Nick Rohatyn – Emerging Markets Multi-Asset Investing at TRG (EP.482)

Nick is the CEO of The Rohatyn Group, a global emerging markets and real assets investment firm he founded in 2002 that manages $7 billion across public and private markets. Nick previously spent two decades leading JP Morgan's emerging markets business across multiple cycles and served on the bank's Executive Committee. He also served as the founding chair of the Emerging Market Traders Association and later as chair of the Emerging Markets Private Equity Association. Nick's worldview is also shaped by his international family history of doing well while doing good. His grandfather, Clarence Streit, was a longtime New York Times foreign correspondent, and his father, Felix Rohatyn, was one of the most influential financiers of his generation. Our conversation traces Nick's path from his international upbringing to capital markets innovation at JP Morgan and the founding of TRG. We discuss his multi-asset class, horizontal investment approach to emerging markets, problems of emerging market benchmarks, necessity of diversification in surviving volatile cycles, importance of currency management, and value of creating scale through acquisitions. We close with Nick's views on the opportunity ahead and his ambition to build a leading global, multi-asset class emerging markets firm. Learn More Follow Ted on Twitter at @tseides https://twitter.com/tseides?lang=en or LinkedIn https://www.linkedin.com/in/tedseides/ Subscribe to the mailing list https://capitalallocators.com/ Access Transcript with Premium Membership https://capitalallocators.com/signup Editing and post-production work for this episode was provided by The Podcast Consultant (⁠ https://thepodcastconsultant.com/https://thepodcastconsultant.com https://thepodcastconsultant.com/⁠ https://thepodcastconsultant.com/)

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Speaker 00

  This issue of single asset class stuff, it really prevails. Let's take a look at it through a private market lens as a way of example. The world has imposed a developed market, private investing construct on emerging markets, which is to say, the vast majority of investment vehicles in emerging markets are mono asset class. It's either private equity, or it's private credit, or it's infrastructure. Many of them are regional or subregional. And that is a terrible way to invest in emerging markets. It is a terrible way because the deal flow in emerging markets will not support mono asset class, single country, subregional funds. And therefore, the people who raise that money

• 0:45Speaker 00

  end up deploying it badly. Layer into that a 15-year bear market on currencies, you end up with a fragmented market full of failing GPs and too small funds, competing with the US leveraged private equity industry. So, forget it.

• 1:09Ted Seides?

  I'm Ted Seides, and this is Capital Allocators. My guest on today's show is Nick Rowatton, CEO of The Rowatton Group, a global emerging markets and real assets investment firm he founded in 2002 that manages $7 billion across public and private markets. Nick previously spent two decades leading JP Morgan's emerging markets business across multiple cycles and served on the bank's executive committee. He also served as the founding chair of the Emerging Market Traders Association, and later as chair of the Emerging Markets Private Equity Association. Nick's worldview is also shaped by his international family history of doing well while doing good.

• 1:54Ted Seides?

  His grandfather, Clarence Streit, was a longtime New York Times foreign correspondent. And his father, Felix Rowatton, was one of the most influential financiers of his generation. Our conversation traces Nick's path from his international upbringing to capital markets innovation at JP Morgan and the founding of TRG. We discuss his multi-asset class horizontal investment approach to emerging markets, problems of emerging market benchmarks, necessity of diversification in surviving volatile cycles, importance of currency management, and value of creating scale through acquisitions. We close with Nick's views on the opportunity ahead and his ambition to build a leading

• 2:36Ted Seides?

  global multi-asset class emerging markets firm. Before we get going, have you noticed that airline travel takes a lot longer these days? Security lines go on as far as the eye can see, and that's even with pre-check, clear, or the pre-check, clear combo. And flights seem to get delayed regularly for no apparent reason. Well, the next time you have even an inkling of a delay and long before you have to board, deboard, board again, and sit on the tarmac for an hour before you leave, might I suggest you fill that idle time with successive episodes of Capital Allocators? By the time your plane leaves, you'll have gotten through at least two or three amazing

• 3:18Ted Seides?

  episodes and probably made friends with your equally frustrated neighbor in the seat next to you who may not have had the benefit of listening until you tell them to. Make a new friend, productively pass the time, and find your way around the world smarter than you started. Thanks for spreading the word. Please enjoy my conversation with Nick Rowethan.

• 3:41Speaker 02

  Nick, thanks so much for doing this.

• 3:43Speaker 00

  A pleasure to be here.

• 3:45Speaker 02

  I'd love you to take me back to your upbringing and how that influenced your path in finance.

• 3:51Speaker 00

  Sure. I was born here in New York, both parents originally from overseas. My father, a European immigrant, arrived in New York at the age of 16. His travel from Nazi Europe took him...

• 4:06Speaker 00

  From Vienna, where he was born, to Romania, to Paris, to Lisbon, to Casablanca, to Rio, where he lived for two years. The path cleared by a Brazilian diplomat, who was the Brazilian equivalent of Schindler. His name was Sousa Dantes, who wrote out 800 visas for European Jews against the express policy of his own government. My father was one of those. Then from there to Middlebury. As a European, he ended up at Lazard Frere, European Investment Bank. My mom, born and raised in Geneva, of a French mother and American father. He was the international correspondent for The New York Times.

• 4:46Speaker 00

  He had covered the League of Nations in Geneva and became convinced that the best path forward for mankind was a political and economic union of the Atlantic democracies. So he wrote a book called Union Now in 1939, devoted the rest of his life to promoting this idea. It made a big splash. He was nominated for the Nobel Peace Prize a couple of times, all of which is to say I have an international background. I have a strong streak of idealism on one side of the family, a strong streak of practical banking-type stuff on the other side, combined with civic participation. I was raised here in New York, bilingually. I was always interested in things international.

• 5:30Speaker 00

  From there, I went to Brown. At Brown, I did a lot of my formative thinking, which got me to where I am today. First of all, Ted, I was convinced at Brown that I was going to be the poster child for downward mobility. I was raised in not the kind of luxury people live in today, but a Park Avenue apartment, a country house, that kind of thing. I had no idea if I would be able to replicate that lifestyle. As I went through college, I'd spent a ton of time thinking about my value set and what I wanted to do with my life. I came to conclusions that made me comfortable with the downward mobility thing. I knew from a couple of summer internships that I had taken, one was at Unilever in

• 6:14Speaker 00

  London, that I had a knack for financial numbers, nothing too fancy, just a knack for it. Coming out of college, I applied to the usual constituency of things people applied to then, mostly consulting firms and banks. Morgan Guaranty Trust Company offered me a job in...

• 6:33Speaker 00

  It must have been February of 1982. They were the first to offer me the job, which meant two things. The sooner I took the job, the sooner I could stop studying. And their job entailed a eight-month academic training program, which meant I would never have to go to business school. One of my goals coming out of college was never to go to school again. So I grabbed the job, showed up in July of 82 at JP Morgan in the training program. My first rotation out of the training program was in what they called the Personnel Department. That taught me a lot about the bank. From there, I went into their fledgling capital markets group. This is 1982. The banks had just gotten some relief from Glass-Steagall. They were starting to get into capital markets, underwriting, what have you.

• 7:17Speaker 00

  At JP, that was a subsidiary called Morgan Guarantee Limited out of London and a sister group in New York that did capital markets. Since I had taken exactly one computer science course at Brown, I was assigned the job of working on one of the two PCs in all of JP Morgan in 1982, on the floppy disks, because we were starting to work on interest rate swaps and currency swaps. That was the year they were first executed, 83. I started running these programs to analyze exposures on interest rate swaps and currency swaps. And in fact, I'm proud to say I executed the first interest rate swap ever at JP Morgan in 1983. A couple of years later, one of my predecessors in the capital markets group,

• 8:00Speaker 00

  who had gone to Japan, where we had a small team, came back to New York to resign. And I looked around the room and I realized, oh, my God, they're going to ask me. That first day, when I learned of his departure, I tracked him down in the hallway and I said, make sure they don't ask me. As I thought about it overnight, I came to the exact opposite conclusion. I was 24. I was comfortable in New York, where I grew up, my friends. I had never been to Asia. I needed to get out of my comfort zone and I needed to get international again. I needed to travel the less trodden path. And that meant going to Japan. So they sent me to Japan initially for three months.

