAS AGUZIN: That's great. Well, Shan, it's great to have you here with us today. To everyone, you've had the privilege of actually listening to Shan talk about everything-- I mean, his books, about business, about private equity, how to get things right, the future after COVID, even management and leadership lessons. So we've been extraordinarily privileged to have you around. And I look forward to seeing the new book. I mean, it's coming at some point, right? There's another one coming. I think that I've heard something like that. But thank you very much for listening and participating, and look forward to seeing everyone soon. Thank you. 

WEIJIAN SHAN: Thank you very much for having me. Thank you, indeed. 

[00:00:08.61] PAUL UREN: Hello, everybody. My name is Paul Uren, and I'm the co-head of investment banking for J.P. Morgan in Asia-Pacific. It gives me great pleasure to welcome Jean Salata to the J.P. Morgan Private Equity Conference. Jean founded Baring Private Equity Asia 23 years ago and has built it into one of the largest and most established alternative investment firms in Asia with total committed capital of over US $20 billion.

[00:00:35.43] The firm invests in the Asia-Pacific region as well as investing in companies globally that can benefit from further expansion into the Asia region. Baring also managers dedicated funds focused on private real estate and private credit. Jean, thanks for joining us today.

[00:00:52.39] JEAN SALATA: Thank you, Paul, and thank you to J.P. Morgan for inviting me here today.

[00:00:55.68] PAUL UREN: Thanks. If we just start and spend a minute talking about the secrets of your success as an institution over time, over the last 20 years, we've seen various crises, financial and otherwise. Notwithstanding a backdrop that at times has thrown various curveballs our way and your way, the firm has continued to be very successful. What do you think are the key secrets of your success?

[00:01:23.34] JEAN SALATA: Yeah. Well, living in Asia, it's a pretty dynamic environment that we're in. And over the last 20, 25 years, we've seen a number of ups and downs and a number of crises. As a firm, I think we've been through probably four crises, including the great financial crisis in 2008 going all the way back to the Asian financial crisis in 1997.

[00:01:44.49] And I think each time, we've learned a lot of lessons going into those crises and coming out of those crises. And I think one of the keys in any organization is to continue to evolve and to adapt and to learn from your successes, to learn from your mistakes, and to be set up in a way where, as an organization, you are a learning organization where you can be humble enough to admit that you don't have all the answers and that you make mistakes from time to time-- hopefully not too often. Hopefully you don't repeat them. But you make some mistakes, and you take away the important lessons.

[00:02:17.47] So if I look back to 20-plus years ago, we were doing primarily minority investments in small to medium-sized companies that needed capital for growth. That was really where the private equity opportunity was in those days. As the markets have evolved, we've seen a shift towards larger, more control-oriented buyouts as the markets matured. And that's become a really interesting opportunity for firms like ours to go after bigger companies with more established market positions and where there's much more of an opportunity to drive change in the business as a way of generating those returns.

[00:02:51.37] So it's becoming more active, less passive, larger, more importance on management teams, on driving change. And if I think about what's happening today, it's much more to do with digital technology and transformation. And so continuing to see where things are moving and trying to adapt as an organization is key.

[00:03:11.10] And a really important part of that is having the right people on your team and having an organization that can grow and that you can rely on. So to me, it's all about the people and how you run your organization and where you continue to adapt and evolve.

[00:03:25.69] PAUL UREN: Thanks. And if we switch and talk for a moment about the investment landscape, you've just closed on your latest fund. It means you have a considerable amount of dry powder to deploy. The environment in which you're deploying that capital probably looks a lot different to the environment we all thought we were going to be encountering at this point in the year. Has the pandemic created opportunities for you that you didn't foresee, and how are you adapting as you look at new investment?

[00:03:59.41] JEAN SALATA: Yeah. Well, I think the impact of COVID-19 initially was a big shock, I think, to everybody, including the financial markets and to our firms and to our organization. We started off primarily being focused on the portfolio and looking at what we needed to do to bed down and to ride out the crisis.

[00:04:21.37] And so we spent a lot of time with our companies, with our CEOs, making sure we had the right cost structure, the right capital structure to tough it out if the environment became more challenging. And so we went through an initial phase of focusing on the portfolio. I think as things have transpired, none of us anticipated the scale of the response that we've seen from the Fed and the other central banks around the world, which has taken a lot of the impact, the edge off of the negative impact that we could have seen otherwise from the sharp drop in economic activity as a result of COVID.

[00:05:02.05] So what we started to become more focused on the last several months is, what are the new investment opportunities that we can look at in this environment? And again, the starting point has been within our portfolio, where are there bolt-on opportunities in companies that we already understand, in sectors that we know well, where we can bolt on smaller companies, perhaps companies that are having a more difficult time going it alone and that are more open to combining with larger businesses? That's been one area of focus.

[00:05:28.68] Another area really has been from a top-down standpoint, to really lean into the sectors that we already specialized in, but lean into the ones that we think will benefit long term from COVID-19 and from the acceleration in the digital, the acceleration in work from home, the acceleration in things like telemedicine, so health care, anything to do with digital e-commerce and logistics, IT services, enterprise software. The whole ecosystem around what we're seeing, the acceleration of the move towards digital, is, I think, an interesting area for us to continue to focus on.

[00:06:05.01] There have been some, I'd call, more special situation, dislocation type opportunities that we continue to look at, things like-- take privates of listed companies that are experiencing a short-term headwind in their industry for, say, the next six to 12 months. And because of that, their stock price has taken a big hit, but where we see long-term value and can take that company private and manage it as a private company through this period and come out the other end with a stronger business.

[00:06:35.07] And there are some sectors that are harder hit than others. So for example, take financial services in some countries-- like, for example, India, which is having more of a difficult macro time at the moment. The banks there have fallen from price-to-book multiples that we saw six months ago-- 2 and 1/2, 3, or even 4 times book-- to something like 1 times book or below. So that's an interesting sector to focus on if you take a long-term view.

[00:07:00.31] So I would say both in terms of digitalization, in terms of public market dislocations, in terms of certain sectors that are going to benefit long term, there are definitely a lot of opportunities right now. And we've been waiting for the markets to correct across the board as far as valuations, but we haven't really seen that. I think there's still a big gap between seller expectations and buyer expectations on price. And we haven't seen a huge adjustment in terms of transaction prices on private companies yet in Asia.

[00:07:31.47] PAUL UREN: And can we spend a minute and talk about managing during this crisis? You have, I think, around 180 employees who operate out of a number of different offices, both within the region and also in other geographies around the world. How has it been managing that team of people during this crisis and also managing your portfolio companies in an environment where clearly, staying very close to management teams and employees is very, very important?

[00:08:03.07] JEAN SALATA: Yeah, it's been a-- in a strange kind of way, it's actually been really energizing to be in a crisis mode. Nobody likes to have to go through a crisis. But if you're in a crisis, I think you can harness a crisis for a sense of urgency and to create that sense of urgency and rally around as a team to solve the problems.

[00:08:27.54] And we've been working very close-- I'd say even more closely than we have in the past as a result of having to deal with a lot of issues that have arisen because of the COVID-19, so much more regular cadence of meetings, using more remote technology to meet regardless of where you are, whether it's from home, in the office, whether you're in Hong Kong, whether you're in Singapore, in Tokyo, or even in the US or in Europe, creating a lot more regular cadence of meetings, and working, I'd say, at a pace that's more accelerated in order to deal with all the issues.

[00:09:02.41] So I think the team has been very energized. I think there's a lot of communication that needs to be happening during periods like this. You can get things done that you otherwise might not have been able to get done because people are willing to take those tough decisions, make those decisions more quickly, be more decisive. And there are opportunities that are being created because of the dislocation and because of the vacuum that's created as a result of this.

[00:09:26.37] So I think managing through this period-- it's gone better than I would have expected. And I think going forward, some of the things that we're doing now, that we're experiencing now, we're going to continue to adopt on a permanent basis. We were talking earlier about things like travel, and I think you can probably do more remotely going forward than you have in the past.

[00:09:51.90] I don't think it's going to completely replace face-to-face meetings. I think face-to-face meetings are very important, particularly in our business where you need to really size up an opportunity or size up a management team in person. But using technology to do more collaboration across borders, across time zones, I think, is going to continue. I think the area of focus at the moment is, how can we take this crisis and create what we call a new alpha in our team, so the new opportunities coming out of this?

[00:10:23.57] How can a company emerge, one of our portfolio companies emerge out of the crisis stronger than it was going in? Let me give you a couple of examples. We have a number of companies in education where we've been adopting ed tech much faster in those businesses than we would have otherwise, I think, as a result of having to essentially provide an online learning experience to many of our students, whereas previously, that wasn't as urgent of a need.

[00:10:47.26] We have other companies that are-- manufacturing, traditional manufacturing industries that have pivoted their business towards areas like wellness, like medical technology, like vehicle electrification, and that are really repositioning their businesses to supply and benefit from what's going on in the world, even to the extent of trying to create a broader footprint that can address the geopolitical tensions in the world-- to offer clients services in China, but offer clients manufacturing services in Europe and the US as well depending on what the needs are and depending on where they feel most comfortable having their supply chain organized around. So there is a lot of things changing as a result of what's going on in the world, but I think that companies that adapt can actually come out of this stronger.

[00:11:38.65] PAUL UREN: China was obviously hit earliest by the pandemic. It took a number of very aggressive containment measures to try and recover. And when you look at all the high-frequency statistics on the economy within China, most sectors of the Chinese economy have normalized or are very close to normalizing. Other economies in Asia, I think, on a relative basis, are doing quite well. How do you think Asia is positioned to recover from the pandemic?

[00:12:14.48] JEAN SALATA: I think Asia is doing well, as you say. And I think that China in particular, it's really incredible how the economy has transformed itself into a digital economy and the convergence between the old economy and the new economy. It's really just one economy now with just about every single company in every sector having to have a strategy that incorporates mobile, digital, and the ability to interact with clients or with their business customers in an electronic or digital way.

[00:12:43.73] So I think China is far ahead of most other countries in the world in this, and it's embracing technology in a way that we're not seeing in other markets. And I think that will continue to be an advantage. And so the growth that we're seeing-- you've seen economic growth. In our portfolio, we've seen-- really, it's a V-shaped recovery that you haven't seen in other markets around the world where things are more or less back to normal.

[00:13:11.33] Some of the consumer-facing businesses are still maybe a bit slower, but most other companies have bounced back fairly quickly. I think China will come out of this well, looking strong. I think investors globally are paying attention and are interested in participating in the growth. So I do think that globally, investors are going to continue to want to get exposure to this region.

[00:13:35.17] I think our industry is well positioned to continue to attract capital to manage, to invest into companies not just in China, but across the region. And I think China is very well positioned. So we're very excited. We're seeing a lot of deal flow at the moment. Valuations are still high. We'd like to see valuations come off a bit from an investment standpoint, but the growth is there.

[00:13:58.95] And also, the management teams that we come across now are very entrepreneurial and extremely professional, very savvy, very hardworking, which I think is a huge advantage, actually. And overall, I think we are extremely positive about the investment outlook for the region.

[00:14:20.29] PAUL UREN: We're certainly seeing similar trends and themes with investors globally, both public market and private market investors who are looking to increase allocations to this part of the world because of the relative attractiveness of the economies. Do you think you'll see an acceleration of LP allocations to Asia? It was obviously happening in a fairly gradual way to date, but do you think that will increase given what we've seen globally?

[00:14:52.58] JEAN SALATA: Yeah, I think our industry globally should continue to thrive. One of the key things to look at is if you look, say, 20 years ago at the fixed income markets around the world, something like 85% of the global bond market, which is about a $60 trillion market, was generating a 5% yield or better. And if you look today, that number is something like less than 3% of outstanding bonds are trading above 5% yield.

[00:15:19.18] So there is a huge amount of capital that needs to generate a return that's better than 1% or 2%. And that money has found its way into the stock market, and it's also finding its way into other alternative asset classes, including private equity, including things like real estate, and so on. So I do think that there's going to continue to be capital that's looking for a way to generate returns above what's available in other alternatives.

[00:15:45.46] As far as Asia specifically, our industry is growing. The private equity industry in Asia is growing. One of the reasons for that is that our industry is maturing. And so you have larger-scale players in this part of the world that are more seasoned, more experienced, that are basically creating investment programs that are more repeatable, that have the real capability to deliver real change and transformation into companies, which is important to deliver that extra bit of return on top of the market return.

[00:16:17.66] And I think the results have been solid and are going to continue to be solid. And at the end of the day, the key driver of returns in our industry is growth, earnings growth. And if you have earnings growth, either because the markets are growing or because you're able to improve the growth profile of the business, the combination of those things should be able to generate above-average returns. And I think the outlook for both of those remains fairly positive.

[00:16:43.99] So we are seeing continued interest. I think you're seeing a bit of a bifurcation in our industry between very large funds that are raising the lion's share of the capital through larger pools of capital that can have an impact on our clients' balance sheet, but also meaning that they can be done in a more efficient way and go after larger targets. And then you have, at the other end of the spectrum, very specialized funds that are more niche, focused on specific countries or specific sectors. I think those are the two directions that we see in our industry gaining traction at the moment.

