Editor’s Letter – October 2008

The most extraordinary events we've ever seen

The credit crunch may ultimately be remembered as the moment when the centre of financial gravity started to shift.

As we put the finishing touches to this edition of PEI Asia in mid-September, the world was digesting the latest round of horror news from Wall Street. Lehman Brothers bankrupt, Merrill Lynch preparing for a fire sale, AIG seeking a $40 billion lifeline, and all of it going on just days after the rescue of America’s two largest mortgage lenders – breathtaking stuff for sure, and yet another reminder that this financial crisis has some rather special qualities, to put it mildly.

“My goodness. I’ve been in the business 35 years, and these are the most extraordinary events I’ve ever seen,” Blackstone co-founder Pete Peterson told the New York Times on 14 September. So spectacular is the fallout in Western markets at the moment that it is difficult to resist that old thought experiment, however clichéd it may be: imagine you’d just returned to Planet Finance after a 12-month sabbatical in Outer Space. Walking straight into the proverbial ruins of Wall Street without anyone telling you in advance what to expect would be quite an experience.

It is not possible to say with any certainty yet what the long-term consequences of the mess will be. But it is a certainty that once calm is restored, the world’s financial system will look different. The credit crunch may ultimately be remembered as the moment when the centre of financial gravity started to shift east. Asia has been on the rise economically for years; now it looks poised to play a more central role in the global financial order, too.

The fact that any rescue of Lehman Brothers, had it come to pass, wouldn’t have worked without large helpings of capital from some Asian institutions says it all. More broadly, the current state of world financial affairs can be summed up thus: Western capital reserves are depleted. Asia has liquidity and has already demonstrated a willingness to use it strategically – and in so doing, to take risks. The potential rewards are enormous, both in terms of wealth and power. Suffice it to say that in a few years’ time, comparing the world’s financial infrastructure to where we were before the crisis started will be a fascinating exercise.

Until then, it won’t be plain sailing for anyone anywhere, and Asia is no exception. On 15 September, news of Lehman’s failure sent Asian stock markets tumbling – including India’s, which had been in a tail spin for much of the year already. Falling share prices in this still rapidly growing country are bad news for many people, and private equity practitioners are no exception. In our cover story starting on p. 23, Siddarth Poddarth considers the implications.

His assessment is that in the short term, there are many challenges facing the industry in India. But in the long term, as private equity continues its evolution in one of the world’s most dynamic economies, prospects remain encouraging. The same could be said about the whole of Asia.

Enjoy the issue,

Philip Borel