• 8:45Speaker 00

  I ended up staying for four years. We built the business over there from the initial four or five people to about 100 people. We had a full franchise, full security subsidiary over there by the time I left. What stage were the Japanese markets in when you were over there? This was a time of internationalization of Japan. This was a bubble time in Japan. Tons of capital, looking for homes, looking for yield. Big, intelligent institutions, maybe not the most sophisticated internationally day to day, but smart, capable people. It was a big business to help them invest their capital in overseas bonds in different currencies.

• 9:31Speaker 00

  They were a big provider of capital to corporates and mostly sovereigns and quasi-sovereigns around the world. It was an exhilarating time. It was also the time where the foreign community really showed up in Japan. It was comfortable there. It was interesting also because Japan itself, even early 80s, mid 80s, it still almost had a post-war feel to it. The architecture was not the gleaming new, the infrastructure, gorgeous highways that you see today. None of that. It was still getting there. Everybody spoke English, but haltingly. It was great fun. Be a bachelor at the age of 24 in Asia on an expat salary in your expat apartment. That's a pretty good gig.

• 10:15Speaker 00

  How did you take what you learned and then repot when you came back? I ended up spending four years in a succession of extensions. I was initially sent for three months. I said, I like it here. This is really interesting. I worked incredibly hard in Japan. Typically arrive at five in the morning, leave around midnight. I would call my old boss, who sat in front of the guy running the group at noon, New York time, just so the guy running the group would hear my old boss say, "What are you doing still working at midnight?" I got about 10 years of experience in four years of work. And that was really formative. I was managing 50 people at the age of 28. I was dealing with large clients with large amounts of money, a big P and L.

• 11:00Speaker 00

  Very few people my age at that time were doing that. And it was because I had gone where nobody else went. So it taught me that opportunity lies where other people aren't. Towards the end, I started noticing that I was just getting, again, a little too comfortable. I started more intentionally looking around for what should I do next? One of the lessons I took from that was to be responsible for my own career path, not just let my boss be the one responsible for my career path. I noticed in early, mid 88, Morgan did the first voluntary loan for debt exchange in emerging markets. It was called the Morgan Mexico Bonds.

• 11:41Speaker 00

  It was a voluntary exchange of loans held by banks into new securities, bonds, whose principal or interest, depending on which choice you took, were then guaranteed by the US Treasury. If it was principal, it was by a zero coupon bond, Treasury just a guarantee. They're called par bonds and discount bonds. You want your interest guaranteed, take the discount. You want your principal guaranteed, take your par bond. When I saw that, the penny dropped, Ted, for the rest of my life, career-wise, which was because I had been trying to figure out, how am I going to manage these two strains of do-good? My dad did good in a lot of ways. My grandfather dedicated his entire life to doing good.

• 12:26Speaker 00

  My mom was a simultaneous interpreter at the UN, in the first class of simultaneous interpreters in the 50s. International ran through and through. But how to combine doing good with doing well? The penny dropped when I read about that deal, that here is something that is clearly good. There is a problem there that needs to be fixed. The problem is a deep problem, which is what we called at the time, LDC finance, less developed country finance. There are many dollars involved. The person who fixes problems with many dollars involved gets paid well and is doing well. JPMorgan should be very well positioned for this because we were one of the biggest

• 13:08Speaker 00

  syndicators of these Latin American loans. So I picked up the phone and called the head of HR. It turned out there was a small group in New York in the bank that was swapping these defaulted loans of various, almost entirely Latin American borrowers amongst mostly banks. This was really portfolio optimization for banks. I'll give you two Brazils, you give me an Ecuador and a Panama. Eight people, they were doing about $800 million worth of volume per year. It was a nascent market. I think we were number three or number four in the world doing that. It was a big step down from running 50 people in Japan, but I grabbed it.

• 13:51Speaker 00

  I brought a capital markets structure mentality to what was a loan swapping, over the counter idea and marketplace. And I brought a different credibility in that my two bosses there knew me and gave me a lot of rope. They let me really aggressively build out the business from this loan swapping business into a proper capital markets, underwriting, sales, trading, research, derivatives, proprietary business. Just as our leadership with that deal led to the Brady Plan, Brady bonds led to the explosion in capital markets in emerging markets.

• 14:32Speaker 00

  It was a beautiful, lucky confluence of events that as the market exploded, I was allowed to build the business as aggressively as I could. And that's exactly what I did.

• 14:43Speaker 02

  So in your years from there through JPMorgan, there's a lot that happens in emerging markets, both the economies and the markets. What did you take away from all of that experience in the various cycles that you saw?

• 14:58Speaker 00

  Two things are the most important, and they're going to sound contradictory. One is you can't ignore the world. And two is you can't ignore what's going on in a given country. There was a long period of time, 2010 to 2024, when what was happening in the world in terms of interest rates and the US dollar was so important that it overwhelmed what was happening in a lot of countries. Prior to that, call it 2002 to 2011, 2010, what was happening in the countries tended to be more important than what was happening in the world. It is this ebb and flow between these cross-currents that is the most important thing to understand.

• 15:42Speaker 00

  When is one prevalent versus the other? That is very relevant because today, what is happening in the country is at least as important as what is happening in the world. And in fact, what is happening in the world is making what is happening in the countries more important. By that, I mean that this phenomenon of the last decade and a half in which capital has so enormously concentrated its flow into the United States at the expense of every other geography, has not reversed itself by any stretch, but has diminished.

• 16:21Speaker 00

  The questions that are arising, particularly in non-dollar-based investment jurisdictions, about where to go invest is absolutely leading people to look at emerging markets much more. At the same time, in emerging markets, you have so many countries, so much variety of where a country is in its cycle. Is it a recovering country? Is it a pretty stable country? Is it an equity-led market this year in that country? Is it an interest rate-led market in that country this year? There are so many combinations within emerging markets. So you have a need to look at it, but then when you look at it,

• 17:02Speaker 00

  this tremendous rainbow of different opportunity sets that you have to judge. A target-rich environment promoted by the fact that US hegemony in terms of being a magnet for capital is over.

• 17:17Speaker 02

  Before we dive into where we are today, what was it after 20 years at JP Morgan that led you to want to start your own firm?

• 17:26Speaker 00

  After building the emerging markets business from 88, when I took it over, it was eight people. By 95, we were 600 people in 15 countries around the world. We were number one in virtually every category of capital markets. My reward for that was I was put on the executive committee of the bank. I was in charge of currency trading and commodity trading. Later, I was co-head of global markets. These were all big jobs. They were operating committee of the bank, executive committee of the bank, possible succession seats. In around 98, 99, we were coming into the dot com revolution. I liked the job I had, co-head of global markets, but the only thing I ever really loved

• 18:11Speaker 00

  was emerging markets. It is the simple truth. At the same time, here comes along this dot com revolution, which seems interesting. When I thought about JP Morgan, I thought about a firm that had fantastic content, fantastic reputation and limited reach because we were such an institutional firm. So couldn't we use dot com to change that equation? So I volunteered again. I said, look, I will give up this fancy seat I have, but let me build our dot com strategy and our fintech accelerator, which I then did. I built something called Lab Morgan. It was a fintech accelerator. I can recite to you my three fantastic successes against my, I cannot remember, the 97 misses we had there.