[00:17:17.77] PAUL UREN: Private equity is a very relationship-driven business, both the relationships that you have with management teams, but also the relationships that you have with your investors. How have you maintained engagement with your LP base during a time where it's been very difficult to meet people in person?

[00:17:38.95] JEAN SALATA: Yeah, the communication is important. We've been on the front foot here trying to stay in close touch with all of LPs. We started off, actually, in January when this first hit. We had our first webinar with all of our investors. That was before the Zoom technology became widely adopted. But we had a traditional conference call with all of our investors updating them on what we were seeing in Asia. And then as it became more of a global pandemic, we had another call with our investors and started to provide more detailed information.

[00:18:12.04] We went through our portfolio. I think the first thing-- we had not been through anything like this before either. But I think it's important to just communicate with your investors and explain to them what's happening in the portfolio, first and foremost. So we spent a lot of time ascertaining, going company by company, CEO by CEO, week by week, balance sheet by balance sheet, trying to understand what the situation was, what the impact was going to be. What's the solvency picture?

[00:18:37.42] What's the liquidity profile? What is the refinancing risk in the business? What are the covenant issues in the business? And then laying all that out and aggregating it and presenting a consolidated view to our investors so at least they knew what they owned and how it was doing. And I think that is comforting to people. Even though they know that we are going through uncharted territory, at least they understand that we are on top of things and reporting to them clearly what we are seeing.

[00:19:04.57] So we did that in a timely fashion. We then had our annual meeting, actually, shortly thereafter, which was already scheduled to take place in April. And we had that virtually for the first time. And that was fine. It was actually very well attended, probably better attended than it normally would have been in person. And we communicated even more to them.

[00:19:24.93] And then we've gotten into this regular cadence of communicating internally much more frequently. So we have a portfolio management committee, for example, that normally meets once a month, now meeting once a week. We review our companies. We have a regular weekly team meeting, but now we've added two other meetings to look at COVID-related issues internally to make sure our staff is well and that things are being looked after properly there.

[00:19:50.08] We also look at the impact on the portfolio. And then we've had much more frequent meetings with our CEOs. And we've even had global CEO meetings with our portfolio companies where we do more experience sharing. So we get two or three CEOs from our companies that are doing interesting things. For example, how have you gone about getting access to government loan programs in your country? Share that experience.

[00:20:15.30] Or one issue that's coming up now is fatigue. We've been in a crisis mode for four or five months. People are tired of being in crisis mode. What are you doing to reenergize your team? This kind of experience sharing is really valuable because it's CEO to CEO, peer to peer on issues that are related to what everybody's having to deal with and to navigate through.

[00:20:36.10] So I think it's just communication, communication, communication, trying to keep some fun and humor at the same time. We're having a happy hour tonight right after, later on tonight, virtually. So I'll have my bottle of wine which I'll have to drink entirely myself. I'll be sharing it virtually with the rest of the team. And there's some funny things you can do now with Microsoft Teams and the like where you put people in a stadium view so you can see everybody's faces at the same time and have funny backdrops and that kind of thing. So I think it's important to maintain the morale and the team spirit until we can all see each other again.

[00:21:12.85] PAUL UREN: Good, good. Can we spend a moment talking about philanthropy? Barings was one of the first funds in Asia to establish a COVID-19 relief fund. Can you talk to us a little bit about what you did there, why you did it, and what sort of response you've had for having done that?

[00:21:32.31] JEAN SALATA: It was a bit of a groundswell within our firm, actually, when this whole thing hit that people felt like we should do something. And we have a history of-- we have a philanthropy program that's active every single year, but there was a feeling that we're in the midst of something. We're in a fortunate position as a firm and as individuals. We have long-term revenues and long-term fees and incomes and so on, that we're not directly affected as much. But there are many other people in our communities that are being directly affected, so we should do something to help.

[00:22:02.32] And so we immediately set up a fund. It's a $5 million US fund, which is a substantial size for a firm of our size. And we funded it primarily through people giving up their salaries. And many of us have given up 100% of our base salaries for the year. And we created this pool.

[00:22:19.06] And in Hong Kong, for example, we're currently funding 9,000 families for all their food requirements during this period through an organization called Feeding Hong Kong and Food Angel, which helps people in that situation. We worked with the Hong Kong Council of Social Services in Hong Kong, which also has a lot of grassroots organizations that they support in the community, a lot of religious organizations that help through churches, and so on, to help get food out to the community.

[00:22:46.48] And then in Singapore, we're doing the same thing. We've done the same thing in Southeast Asia. We're also funding a lot of the PPE, the Personal Protection Equipment that's being used by frontline workers across the region where there's a need for that-- in the Philippines, for example. So we have a variety of things that we're involved in. And I think it's really good to be able to help.

[00:23:05.71] We've gotten some really moving thank you notes and photos from people. And it's also motivating for our team, I think, to feel like we're having an impact on the community. I know that Jamie talks a lot about being a responsible stakeholder and stakeholder capitalism and the way we operate in our communities. I think that's right.

[00:23:25.57] We are, first and foremost, fiduciaries for our' investors' capital, so that's what we focus on. But we also pay attention and try to help where we can to the communities that we're involved in-- not just in creating employment through the investments that we're making, but also in helping those that are being left behind through these kinds of dislocation and pandemics or other types of falling through the net. And so yes, we have been active, and it's been a very, I guess, rewarding or moving experience for all of us in our firm to be associated with that. We hope to be able to continue to do that going forward as well as people's needs change.

[00:24:07.00] PAUL UREN: Well, Jean, it's really great to hear what you've done and the contribution you've made back to the community. It's been terrific having you join us today as part of the J.P. Morgan Private Equity Conference. Congratulations on all of the success that Barings and you and the rest of the team have accomplished to date. This has been a very informative discussion, and we really appreciate you joining us for it. Thank you.

[00:24:33.40] JEAN SALATA: Thanks, Paul. It's been a pleasure. Thanks for having me. Thank you. 

[00:00:08.58] DAVID LEAHY: Welcome, everyone. My name is David Leahy. I am the head of the Financial Sponsor's Group for Asia at J.P. Morgan Private Bank. It is my pleasure to welcome you to the J.P. Morgan Asia Private Equity Conference 2020, where this year we will be hosting a series of fireside conversations and panel discussions with the principals of leading GPs, getting their insights into the trends, and themes, and dynamics as they operate across private markets in Asia. And it is in this context-- it gives me great pleasure to welcome Mr. Edwin Wong.

[00:00:38.85] EDWIN WONG: Thank you.

[00:00:39.78] DAVID LEAHY: Edwin is the managing partner and CEO of Ares SSG and is a member of the management committee and of Ares Management. Prior to joining Ares in 2009, he was the managing partner and chief investment officer for SSG, where he focused on special situations and private debt transactions across Asia-Pacific, with a particular focus on China, India, and Southeast Asia. He was instrumental in a number of acquisitions of distressed assets across Asia, which led to a number of high-profile restructuring situations and he is a founding member of the APAC ACC, the Alternative Credit Council, which helps in developing the private markets in the region. Edwin, very welcome, thank you for joining us.

[00:01:25.32] EDWIN WONG: Thank you.

[00:01:25.83] DAVID LEAHY: Very exciting time for private markets.

[00:01:27.69] EDWIN WONG: Indeed.

[00:01:28.08] DAVID LEAHY: Let's get right into the discussion.

[00:01:30.00] EDWIN WONG: Very good.

[00:01:30.57] DAVID LEAHY: So in the context of SSG in the first instance, which you founded back in 2009, I guess over the past 10 years, you've seen your fair share of market evolution, market crises, and market highs. In that context, what has been, do you think, the secret of the success, of the longevity of the team? And how have you continued to be successful in this segment?

[00:01:50.55] EDWIN WONG: Right. I think most people would know me and my partners have actually been working to get away before the SSG era. So in the last-- a good part of the last 20 years we've been working together. And over that period, it's fair to say we've gone through a lot of economic cycles and financial crisis. We certainly learned a lot. I think one critical success factor or one thing that we've always very much believe in is being local with the environment. You really have to be on the ground understanding the changes in regulations and the business environment. And that has always served as well. I mean, we have very, very focused on building local teams rather than the whole fly in, fly out approach. So that I think has always been good for us.

[00:02:40.22] DAVID LEAHY: OK. And, as a unit, you've been together for how long? I believe you were previously--

[00:02:44.07] EDWIN WONG: Well, I think most of us have worked together for over 15 years.

[00:02:48.51] DAVID LEAHY: OK, OK.

[00:02:49.47] EDWIN WONG: it's been quite a tight team.

[00:02:52.61] DAVID LEAHY: OK. Let's get right into private debt as a segment, as it increases in its attractiveness, particularly in the current stage we were at in the cycle. I guess with-- when we think about [INAUDIBLE] globally and we hear statistics that it may be somewhere around a third of the AUM in the industry at the moment, so plenty of ammunition there to see us through deals for 2020, what's your outlook for the segment as you think 18, 24 months ahead?

[00:03:20.79] EDWIN WONG: I think we're entering to a very, very attractive period for investing as much as we believe that the Asia opportunities that is structural rather than timing. I do think this vintage is actually very interesting one. Your point around the [INAUDIBLE]-- I think Asia is a little bit different, at least than the private debt space.

[00:03:45.34] There's a lot more demand than supply. So unlike what you're seeing in North America where tons of money being raised, everyone's jumping on each other on deals, I think that's not quite a-- quite an environment you seeing here. This is still very much a lender's market where we can dictate terms, whether it's pricing, whether it's covenants. It's very much an environment where we get to kind of dictate the terms that we want to do.

[00:04:12.97] DAVID LEAHY: OK, very interesting. And private debt as an asset class, I guess it no longer is appropriate to refer to it almost as a shadow banking in many respects. Can we talk about some of the benefits from, I guess, an investor and a borrower perspective, as you see them, as this become--

[00:04:27.28] EDWIN WONG: I think for our investors what we have been able to offer them-- it's a significant premium or alpha to what the banks are charging our clients. We're looking at a very meaningful pickup on the returns that we can charge, without really taking a lot more risk. Because what we really offer-- it's a bespoke solution to our clients. Give them flexibility, give them the tenet that they need rather than-- again, usually banks are rather rigid in terms of-- they have kind of a template, you either fit or you don't. So we're able to provide a much more tailor-made solution to them and, therefore, charging them without taking a lot more risk. So that's-- on the investor side, that's really exposure that we-- that they're getting, which, by the way, it's attractive for many of our LPs because, historically, they're very focused on the equity side and they're undereducated on the credit side. So this gives them, if nothing else, a diversification in their Asian portfolio.

[00:05:28.76] DAVID LEAHY: And have you seen a growth in the sophistication of the investor that's coming into the space.

[00:05:32.39] EDWIN WONG: Yes, we have. I think private debt, in general, obviously, that's a well-known asset class starting in the US more than 10 years ago. Europe has catch up in a major way in the last five years. And Asia will follow that pattern. I think we're still [INAUDIBLE] SSG-- or Ares SSG has been kind of the pioneer of this in the last 10 years.

[00:05:57.29] This asset class is now very much endorsed by all the big global players since we're no longer the only guy running around. I mean, all of the big global names are in this market now. So, in that sense, it's very endorsed. Our LPs, our investors are also getting more and more educated about what it means in the alpha that you get in Asia versus the rest of the globe.

[00:06:23.39] Your question about the borrowers, I think, is also important. I think there's a huge demand from borrowers for this alternative lending because in Asia one thing that is, I would say, unique versus the developed markets-- while you have the bank retrenching and that is always a big theme of why attentive lending becomes more and more critical for the economy, here, in Asia, large part of the lending it's also driven by government banks or state-owned banks, which has its inefficiencies or issues around it.

[00:07:02.21] So that is what a lot of the alternative lenders, like ourselves, are really trying to capitalize on, the advantages that we can provide. Again, that whole tailor-made solution, being a lot more flexible, and a lot more thoughtful with the borrower around addressing a capital needs. That is something that, again, if you look at many of the banks in Asia, they-- they're very bureaucratic, they're very policy-driven. We think of credit in much more holistic way. And that's really something that we found borrowers are-- while they understand we're probably are a bit more expensive-- but if you look at the totality of the value added that we offer to our clients, it actually makes a lot of sense.

[00:07:44.46] DAVID LEAHY: OK, very good. And let's take a look within Asia itself because you've a lot of different jurisdictions and you, yourself, focus on specific areas. A lot of those countries and rules and regulations move at very different speeds. I mean, in the context, if you overlay the SSG approach and focus on the region, tell us about it some of those markets and how you might approach them.

[00:08:05.75] EDWIN WONG: I think this goes back to what I said earlier around being local. You are-- you're spot on in describing Asia. Asia is not just one place. It's many different geographies with very different crosscurrents. We're one of the few firms that actually have local teams and local licenses. And, I mean, we operate out of nine offices. We have a lot of foot soldiers on the ground. And that has really given us an opportunity to really be diversified because there are times where China could be the biggest opportunity out there, there are times where India, or Southeast Asia, or Australia, or Korea maybe-- may have it's as unique ups and downs.

[00:08:49.87] DAVID LEAHY: Sure.

