This summer, in Aspen, you said last year was like Alice in Wonderland. So would this year be War of the Worlds?
Around the world, one of the questions that seem to be dominating, particularly the European in the US press, is if it will be a hard landing and a soft landing or a recession. As a long-term investor, and this is not my first cycle. And it’s not about the landing, it’s about where the journey starts, where you are when the plane pulls up and the door opens. And we are going through a period of time of as a great reset. As an investor, you think about where we were – a period of low inflation, globalization, margins across the world going up. Geopolitics had a certain flavour. And then the storm over the last two years, blew through. And with the other side of that storm, in the area that we found ourselves in is quite different. Inflation is again, on the minds of the West. Margins, which had been going down for decades, under globalization have turned the other way. Questions of globalization have turned to regionalization. And a world of time where assets generally moved up together, have now evolved into a world of dispersion of economies and asset classes. We were like Dorothy and the Wizard of Oz.
In narratology, there’s a number of devices that turn up over and over again, and one of the devices is the storm. So the storm shows up in Ulysses, it shows up in Gulliver’s Travels and shows up in Harry Potter. And it often takes characters from one world they’ve been to another, most notably Dorothy and the Wizard of Oz and the tornado. And I think that, as investors, we’ve seen this storm blow through our understanding of the world of last few years, and we’re landing in a quite different place.
Is it that stark?
I think it’s quite stark actually. If you think, particularly for the last 10 years, we’ve had an enormous financial crisis, we’ve had a quite consistent bull market run with quite consistent interest rates. It was a period of time where almost all asset classes moved together, which is not normally the case. And the market had one of the great positive runs for over a long period of time.
One of the sharpest changes has been in globalization that seems to be moving into some kind of a reverse gear. To what extent do you see this decoupling of supply chains, China plus one strategy play out?
The pendulum always swings perceptibly, but the pendulum was swinging for almost 40 years towards globalization. If you look at global trade as a percent of global GDP, it peaked about a few years ago to 58%. It’s down to 52%. And we’re beginning to see the concept of onshoring being talked about more than the concept of offshoring. Global perspectives have increasingly been re-expressed as regional perspectives, I think it’s actually a really interesting moment for the regional view of Asia, we’ve come to spend a lot of time talking about NAFTA, the EU, but if you look at regional trade, in Asia, its three times of NAFTA.
At the same, the Ideas Festival at Aspen you said there are three chapters in these difficult times, we’ve crossed the first one, or at least was being closed to crossing, In November are we at Chapter 2 or three?
I said three chapters. The first we have to remember started in 2021. It was a very odd place, a very odd year. The second act of the play, if you will, is resetting the multiples. If you look at what’s happened, the changes in interest rates have reset asset prices. The third chapter might be will be resetting earnings. So PE is two things. And we’ve seen P move a lot, but analysts still have the S&P earnings up this year. And yet, if you look at Western CEOs, they overwhelmingly are talking about a recession. We know a little better about price now. But frankly, the market is not cheap by historical standards, it’s right on historical multiples of a lot less than 12 years. But the question of what earnings, I think is still much on my mind. And probably that is the third chapter.
So you don’t think whatever the earnings people are talking about haven’t yet turned over yet and we will see more pain in the next few quarters?
Well, if you look for early signals of it — and again, I’m not an economist. But I was in San Francisco, where you couldn’t hire people for a couple of decades now. There are very significant layoffs of some of the employers. Amazon,, Meta etc. So the early signals are that, I’m not necessarily predicting exactly what would come. But we know that in the past few recessions, earnings have gone down on average of about 20%. And so we have the world thinking there’s going to be recession, yet earnings projections have not reflected that. And that, to me is an interesting question at this moment.
And they’re not reflecting because a lot many market participants still believe that the Fed will stop at some stage …
The answer is I don’t know, which, by the way, is three of the most important words today from that count. There’s a tendency for people to try to express certainty in moments like this, one of the things I’ve learned in my career is there are moments where you don’t know what you do, and you set yourself up for uncertainty, as opposed to choose exactly which outcome you think will prevail. And, frankly, within my world, we’re careful with our earnings projections for next year. And I just think everyone has been so focused on the Fed that they maybe haven’t yet processed that next question of the second and third order effects.
But despite this period of turbulence, you made a rather bold move of taking TPG public.
Yes, we went public in January. It was more or less a little better at that point of time. The stock has done quite well. But for me, an IPO is a financing event. And financing events are only a piece of the long-term history of a firm like ours. So it’s a shift in ownership. But in no way was the shift in strategy or shift into who we are. You might also notice that this is a period of time, when there’s a reset going on.