• 18:55Speaker 00

  And there was when we announced the merger with Chase. Typical corporate merger story. Tons of overlap in emerging markets. We were number one, they were number two. Tons of overlap in dot com. They had chase.com, we had Lab Morgan, et cetera, et cetera, et cetera. Just too much overlap. The management committee went from a dozen people to 50 people. The culture of the firm logically became dominated by the Chase culture, not the JP Morgan culture. So after a year, it was pretty clear, okay, this is not where I'm going to spend the next 10, 20 years. I had said to myself, if I don't make it all the way at JP, I will go back to my first love, which is emerging markets.

• 19:38Speaker 00

  And one of the things I had known about emerging markets is emerging markets is a horizontal activity. I had built it at JP as a horizontal standalone activity. It was not a fixed income subsidiary, not a subsidiary of equities or of anything else. It was its own thing. And I believe that to be the way to attack emerging markets. I knew that in a big organization, which had these big silos, that silo inertia was a threat. Had I left JP to go to XYZ big institution to build the emerging markets business there, buy side or sell side, the silos would be attacking.

• 20:21Speaker 00

  Even if the silos did nothing in emerging markets, they wouldn't give it up. So the only way I was going to be able to do what I love to do the most was to build it from scratch, to dedicate it to emerging markets from scratch, to legislate away anything else, and to go to the buy side instead of the sell side because capital requirements, fewer barriers to entry.

• 20:47Speaker 02

  When you thought about how to build a horizontal emerging markets investment firm, how did you think about strategically positioning, other than knowing that if you were sitting inside of a bank, you might get silos infringing on what you wanted to do?

• 21:01Speaker 00

  There are two ways to build an asset manager. One is you say, look, this is my activity. This is what I do. I'm a value investor. I'm a momentum investor. I'm a quant investor. I'm a this, I'm a that. Those of you who are interested in this, please come and talk to me. The other way is to say, look, I have these investment capabilities. How can I create a solution for you out of those investment capabilities? In a way, that's what the large asset managers do. It's a supermarket. You want a diet version, you want a full calorie version, you want the low carb version, the vegan version, we've got it all. And people poo poo the latter. It's not true investment kind of thing. But if you want to build a big firm that is going to outlast you, I was and remain convinced

• 21:45Speaker 00

  that's what you have to do. I knew I was going to build a solution oriented firm that was going to work over time backwards from what investors told us. I knew we were going to tailor it to institutional investors because I come out of JP Morgan, I know nothing else. I knew the dedication to EM was going to be the big calling card. That was the thesis. Build an infrastructure that institutional investors will be interested in. Start your first fund with enough capabilities so that you can then spin out different parts as different investors talk to you about them. And that's exactly what happened. The only fund we ever launched was the first one. It was called the Global Opportunity Fund.

• 22:29Speaker 00

  We launched it in March of 2003. And it was a kitchen sink, what today you would call the multi-strat. We did some equities, we did some FX, we did some fixed income. We even had a dedicated side pocket to illiquid investing strategies. From there, within four years, we had four new funds based on clients looking at what we were doing and saying, hey, I want the Asia version of what you did. Hey, I see you're doing inflation linked bonds. I want a fund dedicated to that. Hey, I see you're doing special situations. I want a fund dedicated to that. Lo and behold, 2008, plans working perfectly. We were five funds, $3 billion. Three of those funds were absolute return hedge funds.

• 23:14Speaker 00

  Two of them were long only liquid and illiquid product funds in, I don't know, five, six offices around the world. So that's where we were.

• 23:23Speaker 02

  What do you see as some of the challenges in the common ways that investors participate in these markets?

• 23:31Speaker 00

  The first thing is the benchmarks. The world is used to benchmark-based long-only investing. Investors are used to it because it's easy. The allocator has taken most of the decision-making out of your hands. They've told you, "I want you to invest in emerging market equities. I'm going to judge you against this benchmark. You have to be this close to this benchmark. Here's your tracking error allowance." Fantastic. This is the way the world has grown up. In emerging markets, different benchmarks have different problems. Keep in mind that I was responsible for building the first bond benchmark in emerging markets. It was called the Emerging Market Bond Index, MBI. I did that at the time at JP in order to help grow the pie because of this exact point, people needed a benchmark.

• 24:16Speaker 00

  So, okay, let's build a benchmark. Now, if you look at equities, the MSCI Global, Korea, China, India, Brazil, make up 70-plus percent of that index. So you are actually buying a very concentrated exposure, not a very diversified exposure. So that's a problem with the equity indices. Second, in fixed income, if you look at one of the benchmarks, so there are two benchmarks that are the prevalent ones. The MBS, MBI are the hard currency ones. And then GBIEM is the outgrowth of what was called the LME, the Emerging Local Market Index.

• 24:59Speaker 00

  This is the government bond index for local markets in emerging markets. It's local currency-denominated government bonds. What is the problem with that benchmark if you invest in it? There are several. First, it's government bonds. And the fixed income market is much larger than government bonds. Fixed income market writ broadly is swaps forwards, FROs, and government bonds. The non-government bond part of the fixed income market in emerging markets is multiples in size of the bond market. Secondly, when that index is built because it's government bonds, they logically, for each country, pick the part of the curve that is the most liquid part of the curve

• 25:43Speaker 00

  in that country. That is not the same in every country. So you are buying a duration.

• 25:50Speaker 00

  That is all over the place, based on each individual country. Thirdly, it's a dollar-based index. Two-thirds of those government bonds are outside of the dollar zone. They're in the euro zone or the yen zone. If you are buying a Polish zloty government bond, your return is benchmarked against the dollar. A lot of your return is dollar-euro volatility, because Polish zloty trades against the euro. The Korean won trades against the yen and the dollar. The renminbi change trades against its basket. If you don't take that into account, then a lot of what you are investing in, in the Almi,

• 26:35Speaker 00

  is dollar-euro, dollar-yen volatility. So that's a problem. On the hard currency debt side, the corporate bonds in emerging markets is a gigantic category of many small issues, not well-followed. So it makes it tough on an index, because the bid offer is going to be very wide on these things. It's not about the index per se, it's about the underlying market. These are the things that are more particular to emerging markets than they are to developed markets. Obviously, in DM, yes, the S&P is different than the Dow Jones, is different than the Russell, is different than this, different than that. But people are used to it by now. The indices are bigger, they're more diversified. You can still get a huge amount of concentration,

• 27:20Speaker 00

  as we have seen in S&P returns. The result is not necessarily that different, but I believe that understanding the market structure and the benchmark design, these are two things that are important as investors approach emerging markets. And that's why, on the long-only side, benchmark agnostic probably makes more sense. Long-only total return. Some people may say, oh, that's a hedge fund strategy. Some people might get away charging hedge fund fees for that. It's still a long-only strategy. You can have a benchmark of cash, or whatever number you want. It's going to be hard to have a benchmark that is an amalgam of an equity benchmark, plus a local currency debt benchmark, plus a hard currency debt benchmark,

• 28:05Speaker 00

  because then you're dictating behavior. It will be those investors who are smart enough and flexible enough to see that the combination of number of countries, number of underlying markets, number of cycles, does not match up well with certainly monoline investing and that that also does not match up well with benchmark-based investing, who will be able to allocate in such a way as to consistently make money in emerging markets over time.

• 28:39Speaker 02

  Given the flaws that you see in the various benchmarks across the markets, is there a systematic way that you can approach this benchmark agnostic investing that you think just by structure can allow you to outperform over time?

• 28:56Speaker 00

  Yeah, a smart beta, if you will, within asset classes, for sure. Let's take local currency debt because we have done exactly that in the past. I mentioned the flaws. If you say, "My benchmark is the LME, but I am systematically going to overcome the bond problem by allowing myself to invest in swaps, forwards and froths. I am systematically going to get over this uneven duration by drawing a straight line across at the five-year mark, and that's my benchmark because I can always get an interest rate for that, whether it's in the bond market or other market. And I'm going to have a currency overlay of dollar, euro, yen that is logical for the underlying investment.