[00:08:50.15] EDWIN WONG: So being able to navigate that, being-- taking a regional approach has given us the flexibility to move around the region a bit. They're all very different. They all require local teams. Again, we-- you need to have mainland Chinese professionals covering the China market, likewise Indians. We have Thai people. We have Indonesians. We have Koreans. You name it. It's a region where-- in a way, it really works for people that have build out that infrastructure or that footprint because the barriers of entry is very, very high. Having that local talent with experience that have gone through multiple cycles, it just-- it's just very, very hard to replicate.

[00:09:31.70] DAVID LEAHY: Understood. And I guess over the next-- if you take that outlook of 18 to 24 months, again, which particular market would you see as-- which-- the most opportunistic?

[00:09:40.82] EDWIN WONG: I think the China and India one would highlight as probably the most-- as the biggest opportunity in the near-medium term, for different reasons. I think China-- obviously, the market sizing-- it's just that much bigger than any market out there. The foreign participation in the China market is still relatively low. There's still a lot of room for growth. We have the ability to do onshore and offshore. And, again, those markets sometimes behave very differently--

[00:10:16.41] DAVID LEAHY: Yes.

[00:10:16.68] EDWIN WONG: --depending on government policies and all that. So having the ability to navigate in and out has given this a bit of an advantage. India, it's going through, as we all know, a little bit of a crisis right now. Alternative lenders, especially the domestic institutions, are going through a bit of stress. That has really opened up the playing field for a lot of foreigners. So we have been investing there for the last 10 years. So we're seeing a lot of opportunities right now to do either single corporate lending or even buying portfolios of performing [INAUDIBLE].

[00:10:55.74] DAVID LEAHY: Very interesting. And just sticking with that topic of trends that may be coming through in the private debt space-- so corporate lending, is there anything else that people should be aware of coming through over the next year or two?

[00:11:07.86] EDWIN WONG: I think corporate lending has-- it's is picking up. Again, banks will continue to retrench. We all know we're still in the midst of COVID. So there's stress in a system across all geographies. Banks are looking at how to strengthen their balance sheet. They're-- and that the bigger and better ones are looking at how to take advantage of the opportunity to buy out their competitors.

[00:11:36.21] So we're-- we are very much aligned with our clients to capitalize on that opportunity. And that's something that, especially around acquisition financing and whatnot-- it's something that we are-- we're very focused on. We're very plugged into. And we see M&A to pick up quite a bit in the next-- in the s-- in the next six to nine months. A lot of money has been raised around that opportunity now.

[00:12:03.96] Valuation, in general-- it has come off a bit. So one of the things that we're very focused on is bringing in kind of a uni-tranche product to Asia, addressing primarily the sponsor's clients. I mean, Ares have a little bit of reputation of really building that market in the developed world and we wanted to bring it out here. Because we know-- right now, for sponsors to be financing a lot of the M&A, so a lot of the buyouts, primarily they're going through banks. Again, we want to be able to address something that is more value add, more bespoke, more flexible, more value add to our sponsor clients.

[00:12:47.30] DAVID LEAHY: OK, very good. And opportunities in distressed, generally?

[00:12:49.93] EDWIN WONG: Distress is as large, obviously. I think we-- as with every cycle, the-- you see a pickup in distressed opportunities. We had the initial wave. I mean, usually you kind of have a little bit of a pickup right in the midst of the crises when the weaker guy just bail out, so you had a little bit of an opportunity. And we were lucky enough to capitalize on that a few months ago.

[00:13:17.04] Then the real restructuring work and turnaround probably takes another six to 12 months because companies need to figured out how to navigate this, how to restructure. Because when is not certain when they're going to be able to open the business and what the EBITDA this year-- next year is going to look like, it's going to be hard to really come up with a real restructuring plans and banks take time to make the right provisions. So all that means the opportunities that will last for at least the next two, three, four years. So we're actually sitting in a very good time right now.

[00:13:53.21] DAVID LEAHY: OK, fantastic. You mentioned COVID. Obviously, no discussion can pass without addressing what's dominated everything for the last six months, particularly within the markets. How did SSG navigate the period? And how did you stay in touch with investors? Do you think it bought additional opportunities for the firm? Tell us.

[00:14:12.62] EDWIN WONG: Yeah, I think the biggest focus of us it's our people.

[00:14:20.50] DAVID LEAHY: Yes.

[00:14:21.71] EDWIN WONG: And that's pe-- that's our staff, that's all the lives that we touch upon as [INAUDIBLE] companies, their people as well. So I think that, if anything, when the crisis hit, the first thing we were looking at is, OK, how do we protect lives, our staff and all the investor companies that we touched on.

[00:14:43.82] So we want to make sure that that's-- before EBITDA and anything else, that's the first things we want to protect. Now that we're more than six months into it, I think what we have seen-- the investment opportunity would naturally come. That's true. Again, on the lending side, because the bigger companies time and time again, every financial cycle, they will come up. They will come around and become bigger and better. They will eat up the smaller guys. So we want to be around them for that opportunity set.

[00:15:17.03] And then certainly you will have a wave of restructurings, distress opportunities, secondary opportunity that you can buy things and turn it around. That would also happen. So that's more on the investment side of things.

[00:15:32.99] DAVID LEAHY: Yes.

[00:15:34.01] EDWIN WONG: I think the other thing that we were very conscious of early on with-- in the crisis was communication with our investors. Because, frankly speaking, no one really knows how the pandemic would affect their portfolio and how long it will last. The best thing we can do would just be transparent and have that active dialogue with our investors.

[00:15:56.25] So I think that's similar to all the good GPs out there. A lot of time was spent-- March, April-- just scrubbing the portfolio and in constant dialogue with your investors around where things are and where you think things might be trending. We're very fortunate that now we can say I think that portfolio is very much intact. So that's very, very good.

[00:16:17.66] But I think the investors appreciate the fact, not only what you produce in terms of [INAUDIBLE] and multiples, but how you conduct yourself in a crisis situation. I think that's something that we're very conscious of, just making sure that whether it's outgoing to your investors or incoming [INAUDIBLE], we can respond to it as quickly as possible. So that's something that we were quite conscious of with the investor side.

[00:16:43.36] DAVID LEAHY: Yeah, very important as well because many of those investors have multiple investments and GPs they need to interact with. So--

[00:16:50.03] - Yes, and, obviously, no one can travel right now. That's the--

[00:16:53.29] DAVID LEAHY: Correct.

[00:16:53.69] EDWIN WONG: --that's the other thing.

[00:16:54.44] DAVID LEAHY: Correct.

[00:16:54.74] EDWIN WONG: It complicates life.

[00:16:55.85] On the point around investing or finding opportunities doing this COVID era, I think, one thing that we have been very, very fortunate is that given that we have local offices in all of the major geographies, we don't need-- we're not as affected by the fact that people can't travel. Again, we-- the way we run things is not so much fly in, fly out. We have local people on the ground.

[00:17:19.65] In fact, the last three four months, we've been pretty active looking at different opportunities, whether it's China, India, or Southeast Asia, Australia. We've actually been deploying a fair amount of capital doing that era. So that has not been an impact for us. In fact, I would probably say the opportunities has picked up because it is a little bit more difficult for some of the other funds to attack that space right now given the restrictions around travel.

[00:17:50.87] DAVID LEAHY: And while all of this was going on, there was a seminal transaction that you closed on-- for SSG with Ares. So on July the 1st that became public and announced that officially Ares had taken a majority stake in SSG and congratulations.

[00:18:06.90] EDWIN WONG: Thank you.

[00:18:07.43] DAVID LEAHY: Tell us h-- tell us the journey towards that transaction. It's a trend that everybody in Asia is always very focused on, a parent or a potential parent from the US or Europe coming into the region and acquiring that skillset. But take us back, how did the discussion begin and--

[00:18:23.33] EDWIN WONG: Yeah, it's-- I would just start by saying that I can't be happier with what-- the merger that we have with Ares. They probably started, I think, 18 months ago when they were looking for a good partner to really extend the buildout that they wanted to do in this part of the world.

[00:18:49.64] I think what make them unique is a-- I mean, the cultural fit-- the-- I know it sounds a little cliched, but it's surprising the matching to us. I think everyone knows that we've been approached by many, many other names in the past. But we just-- when Ares approached us, the way they conducted themselves, the way we think about how we can build out the businesses going forward is very similar to us. And our main objective is-- we see a lot of opportunity in this part of the world. We have invested in-- heavily in building out our platform in this part of the world.

[00:19:30.77] One thing we know is we're not really-- we're not addressing every capital solution that our clients are asking for and we wanted to be able to do that. And I think that's what Ares does for us because they're a much more complete asset manager in terms of their product offering. Obviously, they have a lot more AUM behind them, a lot more LPs that we otherwise wouldn't have a reach into. All those will help us become a much more complete solution provider in this region, which, ultimately, means better for our corporate clients in this part of the world and also better for our LPs.

[00:20:10.17] DAVID LEAHY: OK, OK. And if you were to-- I mean, you mentioned there are asset classes and segments that they operate in that you have not traditionally explored, maybe a little bit about. Where do you think you can--

[00:20:20.70] EDWIN WONG: I think, historically, we have been very credit-oriented, whether it's on the performing side, with direct lending, and on the non-performing side, with distressed special set. While the special set fund does touches on equity, because we do distress for control and all that, we really don't have-- if a solution-- if a situation warrants something more equity-like, that is something that we feel we're much more handicap.

[00:20:48.25] With Ares-- while they're dominant-- they're very, very big on the credit side. I mean, they're equally strong and private equity, on infrastructure, on the-- on real estate, so those are things that we're in the process of tapping into, and really learning, and getting those industry support, and eventually be able to offer that to our clients. I mean, that is clearly one of our aspirations.

[00:21:11.61] DAVID LEAHY: So if you were to look ahead 12, 24, 36 months, the shape of Ares SSG in the region is far more expanded into different client segments and just an ancillary question on that, how do you find the acquisition of talent for-- to fuel that business, I guess, going forward.

[00:21:28.20] EDWIN WONG: We have been-- I guess, on the talent side, we have been very fortunate. Number one, people that have been-- we have been able to retain talent. I think with all the big, global firms coming to the region, there's never enough talent in this part of the world. And we'd be able to-- and we really don't have much turnover in the firm, so that that's something that I'm always very grateful for.

[00:21:52.18] But, on top of that, we've also been able to attract talent and we have grown from-- back five, six years ago, maybe, we were only 30, 40 people. We're now almost 100. And then we have two servicing companies that has another 100. So combined, we have 200 people, again, across the nine offices, working on behalf of our investors. So that's a pretty big footprint.

[00:22:16.35] We're also very top-heavy by design. So we have, I think, 15 or 16 [? MDs ?] right now, senior guys that can really originate executor transactions. Part of that is because we know we are going to experience big growth. So we didn't-- we're not looking to hire when we see the opportunity. We actually hired before we-- anticipating the growth ahead of us. So that-- I think we still have-- I think our philosophy around talent is if there's a good talent, we'll make room for it because the opportunity set is so obvious that if you find good people, might as well bring them in now, even though you may have to wait 12, 18 months, or whatever for them to really, really generate the output.

[00:23:03.63] DAVID LEAHY: OK. Well, it's fantastic to hear that you're doing so well. We look forward to speaking to you again in the future and the very best of luck at this next stage of the evolution of SSG as you partner with Ares in the region and expand.

[00:23:15.38] EDWIN WONG: Thank you.

[00:23:15.80] DAVID LEAHY: Thank you for joining us today.

[00:23:17.17] EDWIN WONG: Thank you for having me again.

[00:23:18.09] DAVID LEAHY: And thank you for joining. J.P. Morgan invites you to continue to stay tuned for additional discussions on private markets across the region as they become available in the coming days. 

[00:00:07.78] FILIPPO GORI: Welcome, everyone. My name is Filippo Gori, I'm the CEO for J.P. Morgan in Asia-Pacific. And it is my pleasure to welcome all of you to 2020 J.P. Morgan Private Equity Conference.

[00:00:19.92] This year, obviously, the pandemic has been, and remains, one of the critical themes across investing on all the asset classes globally. On private real estate markets, though, we saw a record numbers of deals in 2018 and 2019. But this year, in Q1 and Q2, definitely the deal flow slowed down. Also, with changes in consumer behavior, there will be, for sure, some sectors and some industries that could become interesting investing opportunities.

[00:00:59.66] We are blessed and grateful today to be joined here by two veterans. In Hong Kong with me, I have Kenneth Gaw, who is the founder and president of Gaw Capital. And joining us from Zoom in Tokyo, we have Jon-Paul "JP" Toppino, Group President of PAG and Managing Partner of PAG Real Estate. Gaw Capital was founded in 2005, focusing on global real estate, and covers the entire spectrum of real estate sectors. Since inception, Gaw Capital has raised equity of over $15 billions, US dollars, obviously, and commands assets of over $25 and now, almost $26 billions under management, at the end of Q1 of this year.

[00:01:46.14] On the other hand, PAG Real Estate was founded in '97 as Secured Capital Japan. Definitely one of the most experienced real estate managers that spans multiple cycles. PAG Real Estate has invested over $31 billion US dollars in almost 7,000 properties across Asia. And as a group, PAG has assets under management that exceeds $40 billion US dollars as of June of this year.

[00:02:16.34] Before we get started, I wanted to congratulate both Kenneth and JP because both your firms have successfully raised new vehicles recently. And with that, I think we should go on into the question, starting with a little bit on the investment landscape across regions and sectors. Maybe we can start with JP. Where in Asia do you see the opportunities now, specifically with your new fund? What are the areas that you are planning to deploy the capital in a post-COVID world?