Actually, we’ve been setting ourselves up for this period of time for a while. If you look at the last part of the cycle we’ve just been through, it got pretty heated. And during that period of time, we were actually net sellers, we are one of the few net sellers in the private equity industry over the last few years. And we are now sitting with the largest dry powder, in our history, because this period of time, is when the most interesting investments occur. And we’ve been positioned ourselves in the sectors that we think are going to be the most interesting during that period.
So during the last decade, it was a bit of a risk on, risk off decade. So think of it as when risk followed by a next decade of which risk. And among the more complex world, picking sectors and areas like climate change, for example, healthcare, where you think the sectoral dynamics will actually put some wind at your back. As a firm, we’ve always been sector driven.
You mean sensitive to climate change?
Well, when you look at, again, my philosophy of this particular time is, if you’re uncertain about some of the changes going on in the world, you figure out which neighbourhoods to go into, where you might know your least, where the sun may shine a little less but you’re less likely to have problems. And so coming out of Covid, obviously, particularly here in Asia, we have seen big increases in healthcare spends. As the world understood the need to build more resilient healthcare infrastructure, more solutions got built around health tech. We have been among the largest investors in healthcare around the world around. We are quite active here in India. And it’s an area that has very strong trends and hydraulics within the industry. And secondly, it’s an area where knowledge matters. I like areas where knowledge matters. We’ve never defined ourselves as being the largest of firms, but we want to be among those firms that are heavily reliant on sectoral knowledge.
So you look at what we’ve done here in India, in healthcare, from hospitals to Mother and Child centers, to digital pharmacies, eye care, these are areas that have been very successful for us. Cumulatively, we would be the biggest player in India too. And that success has been mimicked around the world. The second area is obviously, technology where we’ve done four IPOs in India, in the last 12 months. And we continue to believe the ability of technology to shape industries and shape our world. And the third area would be climate where as you know, we raised the largest privately funded fund, we’ve obviously been active here in India and around the world. We h perhaps north of $120 trillion to spend on the transition. And solving that problem is one of society’s greatest challenges. It’s also one of my views, one of the four five great investment opportunity that’s seen over the years.
You talked about climate and I have a few questions on that. You have, an Energy Transition Fund, called the Climate Fund. How different is it from the Impact Fund, which is the Rise Fund. And other such energy transition or climate funds that several of your peers KKR, Blackstone, Brookfield have?
Most approach it from the infrastructure fund perspective. So first of all, as you correctly point out, we have a leading impact investing platform. We started in 2016. But when we took on the mandate we asked why impact investing never scale up? And why returns are lower in impact investing than elsewhere. And yet, we’ve looked at our long history of TPG and found the deals that would have been impact investments actually have led to higher returns.
But how do balance both? Returns and create impact simultaneously?
First of all, what is an impact company? An impact company, under our definition, is different from ESG. ESG is do whatever you do better, impact company is a company that buy its products and services to address a problem. So an education company, a health care access company, the faster you grow it, the more its impact. And so if you find companies that have excellent unit economics and deliver income from online education companies, solar companies, etc. The faster you grow them, the more they impact and the higher the returns and so, we started thinking of impact investing very differently. The term impact venture fund was coined in 2007, the same year as the iPhone, but it didn’t grow as fast as the iPhone. In 2016, the average fund was $125 million, our first one was $2.1 billion. And so we took it out of the venture are into the impact area. Because if you really want to have global scale impact, you have to take a company and scale it in size, it’s not about the idea.
Secondly, we embedded it within a major investment firm. So we took all the power of TPG. And we made a chassis upon which we built Rise.
Third thing we did is we said from the beginning, it was absolutely not concessioner. In our view, the early days of private impact investing, often, the idea was investors would accept a lower return, in order to do good, we didn’t see that as necessary. There’s no need to get boxed in — You can be a compassionate and a conservative. You can be a liberal and fiscally responsible, you can generate good returns, and build great impact companies. So we took on those problems. And importantly, we gave it a separate brand, because impact companies want impact capital. And suddenly there was a fundamental change in the quality and scale. We are using the platform to create the largest C&I rooftop solar company in the region, from India.
Essentially, four things happened all at once, within a two-year period of time. First of all, the net Zero pledges. The second thing that happened was what I’ll call the Greta Thunberg effect meaning climate consumerism. People started to care about the footprint of what they bought. The third thing investors began to pay attention. So pension funds, public market, investors began to ask about people’s carbon footprint. And so if you’re a company, and your CEO is committed, your customer wants it and your investors are asking about it, then things begin to happen. And the fourth thing, technology changed making wind, solar and EV totally cost competitive. And the market spiked.
