Transcription
By the way, thank you for taking the time to come here today. And I think it's interesting in terms of the placement and how some of the editorial conversations have been curated here. So from from Paul Chan, we've had pretty much a very big, uh, presence of private market allocations and conversations. We just had one with Lulu, of course, and here and we have, of course, Chris here from Beijing shortly after this. Apollo is coming on as well, uh, with Eric. And I think that's a really good sort of place to start.
We were just having this conversation before we came up here. In terms of how you think global investors are under allocated to this part of the world. I wonder if you could support that with some numbers, Chris.
Yeah. I mean, I think traditionally there has been this trend. You go to the US first and then you go to Europe, and then you do a little bit of Asia and um, you know, you still see that in the numbers where a pack is 37% of GDP, global GDP, but only 15% of alternatives. So, you know, I think the region continues to be relatively under allocated. Um, I have to say hopefully that is starting to change. We've definitely seen in the last 18 months, starting to see some pick up again, as I think, you know, our clients we talked to are generally all looking for a little bit more diversification in their portfolios and starting to look more at the, um, at the region, um, as well. So, you know, on the positive side, that means there is, relatively speaking, less competition, you know. Uh, so that's good, right? Um, but I think overall it's still, you know, very much, uh, under under allocate, I guess we'll, we'll talk about some things. But I, you know, I think there's actually some real positive factors that hopefully should change that over time.
Is what? What do you think the reasons are behind that? Under application. Is it is it homebuyers? Is it lack of opportunities? Is it is it is it politics? I think obviously there's been a bit of geopolitics in recent years which has affected some China allocations perhaps. But um, I think, you know, there's still you know, I was talking to one allocator yesterday who still said, oh, we do. Whereas the US and Europe have actually seen a reduction, greater concentrations. Um, Asia. Uh, total market cap is now more than double Europe and trading volumes are eight times Europe. So, you know, I think there's a lack of appreciation and just how much markets have grown, the depth of markets and the quality. Again one one area where activities convertible bonds for example, um, 80% of Asian convertible bonds are large cap versus 50% in the US. Um, it's again, the Asian convertible is bigger than the European convertible bond market now. So, you know, there's quality, um, liquidity, you know, has grown dramatically, you know, and we see it's easy to quantify, easier to quantify that on the public side. But you also see that on the, on the, on the private side. So I think, you know, there have been some fundamental changes as they Keep on developing that, you know, haven't quite perhaps been recognized yet and avocations. But that should hopefully change up.
Private credits come up. As you know, I'm sure you've seen the news where the best opportunities, in your view for private lending as far as you guys are concerned?
Um, again, I think Asia is a little bit different. Um, private credit to us in Europe, US and Europe, very much dominated by corporate, dominated by sort of mid-market lending, sponsored bank financing. Those are the big sort of giant blocks of private credit. And, you know, when you look at Asia, the markets are just a little bit better banked. Um, the lending gap is smaller. The regulatory, regulatory and, you know, burden on the banks has been a little bit less, particularly on the corporate side. So, you know, we've just seen less opportunity there. The pricing is not so interesting. You know where Asia has seen more regulatory sort of, um, uh, pressure on the banks in terms of capital. I think it's been on the real estate side. So we actually think that, you know, that's where, you know, we're one of the largest private that credit firms in the region will stuff, which, you know, so you're going up they're going up the the risk curve and everything else.
Okay. You know the before we get into China because once we get into China, that's uh, that's quite a deep hole we'll, we'll get into. But just the opportunities outside China as far as real estate and your franchise is concerned, like what's what's been most active for you this year and where do you think things will remain active?
Yeah. So real estate again, it's a major business for us where I guess most active in three markets currently. Uh, Japan, Korea and Australia, New Zealand. Um, Japan continues to be, you know, a great market. Um, again, that corporate governance reform theme pushing through. Um, you know, there's just so much activist capital now pushing public companies to, you know, streamline, sell non-core businesses, creates opportunities for private equity. But also, you know, corporate Japan still owns huge amounts of real estate, um, which really is non-core to the businesses. So just, you know, just earlier this year, we led the acquisition of Sapporo Bear's, uh, real estate portfolio in Japan, uh, which is a $3 billion, um, transaction. And we're seeing, you know, again, just more and more pressure on companies to sort of sell their non-core real estate. So we think this is again, this is a theme that has legs in that corporate governance theme. Again, you know, drives lots of opportunities in Japan across multiple asset asset classes. Um, that's been that's been China in the I guess the starting point there just to build on what we started on just how underweight global investors are.
