What differentiates AIG Investments' approach to the emerging markets from the increasing ranks of your competitors?
Yeung: We've been doing this for a very long time.We have teams on the ground, because private equity in emerging markets is very much a local business. We are extremely conscious of the local trends and the types of business models and deals that we would want to execute. For example, Russia has had pretty robust economic growth due to the oil revenues, so there is a huge pent-up demand in the consumer retail space, which is underserved.We have invested in an automotive retail company, which is actually the largest in Russia, in order to capture that growth. In addition to that, there are many opportunities for growth in the oil and gas sector. But, especially in Russia the oil and gas sector is considered to be quite sensitive, so in order to capture that growth you have to be very careful in terms of your approach and how you position yourself. We are actually investing in oil fuel service companies, which is a means of bypassing the sensitivities of the Government but also capturing the growth of the economy.
As for China, China is the factory of the world; it exports a lot globally. With the US economy slowing down, people have to worry about how a drop in demand may affect some Chinese companies. But we recognize that the country also has very robust domestic market demand. So we have invested in an automotive company which does not focus on exporting automotives, because if they did they would be competing on a global basis with other manufacturers. Instead, they focus on manufacturing automotives for the domestic market, as well as exporting to other developing countries like Africa. That strategy actually bypasses some of the potential problems that you might encounter from a slowdown in the US market, and also allows us to avoid exposure to head-on competition with more sophisticated or more expensive models of those cars.
In India and China there is a huge shortage of power, and nuclear plants are coming back into fashion because of better technology and improved waste disposal methods. At the same time India is becoming a global leader in many of the engineering as well as services businesses, so we invested in a company that focuses on nuclear engineering services. This company capitalises on pent-up demand for nuclear plant design and nuclear engineers, as well as building on the global competitive position of the Indian engineering industry.
And then Latin America has a natural competitive position in agriculture and land assets. One of the deals we did there was to acquire 100 percent of a company that is converting unproductive farmland into productive land. Food is getting expensive and agricultural land is increasingly in demand, so the investment had a lot of upside for us.We listed the company in July of last year, only six months after our initial investment, at two times our entry valuation.
How have conditions in the US and Europe changed what you do in the emerging markets?
Thompson: We've been very consistent in our presence and our investments in various emerging markets for a very long time, as seen in our strong capabilities, track records and reputation. In that way, we certainly continue to emphasise these markets. They stand on their own and they're less correlated than they have been. The difference perhaps is that the contrasts have become more striking over the last six months or so. Clearly if one looks at AIG Investments' capital flows into or out of the private equity opportunities in emerging markets, they have traditionally been dwarfed by developed markets activities, both on the fundraising side and on the capital fundraising side. That's slowed down a lot in the second half of '07 as a result of changes in liquidity and credit conditions. So mathematically, while it may look like the amount of investing activity over the last several months has been greater in the emerging markets, it's really just because of slowdowns in capital deployment elsewhere. It does not represent an acceleration per se of our activities in the emerging markets, because our activities have always been very continuous and deliberate.
Yeung: We are very conscious of what's happening in the US market, in terms of the subprime issue, and in terms of some of the leverage and credit issues, and we believe that we have to keep a close eye on it. We are still very much students of globalisation; we believe all these markets are connected in certain ways. Our investment in the Chinese automotive company that is not focused on exporting to the US is one example. In terms of credit market conditions, the credit markets in most of the emerging markets we invest in have never really developed to the point where there has been overuse of leverage. We never had a “party” in these markets, so we do not have a “hangover” now. So while the US market is having some difficulties, in many of these markets we continue to focus on putting capital to work, in many cases without using leverage.
“In terms of credit market conditions, the credit markets in most of the emerging markets we invest in have never really developed to the point where there has been overuse of leverage.”
What is your current outlook for Asia?
Yeung: In the last ten years, there has been a lot of volatility: you have the Asian currency crisis, you have the internet bubble, you have the telecom meltdown, and then you have SARS and so on. But since 2000, Asian countries actually have become much more disciplined in managing their economies, and much more conscious of the downside of having too much leverage. The other important thing is that they have used their capital to make a lot of investments, especially in China, in infrastructure, manufacturing facilities, and so on. The competitive position of these countries has become much stronger. And so if you look at the economies of the Asian countries today versus ten years ago, I think they are significantly stronger. And as Asian societies become more affluent, a lot more demand comes from their domestic markets, in the retail sector, in the education sector and other services that governments have not always provided. You're seeing major growth in many of these sectors.
Thompson: It is important to know that AIG grew up in China since it's founding in 1919 and only came to America in the 1940s, and so our roots are very much in Asia, especially in the Asian emerging markets. It's been interesting to watch not just how the countries have evolved, but also how the private equity industry has evolved as well. And so whereas a change of control deal was anathema in Japan ten years ago, the amount of M&A activity, corporate divestiture activity, and other types of very developed markets types of transactions are bubbling up at a rapid pace right now. And so we have augmented our approaches in some of these markets to track with the evolution of the private equity industries, going from very early-stage venture capital to late-stage growth capital, to ultimately to change-of-control, recapitalisations, build-ups, these types of things.