• 29:39Speaker 00

  You can absolutely build something passive that will get you a higher Sharpe ratio than the underlying index. I have no doubt about that. And I have very little doubt about it, although we haven't done it specifically for the other asset classes. It may have a lower absolute return, to which if you then apply some leverage and a higher Sharpe ratio, you should be fine. But..." If the goal is, I want positive exposure to this asset class at a better sharp ratio than the benchmark, it is 100% doable, I'm convinced, in every single asset class. And then is there a systematic, or at least thoughtful,

• 30:23Speaker 00

  way of thinking about asset class versus asset class? And when do you emphasize one versus the other? The answer, again, is yes. It is much more so yes in a single country than it is globally. There are still decent elements of it at the global level. If you say, I have a smart beta version of equities, a smart beta version of local currency debt, a smart beta version over here, and each of those is better than the benchmark. Now, what do I do about allocating between these three? If it's a very risk-on global environment, I'm going to allocate more to equities. If it's a very risk-off, I'm going to do more over here. Yes, you can think that way. All of that is doable. You have to be

• 31:06Speaker 00

  thoughtful about it, and you have to have a partner who can do it. The fact that EM is a niche and remains a niche, for all the mega investors, investment firms that are out there, emerging markets is an afterthought. I promise you, it is an afterthought. I don't care what they say. And it always will be, because it's small. It's 20% of global market cap, but if you're managing $10 trillion, or $5 trillion, or $15 trillion, I promise you, you're not spending five minutes a day thinking about emerging markets. Emerging markets requires a lot of thought, simple as that.

• 31:45Speaker 02

  Most of the time, when an allocator looks at emerging markets, it does fit into one of their silos. Public equity, there's a piece of it's going to be emerging markets, or a private equity portfolio, some spoke is going to be emerging markets. How did you approach the idea that you initially were going to have everything under one umbrella?

• 32:06Speaker 00

  There were a couple of elements to that. One was stubbornness, unwavering belief in the proposition. I remember going to see an unnamed, very famous

• 32:18Speaker 00

  Endowment manager as I was setting up my company. He was very gracious. He had read my deck. He said, I read the whole thing. I don't believe in it. I don't believe in multiple funds. I don't believe in multiple asset classes. I believe in having asset managers who do one thing and one thing only in their entire life is wrapped up in that one thing. That was the prevailing notion. My reply then remains the same, which was A, fine. B, not great for that manager, actually, to have their life wrapped up in one thing. I would argue it creates a different level of stress that you, the LP, need to take into account here because you, the LP, are diversified, but he's not.

• 33:03Speaker 00

  Mostly, Ted, what happened was I started the business. In the crisis is when the big lesson came along about tilting into long only, for instance, on the public market side, away from hedge funds and total return strategies. Because even though our hedge funds actually did well in the crisis, we were minus five or six on average across three hedge funds in 2008, which was great. What I noticed was all the money that came back into EM after 08 for the first several years came back into long only strategies. You could see it in the flow of funds. The reason it did was perfectly logical, if you thought about it, which was emerging

• 33:45Speaker 00

  market hedge funds typically have a huge long bias. They're less liquid and they have higher fees. That is not logical as an investor. Why am I paying all this extra in terms of liquidity and fee for something that is essentially a long only strategy? The penny dropped at that point that we need to shift tactically into long only. That's when we launched our local currency debt strategies and since then have tilted the public markets business. The second thing that it made me realize was an extension of that first bit of philosophy, give investors what they want. Yes, I want to build something that can invest across all the asset classes.

• 34:27Speaker 00

  Yes, most investors want you to invest in one asset class. So how do you square that circle? You try to do both, but to do both, if you're building a business and if you have to work in this step function of, okay, the business has to pay for itself as we go along here. Then along the way, you have to give people what they want. And so you have to have those single asset, long only capabilities in your skillset. So that you can then deploy them when you find the investors who say, I see the logic in what you think I should do here. Let's give it a shot.

• 35:06Speaker 02

  How do you balance the concept of giving investors what they want with what you described as your historical experience, say, in Japan of going somewhere and doing something that other people aren't doing? So those two things usually don't go together.

• 35:21Speaker 00

  Got to give people what they want, full stop. But if you are good enough at it and you develop enough credibility and you're thoughtful enough and patient enough, then you do have some standing to talk to people about doing these things. Thirdly, to your point about Japan, global leadership in EM asset management is an empty space. There is nobody out there who can answer the question for allocators, big or small. How much should I invest in emerging markets? In what asset class? In what region? In what style? With whom? And when?

• 36:01Speaker 00

  The firm that can answer and execute against that question with quality is going to be a great firm. I am targeting that empty space that nobody today occupies. And Lord knows, we are far from occupying it, but that's the goal.

• 36:23Speaker 02

  After 20 years plus of running TRG, what have you seen that helps you understand why no one else has been able to own that space?

• 36:36Speaker 00

  This issue of single asset class stuff, it really prevails. Let's take a look at it through a private market lens as a way of example. The world has imposed a developed market, private investing construct on emerging markets, which is to say, the vast majority of investment vehicles in emerging markets are mono asset class. It's either private equity, or it's private credit, or it's infrastructure. Many of them are regional or subregional.

• 37:07Speaker 00

  And that is a terrible way to invest in emerging markets. It is a terrible way because the deal flow in emerging markets will not support mono asset class, single country, subregional funds, and therefore, the people who raise that money end up deploying it badly. Layer into that a 15-year bear market on currencies, you end up with a fragmented market full of failing GPs and two small funds competing with the US leveraged private equity industry. So, forget it. Even though you could logically say, no, it should compete with the domestic equity

• 37:51Speaker 00

  markets, there's a logic to that. Private equity in EM has done better than public equity in EM, but nobody cares because the allocation is coming out of a private bucket. It's not coming out of an EM bucket. The industry has shriveled. There is no real global leadership in emerging market private investing. None. It's a terrible thing. How do we fix that? First, you have to recognize that you have to have a global tailwind in any of this stuff. One of the ways we have stayed in business, especially these last 15 years, is by amalgamating other managers under one roof by acquiring other GPs. Because to grow organically, you need a tailwind.

• 38:36Speaker 00

  You just do. Now, we've got a tailwind, so that's the good news. There is definitely more interest in emerging markets today than there has been in quite some time. The appetite for discussion is greater. The fact that last year, EM liquid markets writ large had a great year is forcing people to have an answer to what am I doing in EM this year? This will make the ground fertile for this discussion. Now, let's shift back to public markets for a second. I look at EM equities, they had this huge rally last year. Korea up 80%, MSCI up 30-plus percent.

• 39:14Speaker 00

  Should I really be doing a beta trade now? Moreover, if I look at the emerging market equity index, 72% of it is four countries. So am I really helping myself here? Something similar in fixed income, something similar in local currency debt. The answer to me today is we are at an inflection point because of the death of US exceptionalism. There's no way around it. When the largest economy in the world, the largest country in the world, is behaving the way a lot of us are used to seeing emerging markets behave. It is making it more unpredictable. Let's use the most neutral word we can use, and investors don't like unpredictable.

• 39:56Speaker 00

  So they are starting to look at EM much more closely. You see the flows, and look, the flows are behind the performance, too. It's one of the famous reflexivity argument. If you look at EM public markets today and you say, gee, I would love to have a 5% or 10% allocation there, but gosh, how do I do it? Equities has these flaws, fixed income has these issues. The answer is this horizontal approach, which we did in our hedge fund strategies, but haven't done in full long-only strategies yet. If you look at the top 20, 25 liquid investable emerging market countries, think of each

• 40:34Speaker 00

  of those as a three-body problem: equities, local currency debt, hard currency fixed income. Each of those countries going through its own cycle. Is it a recovery cycle coming out of a crisis? Is it an inflation cycle? Is it a deflation? Where are we in the macroeconomic cycle? That will lead you to one of those three asset classes. If you choose the best asset class in a given year, in a given country, somewhat consistently, and by somewhat consistently, I mean barely over 50% of the time, because the dispersion of returns is so enormous, even within fixed income and local currency debt, when you are right about choosing the upside.