So maybe just a mental exercise. If you say you went to the U.S., um, a room of ten people and you brought up the topic of China, how many would remain in the room? How many would walk out? I'm not sure they would. I'd hope they wouldn't walk out. But, um, yeah, I think they're still probably nine out of ten people will just not do China and in the U.S.. So let's see. I think maybe there's a little bit has that changed? Friendly relationship? It hasn't really changed. Yeah. I think, it uh, a couple of years ago, maybe people didn't even want to. They weren't even interested in asking. You know, I think now people at least are interested again, from a macro point of view, what's going on in China but not allocating capital. Yeah, maybe a little bit on the public side, but on the private side still, I think there's, um, from the U.S., you know, not much interest.
Sure. Your your call on China is underpinned by your view on the macro. Yeah. We've had this conversation. And I think what underpins that macro view is what happens in the property market. Um, I think we have a graph. Thank you so much. Right on cue. Thank you. Uh, to our producers here. I think what you're looking at just for the audience, this is a month and month changing, I believe new home prices across 70 cities, um, this is across six years. So effectively, what you're seeing here is for the better part of the last 6 or 7 years, it's been declined month and month. Uh, as far as new home prices go. Um, what's the direction of travel that you see? And does this need to improve for the macro to turn convince?
Um, I think, you know, China's growth in recent times have been really largely driven by exports, and consumption has stayed very weak. And, you know, we believe, you know, we've strongly felt that household consumption is not going to return until property, uh, the property market stabilizes. You know, this was a major hit to household balance sheets. Um, and really impacted confidence. Um, so we've been watching very closely to see, you know, our when are there signs of that property market stabilizing and also watching at the same time consumption to see, you know, because, you know, while this property price crisis has been going on, Chinese households have been saving like crazy. So there's about 23 trillion R&B of household cash savings in the bank, and you only need a little bit of that. 3% of that is a 4% GDP impulse, you know. So we believe once that comes out, it could be a huge demand impulse into China. Some of that will also go into equity markets and other investments. And that can be you know, I think that's something that's, uh, an extra sort of boost to China and the global economy that maybe isn't fully sort of baked into people's assumptions. So I think that that is there. But, you know, so I think the market is looking a little bit better. Okay. Um, in first year cities, prices are starting to stabilize, even go up a little bit. In Shanghai and second tier cities, the rate of decline is slowing. You know, we've seen we did last year the buy out we led the buy out of uh, one that commercial, which is the largest? Oh, that's right, shopping mall manager in the world. Not a lot of people know that. You're actually the biggest mall operator in China. Um, yeah. It's a it's an amazing business, actually. Um, so we get we it's very interesting seeing the retail sales data across the whole country. And again, for the first time, we've actually seen the data type, uh, sales per, per visit are actually tick positive. Mhm. And then we do, we do you know we do sentiment surveys among staff etc.. And again we've just seen little signs of things turning positive. So I think um, you know, this is something which yeah, uh, you know, it may be slowed down a bit by Iran and if there's some demand destruction on this sort of side through that. But I think at some point in the next 12, 18 months, you know, I think there's positive you you could see a nice demand impulse coming through that could create and more um employment positive cycle through services employment because again, manufacturing is not really generating new jobs. I think you could see a nice virtuous cycle coming through in China. So that's something which, you know, again, we're fairly positive on the outlook, um, for China.
Okay. On the hedge fund side of the business. Yeah. Uh, this might apply to China. It could apply to other markets as well. You firmly believe this is a stock pickers market?