What was missing was a large part of the market to finance that. So if you think about the climate world, before that it had been an odd barbell structure, where on one side, you had clean tech venture and on the other side, you had contracted renewables. But the question we were asking is, who’s going to create the great climate companies of tomorrow. And it’s not just renewables, if you’re going to solve the climate problem, it’s a different subset. So seeing that happen within Rise, we basically understood that the size of the capital needed for climate was going to swamp the other areas. So we created a sister fund, Rise Climate. Hank Paulson, former Secretary of the Treasury, joined me as the managing partner.
And it was really interesting, first of its kind, in the private equity, of that scale. And not only do we have many of the top institutions of the world, but 28 of the major corporations in the world as well because they haven’t solved their own climate problems. We’ve moved out of talking about renewables and climate being sort of synonymous to renewables. They’re just a sub sector of what’s happening. There’s also a number of really interesting things on the social side of impacted financial inclusion. We have another spin on the spot of Airtel in Africa, called Airtel Money. This is a company growing 40% a year; we bank $22 million unbanked Africans by opening them up to financial inclusion.
In this climate spectrum, how do you model risk? Is it the infrastructure risk, or is the technology risks that you factor in?
Our particular part of the market is to take technologies that are viable and scale them. We admire what Bill Gates does it to breakthrough energy ventures, but he would and we would both say that many of the companies he’s working on will not be ready to scale for a period of time. I find a lot of similarities, but also a number of really important differences between the tech revolution and the climate revolution. Each of them will affect all businesses, and will shift how we live in important ways.
Each of them is going to see a disproportionate amount of the activity driven by specialized tools and capital, just like venture capital played an important part in the tech revolution. Climate focused capital will play an important part in this revolution. What’s very different is that the climate revolution is a fiscal revolution. In the tech revolution, someone built the internet for you. And he just had an idea to send it out for free, we have to build physical assets, we need to throw away computer science book and pick up organic chemistry book. You need to think about major projects, delivering physical assets across broad geographies and so the skill sets of that particular type of investing and share many of the growth opportunities that we saw in technology, but they’re different in terms of how we deploy them. So our job at Rise Climate is to support that engine of taking physical assets and scaling it. And you have to think in a different way. It’s not Moore’s law, it’s the experience curve.
What are those opportunities in India? EV of course was the headline transaction.
Within India, there are two notable investments in Rise. We’ve done a number of social investments in India which have done well. Fourth Partner Energy which is bringing green energy into what was a pretty complicated grid. Luckily things have gotten better and we are helping solve that. It’s a massively positive company in terms of its carbon wins, and then Tata Motors. India needed to accelerate your EV penetration.
One of the things we’ve learned, sort of in Silicon Valley is if you take a technology and you put it in a company and get behind it, get the incentives lined up, it tends to accelerate. Tesla made progress faster than GM in the early days. And so essentially creating a separate entity allowed it to accelerate in a way is important. But we’ve looked at many other things. And I expect to see much more investing amongst in this area. One of the things that is quite positive is obviously, the government has gotten behind this issue. In the US, we just had Biden’s climate bill. And why is that important? It creates incentives that are a minimum of $350 billion. Most people say that they’re going to be quite higher, because they’re not capped. And that will accelerate $3 trillion of spending. Why is that important, because often the US as a technology, US will push something down the technology curve, which will then move out to the world. The EU is also committed about $300 billion to green energy.
To bring down its dependency on Russia.
Yeah. Secondly, higher prices, that’s good, because it reduces the green premium, but you put your finger on the most important thing, which I think is very true for India, is the green revolution is now also a question of energy security. And if you are going to, we’re sitting there today, and you’re going to try to create energy security, suddenly, you have an answer right in front of you, which is great. Regionalization in some ways will also will attend potentially accelerate some of the spending for the green economy.
Has the speed of innovation and technology in India surprised you?
Yeah, it’s surprised me. Many years ago, one of the mysteries of India for international investors was the
. The idea that everyone knew the grid had to be fixed, but now reforms are actually happening on ground. It feels like it’s moving more now. You’ll have a better sense of that than I but there’s a sense of motion and purpose. Look at electric two-wheelers or bikes or E-cycles. We were investors in the largest ebike company in the US but also India. The EV market India is actually a very interesting.
One of the other interesting things about the market for electric vehicles, as you know, is charging networks. But most large parts of India have a very small radius they move within, and don’t use their cars as much for long distance travel. So home charging works better in India, as a percent of travel than almost any place in the world. With the average commute, something like 18 kilometers, suddenly, you don’t need to have as expensive car and a huge amount of the expense for cars that last extra 50 miles. And so I think around the world, EV adoption is pricing on the upside. It’s low in India, so far. It’s 21% in China. It’s high single digits, low teens in the UK.