[00:02:51.30] JON-PAUL TOPPINO: It's a good question. I am sure our existing LLPs want to know the answer to that, also. We were fortunate enough to close close to $3 billion US, actually, in the second quarter. So actually after COVID had already started. Fortunately, we have a lot of re-ups of existing investors, and a lot of people were able to complete their due diligence before the travel restrictions came into place.

[00:03:17.51] You know, as I look at the landscape-- I mean, what we closed is our opportunistic fund, which frankly, is a bit more agnostic than our core and core plus vehicles, which are really, really focused on cash flow and certain property types. As I look kind of at the entree of types of assets that are available right now, I mean, my firm belief is data centers in Japan and South Korea are probably the most attractive sector. I'm going to give you some just high line numbers.

[00:03:49.10] I can develop data centers in Japan, so in greater Tokyo, greater Osaka, at over a 10% cap rate, that's with a lease in place, with a global cloud player. And that market sold with, you know, with the asset bolt and stabilizes probably 3 and 1/2% to 4%. So in terms of kind of delta between your basis and what you can sell it for, probably the most attractive asset class, as I saw the Gaw, the Gaw team has closed a pretty large data center fund recently, also.

[00:04:22.10] We also like distressed debt, non-performing loans. Frankly, we haven't seen as much of it as I would have expected, coming out of COVID lockdowns. But we expect that to increase across the region as credit remains tight. I mean, obviously, China is putting a lot of credit out there, but the other markets are a bit tighter.

[00:04:42.56] And then beyond that, it's kind of for our opportunity fund, whatever makes sense on a risk-adjusted basis. We probably won't be buying any GMS retail centers, but aside from that, nothing's off the table.

[00:04:55.18] FILIPPO GORI: Thank you. And Ken, on your side, in addition to Asia, Gaw Capital also focuses on the US and in Europe. Now, how would you rank these regions right now? And going a little bit further, within each region, how would you see the opportunities in cities, and how would you deploy more capital in that sense?

[00:05:18.00] KENNETH GAW: So we, I mean, we do invest a lot more in Asia than in US and Europe. We are about, I think we're about 75% of our assets are in Asia, versus the rest in Europe and US. But just before COVID closed us down, I was actually in Madrid and London. So that was my last trip, was in March of this year.

[00:05:38.16] And I got back to Hong Kong on the 14th of March from London, cutting short my trip, because Hong Kong government announced that they were going to quarantine everyone coming back from Europe. So I came back. But just before that, on that trip, I was in Madrid, where we have-- in Spain, we have a chain of hotels. And also in Portugal, we have hotels.

[00:05:56.57] That's one of the strategies we had for the last two, three years, because we felt that southern Europe hotel, both from a captured value point of view, and from the room rates point of view is, is relatively low. Also, there is a big pool of unemployment, young people unemployment, so labor cost is cheap. We think that's a good opportunity, and we've been investing a lot in that.

[00:06:22.05] And when I was there in Madrid, I was there with our local partners. And we were reviewing numbers from 2019, and we were something like 20% above budget. And first two months of 2020, we were also double digit above our budget for the year.

[00:06:38.45] And then suddenly-- and so we all decided, we were all saying, hey, this is good market, we're going to expand. And we had multiple deals we were working on. But one week later, everything shut down. So it's actually hard to imagine.

[00:06:51.44] But I think the fundamental driver of why we like that market is still there. Of course, right now with COVID, the prices need to change. So we still like that sector, but I think the price needs to be repriced a bit.

[00:07:06.60] And then we also have a pretty big portfolio in London. But honestly, we haven't actually invested much there since Brexit. Apart from a built for building in 2018, which we bought because of a special situation, we owned the freehold of the land. And one of the leasehold on top was sold, so we bought it basically leasehold price, but with a freehold ownership. So that makes sense for us.

[00:07:30.98] But generally, the market there hasn't repriced post-Brexit, so we found it hard to read. You know, the market may be right, but if they aren't, we still have a pretty big portfolio there. We thought, actually, it could be interesting to invest more in places like Amsterdam, Dublin, which could benefit from the fallout from Brexit. And if there's repricing, I think those are interesting opportunities.

[00:07:58.88] In the US, I would say pretty much for the last decade, one of the main themes that we had was to basically follow, or try to be ahead of the tech companies expanding into new markets. So you know, in early-- maybe early 2010, we were investing a lot in downtown San Francisco, because it's relatively cheap compared to Silicon Valley. And then Seattle, because it's cheap compared to Bay Area. And then it's Portland, Denver, Austin, these kinds of places.

[00:08:27.78] And in fact, the last place we went was before COVID shutdown was Oakland, actually, back to the Bay Area. But again, relatively cheap compared to all those markets. So I think, given how strong the tech market has come back, or tech companies have-- not come back, how strong the tech companies have performed during COVID, I think that's still a valid strategy. Again, we probably want to look for some repricing because of COVID.

[00:08:54.61] Another interesting place would be New York City. A lot of people have talked down New York City, but we think New York is a unique place, and that it will always come back. And you can see companies like Facebook just signed a big lease there. Amazon just signed a big lease. Google is already very big in the Meatpacking District. So we think that if New York reprices, there will be a good opportunity as well.

[00:09:18.37] FILIPPO GORI: Thank you very much. And I would like to take, Ken, inspiration from the first part of your answer, to go back to the second--

[00:09:28.60] KENNETH GAW: Asia.

[00:09:29.59] FILIPPO GORI: Asia-- hotels, office, retail, which clearly, the impact, I would say, on the infrastructure, the impact of COVID on the infrastructure is definitely non-linear. There are some of the sectors that got hit the most, and others that will change with the change in people's behavior. And even banks like ours, considering working flexible arrangements that six months ago, would've been unconceivable, right now, it's part of what, daily discussions.

[00:10:09.28] So maybe a question for both of you, and then we can go more into the specific of the second part of the question. But just to start with, for both of you, your views on how hotel, retail, and offices could change their operating model and infrastructure in a post-COVID world, if at all, they will change? And maybe, I don't know whether Ken or JP want to start.

[00:10:35.61] JON-PAUL TOPPINO: Ken, why don't you go ahead, on this one?

[00:10:38.25] KENNETH GAW: OK, OK. So obviously, a lot of people talk about use of office would be different after COVID. And that could be true, to a certain sense. But I think in the long term, it would still all revert to normal.

[00:10:55.85] You'd think-- I mean, we have heard, for many years already, about office demand peaking. So the first time I heard that would be in 2000, during the last dot-com boom. People, a lot of experts predicted that office demand has peaked, because technology has meant that people can work from home, people can work from the beaches, from the mountains. But guess what? The next 20 years, office demand boomed.

[00:11:20.14] And then, a year after that, 2001, 9/11 happened. Two airplanes went into the World Trade Center in New York. Experts predicted that people don't want to work in tall towers anymore. Guess what? Tall towers went up around the world, and record numbers of offices have gone to that.

[00:11:40.39] People also predicted that people won't travel the same way anymore, because people will be afraid of terrorism, getting on airplanes, airport security will be so difficult that they don't want to travel. But again, the next 19 years, travel demand boomed globally.

[00:11:57.19] I think generally, people's behavior won't really change. And from the pandemic point of view, this is not the first pandemic that humankind has seen, it will not be the last. There's been much, much worse, right? Spanish flu, tuberculosis, and before that, you had the Black Death, the plague, and all that. All of them were much worse than COVID, and we never shut down the world for it.

[00:12:20.77] Just some big numbers, right? You have-- in fact, I looked this up. In 1918, global population was 1.8 billion people. Spanish flu that year killed close to 15 million people. So 15 million out of 1.8 billion people, that's pretty severe compared to COVID. And yet, people traveled for the next 80 years. People went to work for the next 80 years. Europeans, they still greet each other, hugging and kissing, right? So human behavior won't change.

[00:12:55.23] I think in terms of office use, some big companies-- including maybe J.P. Morgan, some of the big, especially big American companies-- I've heard are talking about, they're going to experiment working from home after COVID, or setting up remote offices. But I think they will soon find that the best employees would still rather work from, work in the office, where they can interact with other smart and creative people, and especially interacting with their bosses, where they can showcase their abilities and their leadership qualities. So I think if you have a good company with a group working environment, you will tend to attract good employees. And those are the guys who would rather work from the office.

[00:13:40.75] Now, if you have a bad company, with a crappy work environment, you'll probably attract people who would rather work from home. But then, adversely, those are the people you don't really want to work from home, because they're not going to be very effective. You know, there's still a lot of companies have like, time card system, you punch in and punch out, and have very strict lunch hours. I don't think those companies wants their employees to be working from home, right? So I think eventually, it will all revert to normal.

[00:14:12.76] FILIPPO GORI: And JP, your view, your views?

[00:14:15.05] JON-PAUL TOPPINO: Yeah, I don't disagree, frankly. I could see some change in travel habits. I don't think I make up a vast percentage of the travel market, but I can tell you this personally, and a lot of the people I've spoken to-- the flying 10 time zones to go to one business dinner, probably not something that's going to rebound very quickly. Maybe in the investment banking world, it might-- for me, personally, probably not. I'm very happy to not be doing that.

[00:14:44.77] But I tend to agree with Kenneth. And I'll go a step further on the office side. I mean, I think-- you know, as I look around Asia, you know, your space per employee is quite tight. I mean, Tokyo being the worst, but all of the markets here are quite tight, especially compared to European office markets, and certainly the United States.

[00:15:03.79] Like, if I just specifically look at my business here in Japan, we're still 50% rotation schedule, so an A-team and a B-team week to week. I would say we probably have 40% of our employees, a little bit less than the 50%, and the spacing is about right. Like, I'm not sure that we will bring everybody back. I think certain functions work OK. So I think we'll still, we'll continue a rotation system for the foreseeable future.

[00:15:36.62] But I'm not sure we could actually have the same number of employees without increasing our space. And frankly, work from home, in a lot of places, doesn't work very well. And we actually had to take some auxiliary space for some of our employees that can't work from home, it's too loud, or they have multiple generations there, or they don't have enough space.

[00:15:56.72] And I would say, relative to most companies in Japan, we're probably very high on the IT side of things. So our IT, our tech works, but just-- it structurally doesn't work. And not having that face-to-face communication is definitely problematic, so.

[00:16:13.41] FILIPPO GORI: Yeah, I agree with both of you. From my point of view as well, as a firm, I think we will increase the flexibility, in terms of, people would be given the option to certain days a week, or a part of the time, to work from home. But the bulk of the people will be in the office, because there is an element, also, of culture, and ability to interact, which comes easier being in the office.

[00:16:40.90] Changing topic and moving into retails, Ken, Gaw Capital has a portfolio of retails in China, Hong Kong, Korea, and the US as well. And what's your view of retail sector at this time? And maybe, if there are differences in the various locations?

[00:16:59.22] KENNETH GAW: Right. So most of our retail are actually in Hong Kong and China. In Hong Kong, we have bought a fairly large portfolio of community shopping malls from the [INAUDIBLE] in Hong Kong. These are all shopping malls which are sitting below the public housing estates in Hong Kong. So the anchor tenants are supermarkets, fresh food markets, convenience stores, restaurants, and some education institutions type of stuff.

[00:17:30.76] I would say generally, the supermarkets, the fresh food markets, convenience stores have performed very-- basically very resilient. In fact, supermarkets and fresh food markets have grown during COVID, because people needs to stay at home. And they need to buy more food.

[00:17:47.29] Obviously, restaurants suffered during COVID, when there is government restrictions shutting them down. But if you looked at from June to middle of July, when everything was reopened with no restrictions, business boomed. They were doing multiple cycles during the day. I mean, dinner bookings, you have like, two or three cycles of bookings. So it shows that demand is there.

[00:18:10.06] When there's no government policy restrictions, I think they'll come back pretty strong. It's just a matter of whether they can get through COVID. So as the landlord, obviously, we have to give them rent-free, and rent concessions and stuff to keep them in health, so that they can come back when things open. Oh, and these kind of community malls, because the users all living right above, it's not really affected by e-commerce too much, because day to day, your people just live right there.

[00:18:42.67] In China, most of our investments are not in general retail, but in the outlet mall sector. We have a pretty big investment in the Florentia Village outlet mall platform. For the last eight years, we've opened five of these large-scale outlet malls in the main, in the tier-one cities like Beijing, Tianjin, Shanghai, Guangzhou, Wuhan, and Chengdu. And we have another one building, which we are under construction in Chongqing.

[00:19:12.67] That sector, actually, has also been performing really well. We were shut down for about a month and a half to two months during COVID in China. But since it reopened in middle of April, we have pretty much fully recovered. By August, we were doing, all these malls are doing between 120% to 150%, 160% compared to the same month last year.

[00:19:35.50] And these are malls which sell brand names like the Gucci, Prada, Armani at discounted prices. And they're built kind of like-- well, they're built to Italian, traditional Italian village. So it's kind of a combination of domestic tourism and consumption.

[00:19:55.63] And because the goods are discounted merchandise, they are pretty unique, only available for sale in these shopping malls, in these outlet malls. Not available online, and not available in the full-priced stores. So special category things, these have also done well.