• 41:18Speaker 00

  The combination will lead you to a better long-term absolute returns. If you had done that over the last 15 years over roughly 20 countries, and you were right 60% of the time, in a 15-year bear market for emerging markets, you would have lost money in one year. Because in any given year, if you look at a scatter graph, there are equity markets, local currency debt markets, and hard currency debt markets that are performing. And when they perform, they really perform. So avoid the losers, pick the winners. But you have to be more flexible than any institutional allocator can be.

• 41:59Speaker 02

  How do you resource your team to be able to cover across 20 countries, the three broad asset classes, such that you have enough insight to be able to get that more right than wrong?

• 42:13Speaker 00

  You have to have a lot of experience. We have a pretty deep team. Most everybody has been at it in emerging markets forever. I'm at 37 years and counting here. So it adds up to a lot. At the macro level, in terms of understanding the cycle of a given country, that is not that labor-intensive. Countries are either in an inflation cycle, they're in a recovery cycle. But the macro level, it's doable with not that many people. If your strategy then demands a lot of security selection, then it's labor. The strategies that do demand that have bigger teams, and the strategies that don't, don't.

• 42:53Speaker 02

  When you're cross-fertilizing into a product that allows you to be flexible, how do you think about both the decision-making and the incentives of the team so that together you can make good decisions?

• 43:06Speaker 00

  All for one and one for all. Every fund needs a manager. It's not a committee. You can have a committee, but there has to be one person who decides. That's the all for one. The one for all is everybody shares in a result to a certain extent, no matter their contribution to the result. You want somebody who is a Latin American equity expert to feel good about saying, I think Asia looks like a much better bet than my region. It's a combination of those two things.

• 43:38Speaker 02

  So in markets that are known for having so much volatility, how do you think about the process of risk management?

• 43:45Speaker 00

  One way to think about it is taking this developed market, emerging market economy. In developed markets, you would say, what's my value or risk? What's one standard deviation, two standard deviations, blah, blah, blah. In emerging markets, it is more important to say, if 1998 had happened right now, what would it be? If 2008 had happened right now, what would it be? Scenario analysis is much more important than standard deviations because in many of those scenarios, it was a six standard deviation event. I still remember in my time at JP Morgan, I was in charge of commodities. So there was a commodity crash at some point. I was probably 36 years old. They asked me to come to the board to explain what happened.

• 44:29Speaker 00

  I'm sitting across from Marty Feldstein. That was already a mistake. I then tried to sound smart by saying, well, this was a six sigma event that happened in these markets. And Marty Feldstein, without missing a beat, says, so Nick, we shouldn't expect this in the next 10,000 days, right? Of course, there was another crisis like that a year later. Scenario analysis is more important than the standard deviation stuff. Number one. Number two, on public markets, the most important thing from a risk management point of view is to have a currency capability because currency liquidity almost never goes away in emerging markets. You may have an equity portfolio that is hard to liquidate. You may have a loan portfolio that is hard to liquidate.

• 45:13Speaker 00

  You may have a private equity portfolio that you can't liquidate. An example at JP, there was a Brazil crisis. They had also put me in charge of the loan portfolio of the bank, at least in emerging markets. We had a big Brazil loan exposure, but I hedged it all against the currency in the crash. And it saved us a ton of money because you could trade a billion dollars' worth of EMFX of that currency at the time. Understanding that there is one risk management instrument that is more or less always liquid and always tradable, and having expertise to use that instrument is really important. This is why you put a monoline private equity guy out there in Mexico who just knows how

• 45:58Speaker 00

  to do private equity, then has no clue about currency forwards, currency options, currency swaps. You're going to have a big problem. The biggest thing is there.

• 46:08Speaker 02

  You mentioned a bunch of acquisitions. How have you built up the capabilities across acquisitions?

• 46:14Speaker 00

  What occurred to me after the crisis was that the other big change in the market, aside from this long-only bent, was the degree of favor that allocators were going to give to large managers relative to small managers. If you looked at the amount of money allocated to hedge funds post the crisis, for the next three, four years, 95% of the dollars allocated to hedge funds globally went to hedge funds with more than $5 billion. Imagine that at the time, we're talking about early 2010, how many hedge funds had more than $5 billion? Maybe 100 out of 10,000. 1%.

• 46:55Speaker 00

  1% of the population getting 95% of the dollars, 99% of the population fighting for the crumbs. Scale mattered. The notion of, oh, I'm going to start something the old-fashioned way. I'll hire a team that does X, Y, Z. I tried it in Africa, for instance. Hire four people, spend two years trying to raise money. You raise some money, but it's conditional on other money. It wasn't going to work after the crisis. Again, the penny dropped. Gee, if I look at acquiring another GP, I can diligence them, I can diligence their track record, I can get to know the people. They're probably break even or better. And I'm going to capture the LP relationships, which was also very important.

• 47:39Speaker 00

  Building respectful collegial partnerships with LPs is really hard, harder than investing. Taking on firms who have already done that work, who already have those relationships, and trying to make those additive to our relationships, looked like a good idea. I started in 2010 dipping my toe a little bit. 2011, same thing, taking, in one case, a 50% stake, in the other case, a 60% stake in other managers. I knew from past experience at JP, the pluses and minuses of building joint ventures, minority stakes, majority stakes, but I wanted to try. I learned a lot from both of those experiments, neither of which have lasted to this day, I should say.

• 48:21Speaker 00

  The big change was when Citigroup approached us in 2013. This is now post Dodd-Frank, post Volcker bill. All the banks are getting rid of their private equity groups because the capital treatment was too severe. They had a emerging market private equity business called CVCI. It was a big business, $4.3 billion under management, six offices around the world, I think 75 investments out of four funds, and they couldn't support it anymore. They didn't, for their own reasons, want to just let it spin out. They wanted it to find a home. And they called and we worked out a deal. That launched us on this path. Two or three things came out of it. The first thing that jumped out at me,

• 49:07Speaker 00

  literally within days of announcing this deal, was the secondary market. We started getting calls from Coller Capital, Lexington, you name it, people I didn't know existed. Silly me, I hadn't followed that end of the business, that, oh my gosh, there is this enormous marketplace, which has real implications for our industry. The arrival and the importance of the secondary market hit me then, and since then, we've actually done about 10 secondary market transactions. The second thing was the culture thing. Citigroup has a distinct culture. Private equity firms within banks have a distinct culture, as I have learned.

• 49:48Speaker 00

  I was so eager to get this thing done that I was in sales mode. And now everybody's there. And now you got to deal with the culture issues. And the culture issues are, what did that group look like? And how was it managed? And what did Citigroup do with that group? That was painful. That took a long time to digest. It ended up as a transformative moment in our history. I'm very happy I did it. It made us a global private equity firm. And from there, it allowed us to do other things. To give you a related example, one of the lessons learned on these acquisitions, many years later, 2017, 2018, comes JP Morgan. And they've got an infrastructure private equity business in India.

• 50:33Speaker 00

  For their own reasons, they can't support anymore. And they're looking for a home. I already had a team in India, thanks to the Citigroup transaction. That allowed me to do that deal of absorbing, at the time, it was about $800 million in assets. But under a completely different rubric, which was, "Look, I already have a team here. You guys are going to report to these guys. If you can't accept that, you can't accept it." In both cases, I would say these were arranged marriages. The GP was not a GP, the way you think of it. They were employees of a bank, structured as managing a GP. They had no leverage in that sense. I was negotiating with the bank more than with the team. We've done a bunch of arranged marriages.