In India of late, you’ve been big on large conglomerates. , Tatas, UPL, Shriram Group. Is that a conscious call?
I think you’re only seeing a piece of what we’re doing and those tend to get more attention. It is indicative of a general trend we have which is if you can partner with good partners and to do interesting things that you can create good returns. Look at
, right, that’s where we made maximum returns. There are these are really interesting small companies. I think the big ones sometimes get more noticed because they’re more mature on the investment side, so they’re a little larger. But I wouldn’t overread that’s it’s a tool in a very, very complex and interesting toolbox. I’ve always thought private equity as an asset classes overperformed for a long time. Not always, but that usually, which is why most investors in the world are increasing their exposure.
But with them can you influence the course of corporate action or just be a passive capital provider?
It’s what we’ve been doing a long time successfully. It tells you that we must be doing something right. Recently, we spun out Direct TV from AT&T. TPG is not just a financial investor, it helps to bring change in innovation to the companies that we invest in. It’s not that we’re investing in these companies to simply bring money, we’re also usually helping them go through an evolution themselves. Think about what Tata did. Think about what Reliance did again, they’re evolving their business and we’re there to support and help.
You’re among the first global PE groups to go really deep into consumer tech. First there was a dream run and then came the bloodbath. And some of the portfolio companies are facing serious headwinds. How are you dealing with this reset?
At moments of time, we go through the cyclical changes, but if you look at where it is today versus where we started, it’s still doing very well. That’s what we want to be judged on not at a particular moment. If you look at where growth has been particularly difficult, it’s in the either unit economics or this was an idea but not a company and you don’t see us in that part of the growth investing world. I’m proud with how our portfolio has been holding up.
Is there a number that you could put to future investments in India see over three or five years?
Let’s see what we’ve done, four IPOs in the last year, we’ve done almost $3.5 billion in the last two years of investments. I think you can see as many IPOs out of our portfolio in the year ahead. And I, if anything India picking up share in our investment activity. I don’t predict market. This is not a market share game. It is an opportunity build up one.
But how does India stack up versus other emerging markets How is it compared to China or Brazil?
It’s hard to say. I don’t know what metric to use. I will tell you it’s picking up shares certainly. We are putting more monet here than China in the last few years where we have been been we’ve been underweight China relative to the market. There have been other times we set out India from 2012-2014. One of the things about investing in this region is there’s times where you lean in or you don’t lean in. And this is a period of time where we’ve been leaning in India. So that’s where it is picking out share. I would expect it to continue to pick up share, because as I travel around the world, this is certainly one of the best performing markets in the region. It’s a period of time where the government is stable and rules have been becoming clearer. Tax rates have come down, government investment has gone up in infrastructure. There’s always challenges in any market. But generally, with the amount of activity we’ve had — IPOs investments — it tells you that it’s a really interesting moment.
What are the challenges that you face in Indian economy?
One of the challenges has always been in this sorting itself out. There hasn’t been as much liquidity on exit. So as you know, the local markets were shallower. And secondly, many of the best assets are owned by the family businesses. We were not the first private equity firms in Asia. In fact, several family investment groups across Asia, essentially look a lot like private equity firms themselves. So we’d be competing with some of the great investors in the world, in Asia, on their home turf. So it’s a competitive market. There were challenges on infrastructure. And those seem to be heading in the right direction.
What about ease of doing business?
First of all, investing in the diverse markets around the world regulation and governmental intervention, is an issue at a lot of places, and I’d say the early days in India it was a little bit less clear how the rules worked. And that has gotten clearer. The role of promoters was kind of a new term when I first ran into it but that too has become a little clearer. So I feel like I’m on the long journey of how markets develop. The direction of travel has been very positive, particularly in recent years. But it’s always a journey.
Many of your peers say that, especially for younger companies, one of the challenges they face is the regulatory goalposts keep changing or evolving.It has happened in gaming, fin tech, retail. From Dream 11 Lenskart etc some can become completely black swan events.
Have you paid attention to US markets recently on things like gaming, things like technology regulation? If you know what the rules of the game are, then our job is to go try to win. And if the rules are constantly changing, it’s much harder to understand that and the same is true in the US. Try investing in cybersecurity in US. That’s a pretty difficult situation too to understanding exactly what the regulations is, so I think it’s the slope. But as the rules of the engagement becomes clearer, investors feel more and more comfortable writing ever larger investments. And that’s part of what you’re seeing in the market as the investment size in India is increasing. I can tell you from the US or Europe or elsewhere, in no market goalposts don’t change.