[00:20:11.62] But I would say in general, we find retail, general retail to be challenging because of e-commerce. And we-- I mean, for China, we like the general growth in domestic consumption. But we find that for that, logistics warehouse is a better bet than general retail.

[00:20:34.18] But that is not to say that we cannot invest in retail. If you can buy retail cheap, and you can convert it to a different kind of use, you can also make good money. For example, a few years ago, we bought a large mixed-use development in Beijing called Pacific Century Place. The whole thing is 170,000 square meters, so, very big-- but of which, 75,000 is an old department store, which went out of business. So 75,000 square meters of that is completely empty for the last four years, before we took over.

[00:21:07.39] So we ended up-- so we bought it cheap, and we ended up converting all the department store space into office space, and fully filled it. So we can make money that way, too. So I think for retail, our strategy is either special category, like outlet malls, or a special situation where you can buy cheap and convert.

[00:21:27.35] FILIPPO GORI: And JP, Ken give us a little bit of his views on hotels at the beginning. What is your view on hotels?

[00:21:34.03] JON-PAUL TOPPINO: You know, I think realistically, it's hard to judge when the recovery in the hotel market's going to occur, because it's largely dependent on your inbound tourism, right? So most markets, nobody can-- you know, there's only so many stay-cations that people can have. Personally, I was very excited about-- not, clearly not about COVID, but about, you know, distressed in the hotel industry, because I do like hotels. It's one of those real estate businesses that is also operational. So you have the, buy it cheap below replacement cost, and you can increase performance through better operations.

[00:22:13.51] I haven't really seen much repricing. I know in the US, there's debt that's traded. But in Asia, generally speaking, lenders have really played ball with their underlying owners. So I haven't really seen pricing at a level that's commensurate to the amount of time that I think is going to require for operations to stabilize.

[00:22:36.04] But my view is, I mean, once travel restrictions are allayed-- which probably is a function of timing of a vaccine, it's probably a pretty good proxy for that-- I do believe there's a lot of pent-up travel, and performance will recover. But unfortunately, because of the travel restrictions, that's not three to six months from now, that's probably 12 to 18 months from now.

[00:22:56.62] In general, I agree with Kenneth. I mean, I think, as I look at hotels, I mean, I do believe there's pent-up travel demand. Obviously, it's being stymied by all the travel restrictions. And really, you can't have a recovery in that sector until the travel restrictions are lifted. So I think what would naturally be a six to 12-month recovery is probably much more like a 12, to 18, to maybe 24-month to get to the same trajectory where you were before.

[00:23:21.76] But in general, I believe that human behavior hasn't changed. People will want to travel. I think there will be some reluctance until, you know, there's a widely distributed vaccine, though. And I think that's, that's my general view.

[00:23:35.87] In terms of, were we to be a buyer, we certainly would be. But at least in Asia, we haven't seen pricing at a level that's commensurate with that two year recovery path that is our house view on the sector.

[00:23:49.33] FILIPPO GORI: OK, thank you very much, JP. Ken, going back to you on a different topic, talking about education platform. Education platforms is a topic that is becoming increasingly interesting for PE managers. And it's very interesting to see that Gaw Capital, as well, has raised a vehicle specifically on education platform in major Asian cities. What's your vision in this area? You invested in Stellart International Schools of Arts in Guangzhou, is your first project. We would like to hear from on that topic.

[00:24:28.10] KENNETH GAW: OK. We raised a dedicated $500 million US dollars fund just to invest in education-related real estate. And that includes the propco and also opco, so both the properties and also in the operations. And also, we are, some of the investments may extend to education tech, also.

[00:24:52.14] And the idea is, of course, there is growth in middle class in China, and also in other countries. So China, Vietnam, Indonesia, Thailand, all these countries, we're seeing strong growth in the middle class. And as people become wealthier, they are spending-- they're no longer living kind of hand-to-mouth.

[00:25:14.03] They are starting to invest in the next generation as well. And for Asian culture, education is a big topic. So we see a lot more spending in that sector.

[00:25:25.13] And the Stellart International School, it's in Guangzhou. It's actually situated right next to our Florentia Village outlet mall. So we got a big piece of land there, we had built the Florentia Village outlet mall.

[00:25:38.54] And subsequent to us building, two international schools opened just adjacent to us, and attracted thousands of students. And so we had the opportunity to talk to the principal there. And she alerted to us that there will be a lot of demand for arts.

[00:25:58.64] And then especially the last two years, with the US-China trade war, which becomes also a tech war, a lot of western universities is increasingly more reluctant to accept science and engineering degree students. So more people actually looking towards arts.

[00:26:18.56] And arts also has a very big role to play in today's economy, because of a lot of things. Even in tech, even in tech, there's a lot of demand for creativity, which they don't teach in engineering and computer science schools. But you learn that in art school. So there's a bit of a crossover, also.

[00:26:38.32] So this school is a grade nine-- sorry, grade 10 to 12, for high school. And we have already formed partnerships with renowned international institutions, like Parsons in New York, and UAL in London, and a few other international schools that we are forming partnerships with. And apart from that, we are also working with some well-known English boarding schools to set up the China campuses. And we are also looking at some of these opportunities in Vietnam, as well, and Singapore, too.

[00:27:11.43] FILIPPO GORI: That's very interesting. Going back to you, JP, a question on ESG. Nowadays, it's becoming more and more a fundamental part of the allocation process.

[00:27:23.74] And there is, according to a recent survey, the majority of the Asian investors would not invest in a real estate fund or fund manager that does not properly define ESG policy. In that sense, what are the changes that PAG has made to incorporate the ESG philosophy, and of the three pillars of ESG? Which is the single factor that you focus relatively more on?

[00:27:52.13] JON-PAUL TOPPINO: Right, interesting. I mean, this is something that's been coming for a long time. I was actually surprised to hear your survey with the Asian investors, because we generally hear this more so with our European investors, and certainly the Australian large, large funds. But this is something that's really been a factor for, I'd say, at least the last 10 years. And it is something that's incorporated very early in our process, meaning-- so as we're looking at projects, I mean, it's in our underwriting, it's in our business plan, it's in our execution, and it's part of our exit strategy.

[00:28:27.67] Fundamentally, the E is the easiest to achieve in real estate. Obviously, it goes through your cash flows. So your up-front costs for converting light fixtures, maybe for putting solar panels across the roofs of your large logistics facilities, there's some up-front costs to that, but it certainly pays for itself. And you know, it should be part of your underwriting, anyway.

[00:28:54.07] It's crucially important to investors at this point, but more so, it's actually becoming important to your underlying tenants. So if you wanted to have a large-scale government institution as a tenant in Australia, for at least the last decade, you needed to meet certain minimum requirements in terms of your efficiency in your business-- of your building, rather. So the E's always been important there. I think what we've seen is, it's becoming more and more important to your actual underlying tenants, in addition to your LLPs. And it just makes good sense, anyway.

[00:29:30.22] If I look at the S and the G, governance, for me, that's-- you know, obviously, our company is an institutional manager, right? So we don't have any governance issues. But if I look at what I'm going to invest in, you know, that's probably more of a question for a PE firm, in terms of what they're looking at, or somebody that's investing in underlying stock portfolios and what have you.

[00:29:53.44] The S, which you guys had as sustainability, we view it as societal, and social. So diversity, you know, whether that's minority employees, more working women in our company, elevating [INAUDIBLE] that's where that falls. And that's always been a really important thing within PAG. So that's not something that we're reacting to our LLPs, that's something that we find critically important, to make sure that we've got diversity, that we've set up a really good, safe environment, and that people want to come to work.

[00:30:28.98] I mean, what Kenneth said, working from home, if you have a, not a great company, people want to work from home. If you have a great company with a great culture, an environment that invigorates people, and is fair, and people have the opportunity to move up, then they want to come to work-- that's what we want to have. So I'd say the E and the S are probably the most important to us. The G, I think that just, from a PAG governance standpoint, you just need to have that, so.

[00:30:56.73] FILIPPO GORI: Thank you very much. Ken, going back to something closer to home for both of us, Hong Kong has been having, at the crossroads of many things happening over the last 18 months or so. How do you see the property market in Hong Kong, your views, and whether that-- how is that impacting the rest of the region?

[00:31:18.74] KENNETH GAW: So I think Hong Kong has-- I mean, like you said, Hong Kong has had some troubles. We had the protests last year, we had the controversy of the security law. Of course, we have COVID, just like everybody else. So you have multiple areas of challenges.

[00:31:36.91] But I think I always want to go back to fundamentals. Why is Hong Kong attractive to companies, and people, to come? And for Hong Kong, I would say is especially, why is it attractive to China, because that's the biggest market.

[00:31:53.31] And I would say that the fundamentals hasn't changed. So I would say one country, two system-- English common law as the basis of law, English language as the language of business transactions, the tax rate being the lowest in China, and five, the RMB is still not a convertible currency. So China still have a closed capital markets.

[00:32:20.05] Of these five-- at least four, I don't know when RMB will be convertible, it could happen in the next five, 10 years. But the other four will be firmly in place at least until 2047. And I'm an optimist, I think it could well be beyond 2047, also. But at least, it's still a long time before that, before 2047. And these factors will make Hong Kong continue to be attractive to China, to the biggest companies there, and to the wealthiest people there, to put money here.

[00:32:49.51] And you can also see from the wall of money which is coming into Hong Kong now, just from all these tech-- there's Chinese company IPOs, or Chinese companies which are listed in the US doing dual listing in Hong Kong. There's a lot of money coming in here, that's going to benefit real estate here, also.

[00:33:07.72] And that also shows the value and the resilience of Hong Kong as the Chinese financial center. But you know, on the other hand, like it or not, Hong Kong will be a more Chinese city. And some people may or may not like it. So some people may leave, but there'll be plenty of other people from China and from the rest of the world who will come in and fill their space.

[00:33:35.47] And you know, successful and great cities, they all evolve. And they all kind of evolve, in a way, like this, too. If you go to London, if you go to Mayfair, it's not going to feel like a very British city to you, right? But that's how it evolved. And London remains one of the great cities of the world, so. In the long term, I think Hong Kong will still be good.

[00:33:57.15] FILIPPO GORI: That's great. Maybe the final question for both of you that we can answer, it's a bit more of an open-ended question. Future, the real estate industry in the future, how do-- post-COVID, maybe even further ahead, five, 10 years from now-- how do you see the development, or the future for the real estate funds in Asia-Pacific, and more broadly?

[00:34:23.88] Also, how do you see the differences between investors, between the ultra-high-net-worth investing in real estate funds, and vis-a-vis the institutional investors, how will that change, and so on and so forth. So maybe we can start with JP.

[00:34:37.58] JON-PAUL TOPPINO: I think there'll continue to be a consolidation of funds, honestly. I mean, I think you saw a big bifurcation between winners and losers coming out of the financial crisis. And you had that large funnel move to more of a moderate-sized funnel. I think you're going to continue to see that post-COVID. I think there's going to be, absolutely be winners and losers coming out of this.

[00:34:58.90] And I think the medium to large-size funds-- which I would consider, you know, Kenneth and our business are kind of pushing towards the large-scale funds, certainly for Asia. I think they're going to continue to get larger, and it's going to be squeezed out for your smaller, niche players. Honestly, I believe they'll become our operating partners for certain sectors.

[00:35:20.02] And I think that flows through to the actual investors. I mean, I think if I look at how our partner relationships have evolved over time, you know, our first fund, I think our average check size was maybe $35, $40 million US. And our last fund was about $150 million, so we've always had a smaller number of large investors. I mean, that's kind of the way our business is involved.

[00:35:45.25] But what's been interesting is, we've had large relationships that have allocated to all of PAG's business. So it's not just our real estate business, but our private equity, our credit business, and our real estate business, where we've had very large allocations from large institutions across all of that. And I think that that's a fundamental shift. I think most large institutional investors want to have fewer managers and larger tickets where maybe they can-- it's easier for them to oversee their relationships, but also where they can be more impactful.

[00:36:20.44] KENNETH GAW: Right. Yeah, I agree with JP about how the big institutions are allocating. I think in general, I think the real estate industry in Asia will continue to grow. Real estate has always been a very important part of the economies here, in this region, and it's pretty much the backbone of banking systems here. And I think you'll continue to see that role being played by real estate.

[00:36:46.68] And then a lot of the fundamental drivers of growth, like urbanization, middle class growth, it's happening in China in a big way, but it's also happening in other places like Vietnam, like Indonesia, Southeast Asia, India, all of that is happening. So I think you'll just continue to see that growing.

[00:37:06.43] And I don't see central banks around the world stop printing money. As long as they continue to create money, the wind is in the sail for the real estate industry, because it's one of the few hard asset class which has consistent cash flow. So I think it's going to become an even more important sector in the investment world.

[00:37:31.45] FILIPPO GORI: Thank you very much to both of you, JP and Kenneth. It's been a pleasure to have you here today. We have spoken about hotels, we have spoken about retail, we have spoken about offices, views across Asia and the rest of the world. Definitely, COVID has changed the perception of so many of us about investing for the long term.

[00:37:55.17] But I think I share your views that we will mean-revert to a certain form of normality, sooner rather than later. And there is a demand for people to go back to have a social life. And in that sense, the real estate will remain one of the critical asset class to look at in Asia-Pacific and in the rest of the world.