• 51:17Speaker 00

  And in those, my conclusion is, you have to have the structure to oversee them, and you have to be very unbending about who's in charge. Then you have deals where they don't need to do the deal, and where you're negotiating with the team. That's a love match kind of thing. There you have to see eye to eye. The cultures need to fit and you really need to think it through. And it's a different exercise. I try to be clear eyed about what's the nature of this discussion? Number one. And number two, what are the basic principles on which we're not willing to compromise? There are not that many. One is it's one platform.

• 51:59Speaker 00

  So all the risk management, all the finance, all the ops, all the business development, all of that is one firm. Second is investment, team and process augmentation, not replacement. In any of these, all the LPs have to sign up. And LPs generally don't want you to sign up saying, look, I'm going to change everything here. You won't recognize the signature at the bottom of that newsletter. They have generally signed up with that team. So you have to be able to say hand on heart, we are gonna augment, we'll put in a risk manager, we'll put in a macro guy for an equity team. We're not going to replace, generally speaking. This team is gonna cross fertilize to the rest of the firm also. They'll learn other stuff.

• 52:43Speaker 00

  That's the methodology there.

• 52:45Speaker 02

  What other types of transactions, as you started to look more about bringing in capabilities, did you find in the marketplace?

• 52:52Speaker 00

  One is not GP acquisitions, but GP replacements. There are situations, certainly on the private market side, where they can't get their money out. There are situations where a group of investors in a fund have a sufficiently large position in the fund to be able to affect a change in manager. We have done that at least twice, where a group of investors has come to us and said, we don't like this GP. It may be their fault, it may not be their fault, we're not happy. We're getting rid of them. Will you step in and manage out these assets? That is a perfectly fine business proposition. Sometimes I say, you can be in the rehab business or in the hospice business.

• 53:36Speaker 00

  Both are good businesses if you do them right. You have to understand which one you're in. Sometimes you take on a fund, whether it's GP acquisition or GP replacement, with the notion of, oh, I like these capabilities, it just needs to be tweaked a little bit. Within this group, I like these three guys or these three people. So let's build something around them. The Citigroup London team we built a business around as an example. In others, it's we're not taking any of these people. We're going to manage out the assets. That's what you're paying us for. We have a contract for it. We're not under any illusions that there's anything else after that. Our job is to help you out with this.

• 54:13Speaker 02

  As you look today at what you've done since the financial crisis, how many different acquisitions have you done in total?

• 54:21Speaker 00

  We have done around 10 or 11 in total, of which seven are still part of the business today in one form or another. The most recent one you would have read about was in Africa. Two and a half years ago, we took over a business there called Ethos Capital Partners. Very good group of people. I had known them for a long time. It's a love match. Put every effort into growing that business. It was about a $1.6 billion business, one of only half a dozen surviving scale GPs in Africa. Tried four or five different ways of growing the business. Just couldn't get it done. Nobody's particular fault. I wouldn't point a finger.

• 55:03Speaker 00

  Africa is a tough market for raising money. It's dominated by the development finance institutions, IFC, EBRD, who are particular in the kind of managers and kind of funds they want to back. That's a different chapter entirely. Our typical commercial LPs were not that interested in Africa. So we couldn't get it done. Ultimately, rather than shrink the business to die, the partners there decided to take it back, which we thought was best for the LPs and best for the business. And obviously, if they thought it, best for them. So that's what happened.

• 55:44Speaker 00

  But others mostly, if it wasn't clearly an unwind, have stayed with the firm.

• 55:50Speaker 02

  I'd love to hear about what you've learned about integrating all of these in the cohesive team across sharing information, culture, data, all that kind of stuff.

• 56:03Speaker 00

  Yeah. The first thing is we're consistent in saying what we're trying to build. Nobody can say that they didn't know what they were getting into. I promise you that. Secondly, I don't manage any of the money at TRG. Other people do, PMs, partners. That's a strength because it shows distributed responsibility from day one. Thirdly, the way we run the firm is very collegial. I have an ex go of seven people. We're on the phone formally two to three times a week. We've never had a vote on anything in 23 years. We come to conclusions that we buy into.

• 56:45Speaker 00

  Thirdly, I have distributed equity widely throughout the firm. More than half the firm today has equity in one form or another in the firm. That consistency of message, collegial execution and distributed incentives. I wouldn't say it's been the secret sauce. It's just the way we built the business.

• 57:06Speaker 02

  You mentioned earlier the importance and some of the strategies about having a tailwind behind you. There are lots of cycles in emerging markets. How have you experienced the ability to manage both assets and the team through some of the cycles? Both expected and unexpected.

• 57:23Speaker 00

  We were trying to build from the beginning, but I didn't fully appreciate the importance of diversifying the business itself. That the way to survive the cycles is diversification. Diversification in asset class, diversification in region, diversification in investment style. Some things are going to work in some years and some things are not. If you are a monoline, mid-sized emerging market manager, public or private, it is not a question of are you going out of business? It's a question of when are you going out of business? Because of the question you asked, the cycles unpredictable and violent.

• 58:05Speaker 00

  If you tie yourself to one thing, I'm an equity guy, I'm a LatAm guy, I'm a this person, I'm that person. And you only get to the scale that that thing allows you to get to because it's a niche market after all. You're going out of business. I'm sorry, it's terrible and it's terrifying. This diversification in terms of growing the business by region, by asset class, but also by money raising technique. Continuation vehicles, GP-led secondaries, GP replacements. You have to have this diversification approach, acquiring clients rather than cultivating clients.

• 58:45Speaker 00

  That's the only way to survive in a market with these characteristics.

• 58:51Speaker 02

  What's the breadth of capabilities you have today?

• 58:54Speaker 00

  Today, you should think of us as having three lines of business. We have a public markets line of business, private markets, and a forestry and agriculture business. In public markets, we are solely in listed equities, although we have a very strong background in fixed income as well. We have managed local currency debt strategies, we have managed FX strategies, and we have managed inflation-linked bond strategies in emerging markets. Today, we manage long-only equities in three single countries around the world, Turkey, Mexico, and Thailand. Our fourth invests in non-brick EM countries, so mid-sized emerging market countries and

• 59:35Speaker 00

  frontier, very concentrated, 20 to 30 investments at a time. Our growth is to get up and running something we've been paper trading for a while now, which is a multi-asset class EM long-only strategy. That is the one-stop approach for emerging market investing. We also are working on a couple of other strategies. One is a carry strategy, one is an equity-long-short strategy. On the private market side, we invest in private credit, private equity, infrastructure, and renewables. Our biggest presence is in Latin America, where we have multiple offices. And Latin America is obviously important to this administration, so I think there will

• 1:00:20Speaker 00

  be a lot of strategic capital looking at Latin America right now, for which I think we are well-positioned. We have a business in Central and Eastern Europe, run out of London, but it's basically a Baltics and Central and Eastern Europe business that invests in private equity solely, emerging market cost-based businesses that expand into developed markets. You buy a business in Romania, Bulgaria, what have you, then you expand it into Western Europe. We have a business in India as well that is managing mostly infrastructure and renewables. That's the private investing business. The last piece, which was an acquisition from GMO in Boston eight years ago, is a forestry and agriculture business.

• 1:01:03Speaker 00

  This is our only business that deviates a little bit from my EM orthodoxy. It's one-third emerging markets in Latin America, two-thirds US plus Australia and New Zealand. We have in the firm about 85, 90 people today, half of whom are investment professionals around the world, and we work for 250 roughly institutional investors.

• 1:01:26Speaker 02

  Where do you have your eyes open on the next wave of potential acquisitions?