Yeah. I think the market has changed. You know, I think, um, people always talked about the death of active investing, the death of stock picking. It's all passive, you know, huge money going into ETFs, etc.. And I think there's been some elements of truth to that. But again, we've seen and I really started I would say tick round Liberation Day. So with tariffs okay a lot of export firms in the region lots of winners and losers or relative winners and losers. I'm starting to see dispersion really pick out significantly. Then we also obviously we have the corporate governance reforms in Japan, which had a huge impact. Korea now looking and taking inspiration from that with their value out program. China also looking at some of those lessons learned from Japan. You know, you've seen dividend payouts go up dramatically in China over the past two years. So, you know, we've just seen we have um, in our hedge fund, um, our polymer hedge fund business. We have 70 teams running different strategies across the region, mostly equity long short. And we've just seen the hit rates go up dramatically. Just seen dispersion go up. Hit rates go up. And performance it's been excellent. So I actually think a lot of these factors have some lags as well. Also I of course again another factor global factor creating more dispersion more winners losers outperformance relative underperformance. So, you know, I think I actually think we're could be heading into a really great period for actually long short and sort of start picking and sort of within your verticals.
Then do you think that specifically hedge funds will provide likely the most alpha this year?
Um, I think there's lots of interesting stuff. I actually, you know, I think actually the lending is great. The real estate's been good. Energy transition. Another theme we really like the public performance has been it's been our record year for performance from our hedge funds actually it's been so it's been a great environment. Buyouts in China we think are really interesting now as well. I actually came up earlier um, because again there's very little competition. Valuations are reasonable. You can not borrow cheaply. You can borrow more cheaply in China and Japan for about. That's crazy if you think that it's really amazing. So you know I think there's there's actually lots of interesting stuff you know, to do across the region.
One of the things I also wanted to, and this is an abrupt shift in the topic, but essentially brought up I. One of the things that stood out to me last week was when you had SpaceX come out and say we were going to raise X amount of money. It wasn't even the biggest fundraiser of the week. I mean, Google came out and did an 80 plus billion, you know, follow up placement, and anthropic came out with a I think, series H of 6070 B. So it's clearly companies don't need to IPO not to raise a lot of money. Do you think it's allowing companies to remain private longer forever? Or do you think at some point the public markets is still there to sort of end?
Yeah. Look, I think still all of these companies will ultimately be public. And, you know, I still think the public market gives you more options and flexibility for raising capital. So, um, I think ultimately, but, you know, there is a lot of more of there's more private capital, there's more different types of flexible solutions from the private market. So, You know, I think companies have got the maybe more luxury of waiting to a point, you know, where you're ready. You know, obviously being public adds a lot of pressure, um, and extra pressures, um, from to being a private company. So, you know, you probably want to only go public when you're ready.
Okay. From an asset allocator perspective, how much do you think people should allocate to private markets? I know that that's an it depends question, but what's and coming from someone like you of course as well. But yeah give me a sense of what's what's appropriate.
Um, I don't know. Well, I have 90% of my private and my personal investment in alternatives, okay. Mostly funds, because that's what we have to do. Yeah. Big, big surprise there. Yeah. I think, you know, how private have public have. But you know, I'm talking about, um, book. And so I was about to say that that it depends what I mean. Okay.
So final question for you, how do you think your performance has Fair through about almost 30 years now, through cycles, we've seen every I mean, you've seen everything. Well, I mean, I think, you know, hopefully touch wood. You know, we've been around for a long time. So we've survived the world economy and market's throwing a lot of stuff at us. So um, I like to think we've hopefully been doing something right. Um, you know, I think, um, you know, there's always going to be some challenges, right? But I think right now performance is actually being is being very good across asset classes. Actually. Again, I get nervous when you look at areas where too much capital was raised too quickly. That's usually when you start to see, you know, a more difficult investing environment. You tend to then see funds underperforming.
Well, how do you know? How do you know when something is about to become a problem and something that you could ignore, like what's what scares you?
I think you just have to stay disciplined. And, you know, for us as a firm, it's always been very important that we're diversified enough. So we don't depend on any one thing. So if an opportunity goes away, we can just stop doing it, you know? 2018 Australian real estate was getting very frothy. We sold everything and we didn't go back in till 2024. So, you know, I think it's having the flexibility. It's hard to keep that discipline, you know. Um, but um, yeah I think, you know, if prices get if valuations get stretch sell, you know, take profits. You know I think uh and don't be I think it was Rockefeller. Somebody once said, um, you know, I've become very wealthy by selling too early. So, uh, you know, I think never regret also, if you make a good return. Yeah.
All right. Chris, fantastic. Thank you so much. Round of applause for us for your pick it up. Thank you.