[00:38:19.63] And I agree, also, with what JP said around environmental, social, governance topic. The S for social is probably becoming, more and more, a critical piece for both investors to look at investing, but also for employees, as Ken said, wanted to work for the right kind of institutions. So it was an incredibly pleasant chat, and full of optimism, which I share. And I hope that we can meet again soon, in a post-COVID world, and see how the future looks like. Thank you very much for spending the time with us.

[00:39:00.08] JON-PAUL TOPPINO: Thank you very much, and I look forward to seeing you guys in person.

[00:39:03.29] FILIPPO GORI: Thank you, thank you.

[00:39:05.07] KENNETH GAW: Thank you. 

[00:00:08.11] KAM SHING KWANG: Hello, everyone. Welcome to the J.P. Morgan Private Equity Conference 2020. My name is Kam Shing Kwang, I'm the CEO for Asia Private Bank, and also the Vice Chair for Greater China Investment Bank at J.P. Morgan. This year, we've lined up a series of fireside chats, and we will have the opportunity to hear directly from the principals of some leading GPs who are operating across Asia-Pacific.

[00:00:36.86] Today, we are extremely honored to have Ming Lu from KKR joining us. Ming is a J.P. Morgan alum, and a good friend to the bank. Ming joined KKR in 2006, and is now the head of KKR Asia-Pacific. So thank you, Ming, for joining us today.

[00:00:54.90] Ming, you have extensive experience, and has played a significant part in Asia private equity investing. I'm sure our guests, and myself, included, will be thrilled to hear directly from you. So let's get right into it, Ming. And undoubtedly, KKR is one of the leading and most influential private equity firms in Asia. And you, yourself, personally manage one of the largest and most experienced investment teams in Asia.

[00:01:27.68] What are some of the opportunities that you are seeing across geography, as well as industries, and whether there are any changes to those opportunities in the post-COVID world?

[00:01:40.28] MING LU: Yes. First of all, thank you for inviting me here. I'm very pleased to be back here, and share my perspectives with your audience. This has been the extraordinary year, as we have seen a very unprecedented market dislocation and serious public health crisis in COVID pandemics.

[00:02:04.31] Despite those challenges, our team actually has been very, very busy in sourcing investment opportunities and making investment all across Asia-Pacific. As a matter of fact, we are on pace to deliver a very strong year in capital deployment in this year in Asia.

[00:02:23.48] So how did we manage to pull this off? Before I answer that question, let me make two quick points to just lay the groundwork. KKR, in the last 15 years, has established what I consider among the widest and deepest geographic footprints covering the entire Asia-Pacific, that allow us to be very actively investing into 12 countries. And having the boots on the ground, and the physical presence in those critical market, it really makes a huge difference in this market condition.

[00:03:01.06] And the second is, as a long-term investor, we look at investment opportunities through a lens of three very important dimensions-- long-term macro trends, that hopefully will provide the long-term tailwinds for the sectors and the businesses we're invested in; and business fundamentals that will provide continuous, extended outperformance for the businesses we wanted to invest in; and the long-term valuation cycle and trends that will allow us to ignore the near-term volatilities, and continue to be active.

[00:03:35.00] So with those two as a backdrop, let me just go back to your question. I categorize the opportunity sets into the two bucket. First bucket is opportunities associated with the three investment themes that we have identified all across Asia-Pacific. And second set is the exciting opportunities we start to see when we introduce new asset classes in recent years. So let me talk about first one first.

[00:04:05.00] This three investment theme starts with consumption upgrade. This theme is play into a structural shift of a fundamental driver of Asia's economy in the last decade. 10 to 15 years ago, if all of you remember, Asia was largely export-led economy. The last 10 years, Asia has been transforming into much more domestic consumption-driven economy, and continuing to accelerate on that pace for the last five years. So we expect that by the end of this year, Asia-Pacific will overtake US to be the number one private consumption market in the world.

[00:04:45.44] So what's behind this resilient, strong consumption growth in Asia-Pacific? It's a very interesting demographic and economic phenomena. That is, a rising middle class with rising income. Asia today has over 2 billion middle class populations. This accounts for almost 54% of the global middle class.

[00:05:10.04] And more importantly, this middle class continues to grow. So it is likely, by the end of 2030, Asia will add additional 1.4 billion middle class populations. And this large middle class populations, in contrary to their counterpart in the western world, who actually have been suffering stagnant income, Asia's middle class actually has been experiencing rising income. So we actually estimate that by 2030, Asia's middle class will account for nearly 60% of the global purchasing power. So this is a large, rising consumption class with rising income.

[00:05:54.71] What does the middle class want? You know, it happen that what they want is no different from the middle class in any other parts of the world. They want better quality product, they want to have value-added services.

[00:06:08.27] The best way is to capture the hearts, the minds, and tastes of this middle class is actually to tap into their emotional connections, to the desire for premium quality, healthy living, self-image, as well as social conscience. So we have been looking into the businesses that can provide healthy products, safer products, premium product-- quality products, as well as value-added services in private education, high quality healthcare, wealth management, financial services, as well as environmental services. COVID pandemic is likely to accelerate this bifurcation of consumption trends in Asia, as more and more consumers have become much more health-conscious, quality-conscious, safety-conscious, social impact-conscious, as well as environmental-conscious.

[00:07:08.09] The second theme is actually the technology and digitization. The largest cohort, group among the Asia middle class are actually Asia millennials, and Asia Gen Z populations. Asia today has over 820 million millennials, almost equal size in the Gen Z populations. This two generations are not only very large in population size, they are the consumption trendsetters, they are the consumption trend chasers.

[00:07:43.01] We also call this generation, properly, the digital natives, because they have been growing up with smartphones, social media, all things, everything digital. They are largely unencumbered, or unfamiliar with anything that is not digital. And therefore, the only way to reach out to this consumption class, and therefore tap into their rising share of wallet, is access through the digital channels.

[00:08:12.38] Investing in the technology and digitization has two meanings for us. First, is investing into the technology companies that participate, exciting growth in a digital economy – so our investment in PropertyGuru in Southeast Asia, which is a digital real estate platform; in Cue & Co. In China, which is a digital marketing, digital solutions for brand owner and the retailers; ByteDance, which is an aggregator of the digital content, from user-generated content to live news, and all kinds of entertainment content; to MYOB in Australia, which is this SaaS, software as a service platform for SMEs; as well as the number of social commerce and fintech platforms in Indonesia, Philippines, and China – are great examples of how we are investing to participate in the digital economy.

[00:09:07.65] The second meaning is actually to leverage the enabling technologies, and help traditional business transform. So for all the recent investments we have made into the traditional businesses, we have been working very actively with the management team to engage the digital transformations – from front end, which is digital marketing, customer acquisitions; to the back end, supply chains, logistics; to the middle process, which is the manufacturing process, service provisions; to data management, and data analytics – to enable those traditional companies to tap into digital channels, so that they can continue to reach out to this millennials and Gen Z populations which can only answer to you through the digital means.

[00:09:55.73] I think that COVID has really heightened the attention to the need for acceleration of digitization for your companies. Because as business realized, that if you are not digitally ready to accommodate remote working, remote communication with your customers, remote management of your supply chains, online sales, as well as distribution, you will come out of the COVID as a loser.

[00:10:23.62] So the third investment theme is actually what we consider a very interesting themes – conglomerates' non-core carve-out. So our data – actually, analysis – pointed to a very consistent fact. That is, the Asia conglomerates have been consistently underperforming their pure play peers in public market valuations, in return on invested capital, as well as corporate governance.

[00:10:52.77] Because of that, the public shareholders, particularly activist shareholders, have been putting a lot of pressure on the conglomerates for carve-out non-core subsidiaries. Carving out non-core subsidiaries would allow the conglomerates to rededicate their limited resources and their management bandwidth to the core business. And carve-out business force as a buyer, new owners, also represents significant operational upside, because those businesses have been undermanaged, underinvested for a long time. And they actually are underperforming their own potential. So this is one set of opportunities.

[00:11:30.39] Another set is the exciting opportunity we've seen in a number of new asset classes. In the Asia infrastructure space, we have seen renewable energies, digital infrastructure, such as cloud data center capacity expansions, as well as telecom tower, rolling out. In the Asia real estate space, we've seen the investment themes like urban renewal and logistics, as well as data center as a real estate play.

[00:12:00.54] In the private lending place, we actually start to see more and more businesses are struggling to look for bespoke, long-term credit solutions, rather than short-term funding. The large part of Asia growth has been funded by short-term bank lending, which is clearly mismatched.

[00:12:18.78] The final category of the technology growth opportunities, those are the technology companies that are post-VC rounds, but it's not yet into the mature stage. So it's in-between. They represent different risk profile, but also presents a very exciting growth opportunities.

[00:12:37.99] So in the last seven months, KKR Asia has made investment in all three thematic categories, in all those new areas that I've just talked about. We believe this is actually a good time to be on your front foot, in looking for investment opportunities. As Warren Buffet said, you know, when everybody is fearful, be aggressive.

[00:12:58.89] KAM SHING KWANG: Right.

[00:12:59.66] MING LU: So that's, that what we've seen--

[00:13:00.78] KAM SHING KWANG: Thank you, Ming. This is really interesting. So middle class consumption, digitalisation, and carve-outs, and, I assume, COVID, have not impacted these three trends?

[00:13:14.54] MING LU: Yes, actually, on the contrary, they actually put a positive spin on all three areas. For the consumption, it becomes a little bit more bifurcated. And obviously, the important thing is how you can sell your products and services through the online digital channels, during COVID. If you don't have those capabilities, you'll get screwed.

[00:13:40.21] On the digitalisations and technologies, clearly technology is a winner during COVID. And this is not just limited to the COVID. Post-COVID, you will continue to see technology companies continue to grow. COVID carve-out, I talked about that.

[00:13:55.83] Post-COVID, a lot of – during COVID, actually, the shareholders put a lot more pressure on the conglomerates, for them to raise even more cash, because they needed to deal with liquidity challenges, and balance-sheet challenges. They need you to meet demand for increasing investment in technologies and transformations. So it's kind of like, forcing them to sell more non-core, so that you can invest in digitalisations.

[00:14:25.29] KAM SHING KWANG: So potentially, you might even see more opportunities in these three areas, that's fantastic, Ming. You talk about year 2020 is an extraordinary year, to say the least. And the world is obviously being confronted with lots of uncertainties, arising from not just global pandemics, but as well as the geopolitical tensions. So how is KKR and your team managing the portfolios, and also helping the portfolio companies navigate through this period?

[00:15:00.88] MING LU: Good question. There is really no question that we are in the environment today where the risks have significantly elevated – in geopolitical tensions, particularly between US and China; increased regulatory scrutinies; more frequent, and sometimes sudden changes of regulations and policies in a number of countries; and the heightened attention to data securities, particularly in light of many people working from home; as well as the interest in the heightened attention to "S" components in ESG, which is social components, mainly due to a lot of incidents of social injustice, and proliferation of the social media usage.

[00:15:48.11] COVID pandemic actually just adds additional fire – fuel, to an already large fire, OK? So in such a increasing risk environment, how did we, KKR Asia, actually manage or mitigate those risks? To me, it's very important that any organization needs to have a critical capabilities, and together with very coherent culture and strong leadership, to lead the organization, and lead your teams through this crisis.

[00:16:21.95] So let me use COVID as an example to just show you how these things work together. Asia, unfortunately, was hit by COVID early, in the first. So in February, when we were facing a potentially very challenging, unprecedented pandemic in Asia, none of our peers in the US, in Europe, was even aware of potential serious consequences. So we were facing a situation where we did not have any precedent to lean in, or prior experience to learn from. We almost have to create our own solutions to deal with that.

[00:16:59.81] So what we did is, we've quickly formed a COVID-19 task forces, with all the senior leaders from-- cross-functions, all the key functions-- private equities, operations, our macro team, that can trace and track the micro-indicators, as well as macro qualitative response across different countries. Then we have stakeholder ESG management teams, legal compliances, KKR capital market teams. So we all work together, both across regions, even bringing in global resources.

[00:17:34.12] The number one concern at the time, for us, is the safety of our employees. This not only includes the KKR employees, it also include our portfolio companies' employees, which is quite large. It turned out, this is actually a monumental task, because to track and trace hundreds of thousand employees, over 50-plus countries in hundreds of locations on a daily basis-- so you can imagine the challenges.

[00:18:04.57] We need to understand their status – whether you have categorized as infected, suspected, in the hospital, or you are safe. And then we need to put together proper solutions. We actually overallowed assistance and help to those employees, in their categories.

[00:18:20.11] Then, we put our entire 42 portfolio companies in Asia into a dynamic tracking mechanism. And we track along three very critical dimensions – liquidities, bank covenants, and the business impact. In the first phase, which is in the lockdown phase, our focus was on the liquidity. And just to show you the resiliency of our portfolios, out of 42 portfolio companies, we actually had only five companies that experienced some kind of challenges on liquidities or bank covenants. Or in the case of two out of the five, they faced both.

[00:19:00.82] So we quickly organized the teams, working together ways of financing banks with our investor base, to put together solutions. Very quickly resolved the potential liquidity issues. We put a company on another test, to say, can you have enough liquidity to survive in a worst-case scenario, during COVID? So we put that to bed. And we actually managed through, also, covenants, issues, along the way.