• 1:01:32Speaker 00

  For each of these lines of business, we have a map. Last year, we talked to 120, 130 GPs, probably two-thirds potential love matches, one-third arranged marriages, and it's everywhere. Yes, we have to be strategic about it. So where would I like to do something? I'd love to do something in fixed income that got us to scale right away. That would be great. I would love to do more in Southeast Asia. That would be great. I would love maybe a gems, large market, EM equity strategy. That would be great. There are priorities, and we have a strategic framework for scoring things. At the end of the day, it all ends up with who shows up that wants to do a deal.

• 1:02:14Speaker 00

  Today, for instance, in forestry and agriculture, it's more agriculture managers as opposed to forestry managers who are interested for reasons pertaining to that marketplace. Elsewhere, fixed income is hard to find. Equities, there's a lot of different flavors that can be complementary. Private investing, private credit, obviously, would be the big thing. To me, the eyes-open stuff is also a lot about Latin America. You may agree with the reasons, you may disagree with the reasons, but it certainly is a region that is relatively diverse without being too diverse. One of the arguments about Africa is it's too diverse, 54 countries. Latin America, really more like a dozen that count. It's got a bit of everything.

• 1:02:58Speaker 00

  It's got energy, it's got natural resources, it's got critical minerals, it's got Brazil at the heart of it, which is a big economy. It's got Mexico for nearshoring. It's got a lot, and it has this overarching narrative of...

• 1:03:15Speaker 00

  The American strategic interest in the region. I think investors are going to pay a lot of attention to that. It is an opportunity-rich environment across the board.

• 1:03:26Speaker 02

  How does that enhanced American strategic interest impact how you think about investment opportunities?

• 1:03:33Speaker 00

  Somebody said to me today, gee, if this all works out, it's going to be a great investment opportunity and a great business opportunity, to which the answer is yes. The if is the relevant word here. If you can invest from this level in a country that has the resources and the scale and the proximity and the strategic importance that Venezuela has. And if you can invest at scale at these levels and then have a relatively straight-line macro improvement to the point where it looks like Chile or Mexico 10 years from now, you're going to be really rich. Lots and lots of ifs along the way. First of all, you can't invest right now.

• 1:04:17Speaker 00

  Although, there is money for everything. There will be adventurers who will try to invest right now. I have no doubt about that. They're not going to be the biggest institutional investors around the world. They're going to be family offices, locals, or exiles with money, and development finance institutions and sovereigns doing it for strategic reasons. That's the group that will go in today. Commercial institutional investors, no way will they be in today. If things get better along the way, if the new regime, whatever it is, reinstitutes various institutional frameworks, rule of law, central bank, treasury, constitution,

• 1:04:59Speaker 00

  it's a long list, then it's a great opportunity. By the way, Argentina is a great opportunity, too. And they're well ahead of where Venezuela is. Beyond that, I'm going to be focused on, hey, what can we do in Mexico? What can we do in Argentina? What can we do in private credit in the region? What can we do in energy in the region? There's a lot that can be done right now.

• 1:05:23Speaker 02

  When a lot of people think about investing in emerging markets over the last 10 or 20 years, the biggest opportunity and then maybe biggest risk has been China. Somehow, we haven't spoken at all about your thoughts on China. So I'd love to hear how you think about China and integrating that into your investment program.

• 1:05:40Speaker 00

  We have never been China experts for a couple of reasons. It is a highly competed marketplace. This statistic in the US, there are more private equity firms than McDonald's. There's something like that in China. There's at least 10,000 private equity firms in China. For a long time, everybody owned equity in China. Everybody knows the story about the equity returns in China over the last 20 years and that it's the cautionary tale for GD pre-growth does not equal equity returns. I don't have a particular insight on the Chinese market. What I have observed is for a period of time, it became the other magnet for capital and it was the other problem for the rest of emerging markets.

• 1:06:24Speaker 00

  Emerging markets for a long time, until five years ago, was competing with two magnets. Outside of EM, it was the US. Inside of EM, it was China. There was a period of time where of all the private money being invested in emerging markets around the world, 90% of that money went to Asia, of which 90% went to China. This concentration, 81% of all private investing money in emerging markets flowed to one country for year after year after year. That is no longer the case. And it is no longer the case for the reasons we all know in terms of a turnaround in policy that made it unpredictable about five, six years ago.

• 1:07:05Speaker 00

  By the way, big echo of the United States in 2025. Since then, China went from the darling to uninvestable to today, it's a trade, it's not an investment. I will say, you should not ignore China in general, but it is also an abject lesson in the need for diversification and the fact that institutional allocators.

• 1:07:31Speaker 00

  Who allocate to a given country are also asking for trouble because the cycles are so tough. So if you say, "Well, I'm just going to invest in China and India because these are the largest economies," it's a mistake because it's not your job to support large economies, it's your job to make money. Putting that many eggs in so few baskets doesn't make sense anymore.

• 1:07:54Speaker 02

  How do you think about incorporating FX foreign exchange across the world into your investing?

• 1:08:02Speaker 00

  In a number of different ways is the short answer. First of all, on the private investing side, there are absolutely industries that are FX depreciation, positive return industries. That is to say, their earnings are in dollars, their expenses are in local currency. Think about any export industry in emerging markets. You look for the things that are, by definition, unexposed or positively exposed to the depreciation, recognizing that now you've got to think the other way, too. Secondly, if you have a fixed income capability next to, let's say, your private equity capability, and they're not in silos that are in different buildings of a mammoth asset manager, then

• 1:08:46Speaker 00

  your private equity people should be able to talk to your currency and macro people and say, "What do I do about this currency risk?" There is always something you can do about currency risk. There are currency options, there are currency forwards, there are... Everything comes with costs, but this is where I say that having everything under one roof is far superior if they are incented and cultured to work together. Because if you have a good FX person next to a good, even public market equity person, both of those will generate better returns for sitting next to each other. Similarly, on the private investing side, it's not just about currencies, but about sourcing. If you have somebody who can source private equity in a given country, they should be able to suss out the good private credit opportunities as well.

• 1:09:31Speaker 00

  So you have all of these return synergies if you build an integrated firm in emerging markets. There aren't that many people who are trying to do it.

• 1:09:40Speaker 02

  How do you manage sitting next to each other when you have offices around the world in different time zones?

• 1:09:45Speaker 00

  I've done it for so long now, Ted. It's been since 1988. To me, it's very second nature. Back then, it was called the squawk box, the push to talk. Now it's teams, what have you. So people are talking to each other all day, every day. And then as many get togethers as possible in person. So we know each other in person, sometimes harder to do than others, and lots of travel. Luckily, I like the travel. I typically travel 10 days a month. It's one of the things that drew me to this industry. Learning about these countries, these cultures, the language, the music, the art in these different places is great. I have friends in all of these countries by now.

• 1:10:29Speaker 00

  Everywhere I travel, I can have a social dinner. I've gotten to know a lot of finance minister types and then business leader types in these countries. It's endlessly interesting.

• 1:10:39Speaker 02

  As you travel around and engage in all these markets, what are some of the things that you've come to believe that are different from how you think most people view both the countries and investing in the markets?

• 1:10:54Speaker 00

  I think that people inaccurately in holding, let's say, the US as the benchmark for rule of law, for sanctity of contract, for this, for that, unfairly denigrate a lot of these other places because there are rules in all of these places. There are laws in all of these places. There are contracts in all of these places. The process may be different. The importance of relationships may be more important than the existence of a contract and a precedent, but you can figure out how to do business in any of these countries. If you take the time to understand the country and the culture and the people,

• 1:11:36Speaker 00

  and to have a local presence in these countries, which is really important. I've had so many people in my time at JP and since, who say, you know, emerging markets has this giggle factor. Oh, we don't understand it. It's crazy. That president is crazy. This thing is crazy. Nothing is crazy. Everything is understandable. Just as things are never as good as they seem, nor are things ever as bad as they seem. This notion that people have, and it's a global notion, of extrapolating from the present in a straight line, is just as wrong in developed markets as it is in emerging markets.

• 1:12:14Speaker 02

  As you feel this tailwind potentially starting to push, what opportunities are you most excited about?