Columnist Ruchi Sharma wrote when a term like Metaverse escaped from science fiction and appeared in the real world, it belies the fast that physical world and physical goods are still important and are in demand.
A $1 trillion company renamed itself for a non-revenue generating world. But one of the things that I’ve always told our team is, it’s really important to stay curious and to watch these things as they never move in a straight line, as my professor told me a long time ago. We have to remember, we put a man on the moon before we put wheels on suitcases. Technology does not move in a logical straight line. So I’m a little skeptical, but we’ll see.
The government in India is very keen to get out of business, to privatise refiners and banks like . You own banks around thd region and the world. Would you be keen to bid?
We own bank, non-bank financial services companies too around Asia, We’ve been large financial service investors. Here in India, in China, where we were the only western entity to control a Chinese bank since 1949. We restructured a bank called Korea First Bank. We’ve had a very successful record of financial service investing. We’ve done less of that recently as interest rates were lower and the ROEs came down in a way that they were less interesting for us. But if interest rates get higher, and we can potentially add more value. Today, our work in financial services is more in the area of using new tools to create financial inclusion.
But in IDBI you have that opportunity. Transforming a legacy bank, into a new bank, using technology.
We’ve done this before. We bought and made the first digital bank in Indonesia and sold it over time. Besides digitization, as I said to you, we did the first all-digital national bank in the US which is a very well-known savings app. So it essentially allows and teaches young people how to digitally manage. You can pay your bills and round up and buy ETFs so that you invest in stocks. So we believe in digitalization. I cannot speculate what this particular banks need, but we’re well-known for this kind of work.
You talked about earnings and stuff, and obviously I sense that it’s largely US and Europe centric and more public market centric. So therefore, would private markets be a safer haven now compared to public market investment?
First of all, I’m obviously a pro private markets person. We do invest in public markets, but we tend to work mostly with private market investors. I think in a momentum market where you’re risk on, risk off, the public markets are relatively advantaged, because it’s easy to get in and out. So, I actually think the public markets were advantaged relative to the private markets over the last decade. It doesn’t mean that private markets didn’t overperform, but relative to other decades it was harder to overperform because for much of the last decade, the best thing you could have done is buy an Alibaba and then just go-go, and that’s not a particularly conducive market for the private market. India is doing pretty well on the global scale. Moreover, expressing ideas in the private market for spaces like climate, it more conducive.
Are there 1-2 entrepreneurs in India who have really wowed you? Like he’s the next Mukesh Ambani in the making?
I’m going to pass on that one (laughs).
Okay, not Mukesh Ambani, but someone who has really impressed you. Let’s now draw comparisons.
We have an Indian CEO of Google (laughs). Some of the great managers in the world have them born here. The fact that we’re seeing that in the US, tells me it’s here. The reason I’m going to pass on the question is that, I think we have a number of them in our portfolio and I wouldn’t want you to write about one of them, because I think there is… I’ve been very impressed by a generation of entrepreneurs who are challenging themselves and the country to think differently about what the future structure of the business could look like.
The conversations that you hear around the world, do you see India’s name coming up much more these days?
Yes. As you know, you said that there’s the trend to look for China + 1. Take ear pods, first of all, that is a huge business. It’s a $25 billion business for Apple alone, and they’re moving a bunch of it here, right? But, it’s not just that. In a world of work from home, people are more comfortable with dispersed workforces which will be a new shot in the arm for much of the outsourcing that has been done in India. So, if you think about India’s strengths in knowledge-based industries, this is I think a pretty interesting trend.
The government situation here has been stable, the rules are clearer. So, I think I hear India coming out more and more as a destination for capital. And, if you look at growth run rate, it’s very clear, the challenges on the front of Europe, the US is… people are debating how far into recession it might go or if growth is not there, and China growth has been constrained by COVID policy.
If you look at where growth is across South-east Asia and India, is some of the most interesting growth that we’re seeing. The point is India is picking up share in the discussion and it’s not just China v/s India, it’s India on her own stead. When we started coming to Asia, the story was Asia out. Asia was going to be the workshop of the world and India never quite got there. They never got this figured out other than IT services. The next wave of Asia was Asia consumption and and China hit that too. So for the last 10 years, everyone was focused on that. And, now in a world of regionalization, the theme is actually inter-Asia. So, India has that moment and it’s at that inflection point of consumption. So, you have a double whammy going on here, where it’s moving to a regional player where you can get the China + 1 and you’re at a domestic consumption take off point too.