[00:19:26.91] In the second phase, we move into the reopening phase. The task is, you called it daunting, because when we started to reopen in April, May, many other countries were still in the height of the COVID cycle-- very challenging.

[00:19:42.86] The key is to educate, train our employees to follow proper safety operating procedures, social distance rules, so that there will be no second wave for our employees, and the reopening can be sustained. Our task force was able to put together a large volume of the document training manuals, presentations, videos, to do the proper trainings and best practice sharing. And then we follow with tracking and tracing to ensure people follow through their safety operating procedures.

[00:20:17.66] We're now in the third phase, which is a value recovery phase. We quickly develop a value recovery plans for all the critical portfolio companies, where we identify all the critical action items, with the people assigned to it. And hopefully, with that, we can accelerate the recovery of our portfolio companies. I think that through this very coordinated, cross-functional, and disciplined approach, we really have managed our portfolio very well.

[00:20:49.13] So I have three takeaways. The first takeaway is, we followed, very religiously, on our thematic investment approach, which has led to an entire portfolio on an overall basis that are very defensive and resilient. So that's the foundation.

[00:21:05.48] The second is that we have built this multifaceted capabilities. I mentioned the operational macro, ESG, stakeholder management, legal compliances, capital market – all those working together with the investment teams to establish a robust standard operating procedures for the entire investment management process. That allow us to be in the forefront in compliances with all the legal requirements and ESG requirements. And third is global connectivity, it allow us to leverage the entire KKR global resources to help in Asia.

[00:21:40.85] So the results speaks for itself. You know, for the last 12 months, ending second quarter of this year, our P portfolio has delivered 4% value growth. Remember this 12-months periods have two months of severe-- two quarters of severe pandemic impact.

[00:22:02.69] Just put it in context – during the same period of time, S&P was down 7%. And two of our largest peers have done, their portfolio have done minus 13, minus 17, respectively. So that just shows that if you have a coordinated effort, strong leadership, you can manage your business better.

[00:22:22.98] KAM SHING KWANG: This is truly impressive, Ming. If I may just, end, maybe, this session discussion by asking you a slightly different questions. Ming, you are a private equity veteran in Asia. And you have seen the cycles up and down in the past two decades. What do you think the private equity environment will be like in Asia, in five to 10 years' time?

[00:22:49.37] MING LU: Good question. We actually ask ourselves very often now, particularly the, what lies ahead for Asia private industries in the post-COVID world? So before I touch upon the next decade, let me walk you back to the past two decades.

[00:23:07.52] 20 years ago, Asia private equity, entire Asia private equity had an AUM, total AUM less than $39 billion. Fast forward to 2019-- we now had total AUM little bit over $1.3 trillion. Very fast growth over a 20-year period of time. it could be very impressive if you just look on this alone.

[00:23:33.20] But if you put it in the context of global private equity industries, it's not that impressive anymore. 2019, European private equity industry had an AUM over $1.4 trillion. In the same year, our AUM was only one-third of US AUM, private equity industry AUM.

[00:23:52.41] So when you look at the economy size that we're dealing with, 2019 Asia-Pacific combined GDP was larger than North American GDP, much larger than European GDP. So that means that the penetration of Asia private equity industry into the Asia economy is still very low. We're at about 2.5% range, where Europeans actually approaching to 4%. US is actually above 7%. So that just point one direction, that there's a potential for private equity industry to continue to grow.

[00:24:24.73] Interestingly, Asia's economy will continue to grow faster than the two other regions. So we actually estimate that by 2030, Asia's GDP will be almost equal to the North American GDP and European GDP combined. So this fast growth clearly will create very fast-growing demand for long-term capital.

[00:24:53.39] And on the supply side, where Asia capital market has been growing and developing very nicely over the last 20 years. But it's still relatively small – in size, comparing to the US in size, liquidities, sophistications, and the regulatory maturity. Because of that, in the last decade, the large part of Asia growth have been funded by short-term credit. So the entire credit market in Asia, 80% of their credit market is actually bank lending. Vast majority of bank lendings are short-term in Asia.

[00:25:30.13] So you have this mismatch of long-term growth with short-term funding. This also speaks very, very well, favorably, for a long-term equity provider by Asia private equity investors. So that sets the right stage.

[00:25:46.81] And then you look at the private equity industry in Asia, another interesting trend's emerging, which is consolidation. I said that Asia private equity industry in 2019 is smaller than Europe, much smaller than US. But we have greater number of GPs in Asia.

[00:26:04.15] KAM SHING KWANG: Yes.

[00:26:04.96] MING LU: So we are much more fragmented. I put it in another context-- three years ago, we raised $9.3 billion Asia funds rate. At the time, it was the largest private equity fund in Asia. But if you put that funds into US private equity industries, we're not in the top 15. You put that into European private industries, we're barely squeeze into the top 10.

[00:26:28.06] So consolidation is inevitable in Asia private equity industries. Actually, consolidation is happening, as our data suggests that average fund size in Asia is going up. And so is the market share captured by the top 20 funds in Asia. So it is happening.

[00:26:47.98] You put all those factors together, I would say there is a reason to be optimistic about Asia private equity industries. And also, I'm really confident about the KKR Asia platform to continue to enjoy strong growth.

[00:26:59.14] KAM SHING KWANG: It seems that a golden era in Asia private equity is ahead of us, definitely. So thank you so much, Ming. This is extremely illuminating. I want to thank you for your generosity with your time, and as well as sharing your insight with us. So may I take the opportunity to also wish you good health, and all the best in the year ahead. Thank you.

[00:27:23.53] MING LU: Thank you. 

[00:00:09.59] JACKEY CHAN: Welcome. My name is Jackey Chan. I'm the Investment Team Lead for China region, J.P. Morgan Private Bank. We are honored to have you join this year's J.P. Morgan Private Equity Conference, 2020.

[00:00:24.32] This year, we have set up a series of fireside chats where we have invited our principles of leading private equity operators in the region. Now it is our pleasure to be joined by Mr. XD Yang, Managing Partner and Chairman of Carlyle Asia.

[00:00:48.89] Carlyle Private Equity needs no introduction. It has a prominent place in private equity hold frame. And Carlyle Asia has started investing in the region for more than two decades. It is one of the largest private equity investors in the region.

[00:01:06.59] XD and his team started investing more than two decades ago. And they have done more than $15.5 billion worth of investments across 150 companies in China, India, Australia, Korea, and Southeast Asia. XD himself joined Carlyle in 2001. And he is a veteran in the private equity industry and very well-respected. It is my real honor to be joined by you today and hear your insights.

[00:01:37.58] Now, XD, for a long, long time, the US primary deals and secondary deals have delivered very, very strong performance for investors. But starting about the last 10 years, Asia investments have started to grab the spotlight, delivering very handsome returns for our clients. So I would love for you to walk us through the landscape. Where do you see opportunities in Asia?

[00:02:03.44] XIANG-DONG YANG: Thank you, Jackey. It's my pleasure to be here with you all today. I know many of you are investors in various Carlyle funds. So thank you for your support.

[00:02:17.45] So I think, Jackey, to answer your question, what is the common theme when we think about investment in this environment? I would say, simply speaking, I would put it under two themes. One is growth. I know people want to invest in Asia in growth. And in this day and age, I think growth is even more important.

[00:02:41.46] The second theme that I think is very important is change. So the change has really two aspects to it. There is a change of consumers, which, as you know, underpins a lot of investment in Asia.

[00:02:55.10] And the other aspect of change is technology-- e-commerce and all the other aspects of technology-driven changes to the companies we invest in. So any investment comes to our investment committee, I think we need to look at these two aspects of it.

[00:03:13.25] Part of it is because, globally, as you all know, valuation is very high. In a high valuation environment, how do you get return? One of the ways is invest in the faster growing companies. And with faster growing company, even if you pay a higher valuation, then there is still a chance because of the growth that eventually that you end up with a very good investment.

[00:03:38.78] But growth these days in China or, to some extent, in the rest of Asia, is not just about simple growth, your revenue growing, your customer growing, and all that. A lot of the growth really has to be in the context of the technological change.

[00:03:55.07] And also, the consumer behavior has changed a lot. Some of it were accelerated because of COVID. But a lot of it is that the Chinese younger generation of consumers have really become the driving force for most of the business we invest in.

[00:04:11.52] So I think to drill it down a bit further, I would say there are three or four themes we think about in this context I just said. One is obviously industry with a strong tail wind. I'll give you an example. We invest in India in SBI Card, which is the leading credit card company.

[00:04:32.36] And that industry, if you compare to what has happened in India, what has happened in China, China may have 900 million credit cards-- India's still in the 40-50 million card range. So you can see this tail wind for this business will continue to grow because consumer needs credit and credit cards these days have become very, very convenient.

[00:04:54.40] So as you know-- as J.P. Morgan, you know-- that it's not just a plastic card. It's on your phone. And everything on the consumer side is convenience. On the backside, it's all technology, all the data and what have you. So that is continuously going to be a sector, that Asia clearly is going to be growing faster than the rest of the world.

[00:05:19.05] As you know that, historically, the last decade, as you have said, Asia probably had been more than half of the global growth. And we expect that probably continue to be the case. So there will still be sectors where there is technology sectors or health care sectors that the tail wind related sector of businesses is one very common theme that we have been actively looking.

[00:05:47.58] The other theme I would say is, I guess you can call it a "technology disruptor." This word is being thrown around a lot for probably over a decade. We all know a lot of these.

[00:06:04.92] For example, we invested in Ant. And obviously, Ant is probably one of the best examples of a technology interrupter. They really created the fintech on a scale with the capability that is unparalleled, I think, in the world. We also invested in [INAUDIBLE] a fintech company called DXM-- very much similar to Ant, but on a much smaller scale.

[00:06:33.93] And recently, we invested in a company in China called Perfect Diary, which is a rising-- in fact, the leading China domestic cosmetic company now. This company, realistically, is probably less than five years old, but has grown so fast because it has really understood the Chinese consumers and has really driven a very successful online strategy.

[00:06:58.60] So they're able to disrupt. Cosmetic is a very old industry. It has been around the world for a long, long time. And this is the time, I think-- it's very rare for a startup, in five years, can capture a very big percentage of market share, because they really know how to use social media, particularly, to do the marketing with KOLs.

[00:07:23.28] I'm sure you all heard about the power of Chinese key opinion leaders. And in this industry, in this business, it's tremendously powerful and can really make and sometimes break your company in a very short period of time.

[00:07:40.12] So these technology interrupters are very, very important. So for us to identify which one-- it's not just that has the premise, but they also have the execution capabilities, has the management depth, eventually it can do that.

[00:07:55.98] And I think the third theme we have kind of invested along is really geographic expansion-- particularly, I would say, for companies in US and Europe-- to expand into Asia. So our fund in the past had worked with our sister funds in those regions as part of this One Carlyle global platform.

[00:08:20.26] For example, we built up the Moncler business in Asia. When we invested, they virtually had nothing. And the first Moncler store was actually in Hong Kong in IFC, which became the number one selling sales store in the world, both in terms of per square foot and in terms of total revenue per store, which is a very counter-intuitive idea, because we're in Hong Kong and we don't snow as frequently as the rest of the world, if at all. So I think that really took a lot of insight from our team to understand what does fashion mean in Asia. But this is, obviously, a few years ago.

[00:09:00.45] And recently, we invested in a company called "Golden Goose." And I hope many of you had had the chance to wear them. They're very comfortable and they're fashionable in a way that I think is very well done. I think they have a very big store at the K11 building. It really is something that we felt we can take a company that is outside of Asia and tap into this Asia consumer.

[00:09:37.48] So I do think that Asian consumers and their purchasing power and their tech savvy-ness is the underlying growth for this big growth trend that I have talked about. So if you look at our investment today, I would say the majority are following these key themes.

[00:09:59.88] And a lot of it is concentrated in China, for sure, but also in India. For example, in India, we've done four deals even this year. Three are in the pharmaceutical space. A lot of is basically the supply chain to the global pharmaceutical industry.

[00:10:21.21] And it's another one of those big trends that we feel that these companies have a lot of advantage. So we're able to invest in these API companies or CDMO companies.

[00:10:38.83] JACKEY CHAN: It's hard not to get excited as you walk through the landscape of investing in India, pharmaceutical, big sort of upcoming unicorn IPO in China. Sounds great. But the overhanging thing in everyone's mind is US-China relationship. Just let us up some of your thoughts on this.

[00:11:03.29] XIANG-DONG YANG: Yeah, thank you. Well, I'm sure this topic, everybody has given a lot of thought because it does impact all of us. And it certainly is a very complicated issue, given the rise of China economically as a great power of the world.

[00:11:24.92] So I don't pretend to have any better insights into what may happen. But I think we're clearly in a period where the equilibrium has not been achieved and hopefully that the wiser views or the smarter views will prevail so the two countries find a way to reach some sort of equilibrium.

[00:11:54.73] But decoupling, to some extent, I think most people think will happen. To what extent is debatable. Or, in fact, it's not just the debate. In fact, the outcome is not certain yet, right?