• 1:12:21Speaker 00

  The developing a multi-asset class approach in both private and public markets is the key to unlock large pools of capital coming to emerging markets. I really believe that. Because I don't think we will end up with large pools of capital in traditional strategies sufficient to make a difference, either to the investors or to the countries involved. Let's spend a minute on the private market side on this, Ted. As I mentioned, the market for private investing, super fragmented, lots of small managers, very little ability for your typical sovereign wealth fund, large state pension fund, Canadian pension fund, to deploy hundreds of millions, let alone billions of dollars,

• 1:13:04Speaker 00

  into these countries which need hundreds of billions of dollars. The solution is to do so in a structure that allows deployment into all of the private asset classes to the extent possible, across as many countries as possible. In other words, diversification on two dimensions. A lot of private credit, plus some private equity, plus some secondary private equity, plus some infrastructure, plus some renewables, let's say, for starters. If you have real estate capabilities, fantastic. If you have venture capital capabilities, even better. There is a core that is those first three or four items where if you have the ability

• 1:13:49Speaker 00

  to deploy, you can deploy very large amounts. And if you are empowered to do that over at least an entire continent, if not all of EM, that's when you get to something that can make a difference. Nobody's got that. Nobody has the strategy nor the scale yet. That's where I'm trying to get to. This methodology exists in spades in developed markets on the public market side. I think the biggest multi-asset class fund in public markets is the $100 billion fund. The biggest one in emerging markets is $800 million. There are only five that I can find. In private markets, you're starting to see multi-asset class in developed markets.

• 1:14:33Speaker 00

  You have not seen it yet in emerging markets at all. My ardent hope around this moment, which I do think is a real inflection point for EM that can last quite some time, is that we as an industry, not just me, TRG, will involve in such a way that we can offer these kind of solutions to investors. Keep in mind, one thing I didn't touch on, Ted. My motivation here is, yes, of course, I want to build a big business, but the do-good part is definitely still there. At JP, I was the founder and first chairman for five years of the Emerging Market Traders Association.

• 1:15:13Speaker 00

  We brought transparency, code of conduct, standardized documentation, all of that stuff to the markets. The trade association was absolutely central in growing the pie that was emerging markets trading. Here, on the private market side, I've been the chairman of the Global Private Capital Association, which used to be called Emerging Market Private Equity Association, same thing. My two professional goals in life are build a great business and help the pie grow for emerging markets, for the recipients and for the investors. Being able to do that and hopefully saying that I had something to do with that is a very gratifying thing.

• 1:15:53Speaker 02

  Well, Nick, on that, I want to make sure I get a chance to ask you a couple of fun closing questions.

• 1:15:56Speaker 00

  Yes, fire away.

• 1:15:58Speaker 02

  What is your favorite hobby or activity outside of work and family?

• 1:16:02Speaker 00

  Cycling. I've become an avid cyclist. It started when I was a kid, originally European, cycling in Europe, Tour de France. I was crazy for that. Then I dropped it when I went over to Japan, not a good place to ride a bike, in Tokyo, and picked it up again when I came back. I absolutely love going bike riding outdoors, road biking almost exclusively. I love that it's a social sport. I love that it clears my head. I feel that it chemically alters my brain for an entire day if I have a good bike ride. Of course, if I wanted to stretch the analogy into emerging markets and what I do, I would say there's a lot

• 1:16:46Speaker 00

  of risk management there and all that kind of stuff. I have ridden in emerging markets, ridden in Africa. I haven't ridden yet in South America in a big way, but it is something I absolutely love to do. And I do it, say, 100 to 200 miles a week normally. I get into Central Park early in the morning. It's a great sport. I have three grown children, 20, 23, and 26. My wife has a thriving art business. She's an art dealer here in New York. I told you I was going to give a plug for my younger brother's movie called Drop Dead City, about the New York City fiscal crisis of 1975, which people can find on Amazon. My wife's gallery is called Salon 94, but that's really it.

• 1:17:29Speaker 02

  What was your first paid job and what did you learn from it?

• 1:17:33Speaker 00

  The first paid job by somebody not related to me was as a busboy for two summers in a row, once at a place called The Box Tree in Westchester, and once in France in a hotel called the Concorde de la Faye. That taught me a ton about

• 1:17:50Speaker 00

  Hard work, discipline, collegiality, the fact that there's value in everybody. A couple of times I whined about stuff and I got shot down. That taught me something, too. I loved those experiences. They were great, great experiences. Then I ended up at Unilever as a summer intern. Little did I know that what I did all summer, I literally did not realize this until a couple of years later, was that I was quoting FX forwards to all of their subsidiaries. I didn't know that's what I was doing. I was writing down numbers that the banks sent me every day. And then when the Dutch subsidiary or the French, I would take, well, these are the numbers. I didn't know they were forward foreign exchange points.

• 1:18:33Speaker 00

  But being a waiter, the other thing it taught me was I can stack four plates on one arm. Nick, which two people had the biggest impact on your professional life? One was Dennis Weatherstone. Dennis Weatherstone was the CEO of JP Morgan after Lou Preston. He's British. Started as a teenager in the trading room, sweeping the floor, literally, and grew to be the CEO of JP Morgan. Sir Dennis Weatherstone, diminutive fellow, soft-spoken, always calm, and a gentleman. He grew up on the trading side of the house. To say that for people who grew up on the trading side of the house is saying something. I love that fact about him.

• 1:19:17Speaker 00

  The second was a fellow named Ernie Stern. Ernie was a concentration camp survivor who came to the US, ended up as the vice president of the World Bank, and for a time, the acting president of the World Bank. The World Bank is one of these places that has one vice president. And Ernie was a legend, an absolute legend at the World Bank. The World Bank would typically have- Political presidents, but Ernie was the constant. He was absolutely revered. When Lou Preston went to run the World Bank in 1995, Ernie, in turn, came to JP Morgan and became, not my boss directly, but he became the vice chairman of JP Morgan, in

• 1:20:01Speaker 00

  charge, basically, to look after emerging markets. I spent a lot of time with Ernie Stern. Ernie was a great man. Whatever you said, if he agreed with you, he would say, "You're absolutely right." Just like that. To have a great man deal with you like that, to me, was incredible. The humility, the accessibility, the straightforwardness was amazing. This is a guy who brought China into the World Bank. He did it. A guy who Stanley Fisher worked for him. Man Mo and Singh worked for him. These are the caliber of people, and that he would spend a minute with me, I always

• 1:20:46Speaker 00

  kick myself. So, those are the ones that I remember the most.

• 1:20:50Speaker 02

  And Nick, last one. If the next five years are a chapter in your life, what's that chapter about?

• 1:20:55Speaker 00

  I would say achievement and happiness, hopefully. Maybe those are two different things. Getting my firm to where it does make a big difference, because it's bigger. It's one of the things that, maybe it's a truism in many businesses, people don't always think of it in ours, but I think we will do much better the bigger we get. The bigger we get, the more good we will do. This is the flywheel I am after, and we are at a scale and a set of capabilities and at a moment in time that augur well for that, but we still have a gigantic execution challenge ahead of us.

• 1:21:34Speaker 00

  If five years from now, my firm is a $50, $100, $150 billion asset manager in emerging markets, that would be very gratifying. Secondly, all of the components of wellness and happiness and truly multi-dimensional satisfying life would be important.

• 1:21:55Speaker 02

  Nick, thanks so much for sharing the wisdom from so many decades of experience in emerging markets.

• 1:22:01Speaker 00

  Well, it's been a pleasure.

• 1:22:02Ted Seides?

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• 1:22:27Speaker 03

  All opinions expressed by Ted and podcast guests are solely their own opinions and do not reflect the opinion of capital allocators or their firms. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of capital allocators or podcast guests may maintain positions in securities discussed on this podcast.