[00:12:07.63] So I mentioned earlier about our investing in the global pharmaceutical supply chain. Part of that thesis is also, because of COVID, it really awoke all the governments of the world and all the people in the world of the importance of these medical product, medical device security. So I think for us to invest in India, which has great capabilities manufacturing these things at a much lower cost, that that is a theme that we have been trying to capture.

[00:12:49.66] But I think we're investors. And we think regardless what the scenarios may be that there are always going to be good opportunities. So it's really important for us to find out which companies can do well.

[00:13:07.51] So one of the things, what I have found increasingly working with the Chinese companies you talk about in the last decade, how the rise of Asia-- is a lot of it seemed to be concentrated in the last five years. A lot of the big companies, including companies like Ant just came from-- I wouldn't say nowhere-- from very small to very big, very fast. And you can name quite a few others, like companies like ByteDance and what have you.

[00:13:37.49] So I feel a lot of the Chinese companies are kind of focusing on devaluing the business. I do think it's very important. Don't go too sidetracked by this decoupling or US-China relations or what have you.

[00:13:53.44] As businesspeople, as investors, I think we should focus on building a great business. And I think that's still going to be there. There are going to be 600 million Chinese consumers who are very savvy, who have a lot of money. Their wealth is still rising, regardless the short-term turbulences. And so the companies who can deliver a service to them, deliver it in the best way.

[00:14:18.82] This morning, I was in a five-hour meeting with McDonald's China's senior management team. The whole topic is all about digitalization. When we invested about three years ago, the company basically didn't have a digital app. So their digital membership was zero. And today, it's about 150 million in three years. So that's the kind of scale change we're talking about.

[00:14:43.97] So you could worry about this change, that change. But more importantly, how are you doing yourself? How are you doing compared to your main competitor? What are your strategies? What are your goals? What is the execution?

[00:14:56.33] And so it took four or five hours of discussion of all the aspects of the business. So I do think these technological changes are transforming this business so importantly that, in a few years, a lot of this business will be not recognizable. So my own view, my advice to myself, is not to focus on the decoupling, but focus on the businesses. Focus on the management team.

[00:15:23.80] JACKEY CHAN: I would say a lot of our clients would agree with you because, as we were talking to our clients about this US-China relationship, many of them cited exactly the same point-- diversify a little bit if you could. Place your supply chain where it makes sense. And many of them just said, keep growing the business. Keep growing the business where don't get distracted. Those are exact words that you use.

[00:15:46.66] Now, some of our clients, I remember as we talk to them about private equity, they would say, the private equity guys are very, very sharp. They are particularly good in finding exits for their deals. Because for global titans, such as Carlyle, their Rolodex is just so big that they can find a trade sale or find IPO.

[00:16:08.64] However, on the other hand, we saw that the number of cross-country trade sales actually has been falling. So share with us the landscape of exits.

[00:16:19.21] And the other thing is homecoming IPOs in the region of ADLs have been a trend. So I'd love for your insight on that, as well.

[00:16:28.60] XIANG-DONG YANG: Yes, so I think on exits, generally speaking from our experience, that there are two types of companies. The exit's easier. One is company of scale. And the larger the company, the more options you have. That's just the way.

[00:16:48.22] If you listen to the Hong Kong Stock Exchange, of your market cap is too small, A, it's very hard to do. B, there's no liquidity. You can be listed, but what does it really mean? And the other one is, you just have a special company. Sometimes special companies have scale, too. But if you just happen to have a great biotech company or you have a very good niche, you can sell. Or you don't list, somebody will buy you.

[00:17:13.30] We see a lot of M&A at a smaller scale. So a lot of our portfolio companies are actually buying some of the smaller companies. But when you get to the little bit medium-size company, they want to list. It's hard to list. There's no liquidity. And you want to sell. You want to price. And if somebody wants to pay a few hundred million or billion dollars, the fit better be good. The rationale better be good.

[00:17:36.72] So I think I would say Carlyle probably had a very good track record in terms of our exit because before we go into an investment, we don't want to get too carried away, just to say this is so great. We don't worry about the exit, precisely as you said.

[00:17:52.45] Generally speaking in this part of the world, the exits are a little bit more challenging than in, for example, Europe and US. And for our industry, for example, Europe and US, a lot of the deals are really controlled buy-outs. And so they can sell to each other or to others.

[00:18:13.55] But if you have a minority in this part of the world and the company doesn't want to sell itself or expect a huge price to sell itself, or your business is too niche and nobody really wants to buy it, I think a lot of the Asian companies or families still feel, why would I pay a few hundred million dollars to buy you? I'll just build it myself. So there are people less willing to pay a high price for it.

[00:18:40.75] In terms of what you said about, there's a little bit less of even some of these secondary sales or to PE firms. If you think about two PE firms that are trying to sell to each other-- and they have the same dilemma with all the investors of the world today.

[00:18:56.15] The seller looks at the public market, which is very high. So he wants the price as high as the public market, sometimes higher, because you're buying control. And we all know, even though COVID has such a big impact on all the global economies and on every company, but people just brush it aside, right? The valuation just still near all-time high, or sometimes goes over all-time high.

[00:19:26.63] So you have the seller who doesn't want to sell, have to sell. And this time is very different than 2008. It's not like a lot of the banks are pulling the plugs. And some of the companies breach the covenant and they just get a waiver, right? So that's the mentality of a seller.

[00:19:44.98] The mentality the buyer said, well, the valuation is very high. With COVID, I'm not going to pay all-time high price just to do it. So there's a little bit of that stalemate right now. It doesn't mean over time that won't happen, because over time, people would need to look for exit.

[00:20:04.63] And the other part is, I just think oversee M&A while a lot of the Chinese M&A deals have not really worked out well. It's ironic. As you may know, for a period time, you would say, the Chinese buyer is smarter than like when Japan paid high price to a lot of companies. I mean, a lot of Chinese companies paid a very high price for a lot of assets, and they're trying to get out.

[00:20:27.29] But anyway, so I think that's how I see it. And the second part of your question was?

[00:20:36.42] JACKEY CHAN: Homecoming and ADL. [INAUDIBLE]

[00:20:38.29] XIANG-DONG YANG: Yeah, I mean, obviously, this is one of these things. Nobody six months ago would have predicted that it would become such a big thing and high liquidity go after. And I think it's great that Hong Kong becomes important, if not primary market or secondary market, for a lot of these companies.

[00:20:59.19] So some of the portfolio companies we have are in very advanced stages were trying to list because the investor pool is big enough. And it's one of those things, once the momentum gets going, there is enough liquidity, then there's more liquidity. So I don't think it's a fad. I think it's a big step up that will continue to expand.

[00:21:25.07] JACKEY CHAN: I think you have shared a lot of insights. But I'm going to push it a little bit. You mentioned liquidity has improved in Asian public markets. Some of the investors have really gotten extremely handsome return in the public markets.

[00:21:41.72] Now, you are a private equity guy. So that's not exactly all good news all the time. So how do you think about investing in Asian private equity versus Asian secondary market in public markets?

[00:21:56.09] XIANG-DONG YANG: Well, I think, first of all, I'm really happy if you made a lot of money in the last few months doing this investing. And hopefully some of those moneys someday will come to invest in private equity.

[00:22:07.38] So I think, look, all of you are very experienced investors. So when you have this situation where you can make a lot of money, you should of course take advantage of it. I'm not giving investment advice to say, do more, and there's more to come. But I'm sure many of you are very, very happy investors.

[00:22:28.56] Well, private equity is a very different class. It's not measured by three months or six months or even a year. It's really, you've got to benchmark against over a 5-year, 10-year period of time, how has PE done relative to the public market? And I think most of the data would say the top performing PE funds have generally done probably 5% or 10% better than the returns on public market.

[00:22:59.00] And so I think the key is-- you're an investor. Obviously, you need to construct a portfolio and not just chase the next new, new thing. You can do a little bit of it. If you do all of it, chasing the next new, new thing, you can do it spectacularly well. Or you can really regret.

[00:23:21.56] So PE is probably quite unique, as an asset class has been able to demonstrate. We do well regardless whether there's a boom in the public market or when there is a correction. But generally speaking, obviously, they have done better when there was a correction in terms of new deals done.

[00:23:41.15] And when I think about why the PE investors are able to do a little bit better than the public market, not because we're smarter, not because we're harder working, even though some people in our industry may think we work hard. And some may even think they're smarter. But I think the PE industry has some inherent structural advantages to have a sustainable performance.

[00:24:14.16] And a part of it, if you look at our business model, we are a long-term investor. We can own a business for three to five years. In that period of time, they enable us to improve the business, enable us to determine the exits.

[00:24:31.17] And so I think that patience, that ability not to have to worry about quarterly performance and monthly performance-- a lot of the company, when we invest, we really set up a three-year plan. We say, we're just going to invest.

[00:24:46.79] For example, McDonald's China, during COVID just said, we're not going to slow down our restaurant open because, unless this thing lasts for years, we should just do it. We'll continue to try to open 400 to 450 restaurants a year, which is a lot of CapEx. Because we don't have to worry about, necessarily, the opinions of the public market on the day-to-day basis.

[00:25:17.38] And certainly, we spend a lot of time doing due diligence up front. And we sit on the board of companies. And I think the more established PE firms like ours have really developed a lot of, not just the investment judgment and expertise and all that-- a lot of it is sector expertise.

[00:25:38.33] So like, our teams are organized both locally in Asia and also globally into whether its health care sector, consumer sector, technology sector, industrial sector, so that we are able to have a lot of data help us to understand how the industry performs through different cycles, and who are the good management we can back, and what are some of the key things that we need to watch out for, or other opportunities.

[00:26:07.04] So I do think that that is increasing our trend. And we have a lot of senior advisors that basically are people who work in the industry for a long time, who help us to develop further insights for networks. So I mean, so far I think our industry has done pretty well.

[00:26:28.04] JACKEY CHAN: I think what you mentioned makes perfect sense. Public market, there would be moments of very, very strong rallies. And then there would be moments with a lot of volatility. But the consistent value-add delivered by private equity managers are real reasons we wanted to continue to have clients to look into private equity.

[00:26:48.40] Now, there was a little bit of COVID-19-related management change-- a change of the way you help your portfolio companies in dealing with changes, right? Share with us more sound bites related to COVID-19. I think a lot of our clients are looking for inspirations-- how to do things differently.

[00:27:09.86] XIANG-DONG YANG: Yeah, I think all of you probably have businesses or work in a big company. I would say that one of the conclusions we get looking back is that a company can do a lot more than you think. And they can do a lot more with a lot less than you think. I mean, can you imagine people work from home, everything gets done.

[00:27:33.12] Like J.P. Morgan, I think a huge percentage of your workforce is still working from home, right? And meanwhile, your business is bigger in terms of everything, right? Volume, even profitability, probably. So that's one of the things that surprised, I think, most people, is that organizations and companies, when challenged, can actually do a lot more than they think.

[00:28:01.61] And so during the financial crisis, of course, China got hit first. And we had a lot of Chinese portfolio companies. So we benefited a little bit from-- the US had 2008 financial crisis. And we talked to our colleagues and worked with the management during the crisis, what to do. And so of course, we worry about our employees' health and make sure they stay home. Or if they don't stay home, we bought a lot of different PPEs for them from around the world back then. And I'm sure many of you remember that.

[00:28:38.95] But I think for us, because we're investors, we're not really managing the company day-to-day, it is important for us to help management, hold their hands, make them a little bit more comfortable. There's a period of time when people don't know how deep this thing goes. People lose their nerve, right? So you have to really work with them. With companies, we tell people, OK, right now, let's play defense.

[00:29:08.11] I remember McDonald's had the two teams. One team just deal with the health crisis, like somebody is sick or some restaurant closed. Then they have another team just try to do the reopening, right? So I do think there is a lot of learning in that process. And we shared across the platform.

[00:29:26.25] One thing I would say beyond just the portfolio companies, I think I mentioned in the beginning of my remarks is the consumers are really changing, as you know. So COVID really accelerated a lot of these companies' consumer behavior.

[00:29:42.46] We have an investment company called [INAUDIBLE], which is the largest chain of retailer of home furnishings-- blankets, pillows, and beddings, what have you. And during COVID, the stores are closed. And so they're a franchise system. And the franchisee, they don't have anything to do. They're home, and their business went to zero.

[00:30:03.19] And so basically, the company kind of developed through the WeChat mini program that trained them for two weeks to use their WeChat so they have their own little store, basically. And they all have their customers. They have their WeChat. So they set up a business. And that became 40% their business. And even today, after China-- obviously, all the stores are open-- that is still 30%, 40% of their business.

[00:30:28.31] And you think about, in China, if you have a franchisee in the fourth tier city, they have three stores. And you say, OK, I want you to move online, they'd be like, OK, maybe in the next three years. But I think these things happened in two months. So I think consumers, just they changed, too. So I think how we work with the company to adapt to this change is very important.

[00:30:50.15] JACKEY CHAN: Sounds really good. I think in this session, we have heard a lot of very interesting insights from you across the change, the tech disruption, across so many industries, COVID-19. Once again, I have to say a conversation like this with you, we feel energized and lots and lots of opportunity to look forward to. Once again, thank you for being with us today. And we hope our audience enjoyed our session. Thank you very much.

[00:31:23.66] XIANG-DONG YANG: Thank you, Jackey. And thank you, everybody. It's my pleasure.

[00:31:26.45] JACKEY CHAN: Thank you.