Industry Q&A: Glenn Hubbard

Q: What are US LPs looking for in Asia?

A:    The real play, and something the US doesn't have, is growth. If you're interested in growth opportunities in almost any industry, that's really not available in the US. Asia has very rapid growth opportunities.

From a US LP perspective, as opposed to a GP investing here, it's about allocation. If you look at the world, where would you want to store your wealth, or a pension fund's wealth, over time? You'd want increasing allocations to this part of the world. And I think that's going to be a big institutional change, because there are two ways I could try to do that. One way is to increase my allocations to a PE class of very large global funds and hope that they're investing [in Asia], because they see the same [growth prospects]. But I don't think that's what on LPs' minds.  A second way is to find funds in the region.  I know that Columbia Endowment, which is a big investor, finds direct partners in Asia.

Q: Is that industry change to some extent a reflection of performance that came out of the 2006-07 bubble and its aftermath?

A:    Obviously there are fundraising reactions to lagged returns both on the upside and the downside. But I think that reaction would have been there anyway, in the sense that if you want more exposure to this part of the world, you have to ask yourself: What would it take to source the best deals on the best terms? And I think other than for very big buyouts, there's going to be an emphasis on local [firms], and particularly if you get to VC.

Q:     Has evaluation of risk in investing into this region fundamentally shifted?

A:    It's a big change from pre- Asian financial crisis because the growth opportunities were there before the crisis. But I think there was considerably more risk [in terms of] the financial systems then, and even the political systems in some jurisdictions. But I think investors are now pretty comfortable with that. Many if not all of the large countries in the region are surplus countries with stable economic policies and stable regimes, so I don't think the risk is any more than a typical business risk.

Q:     Do you get the feeling that LPs in the US are looking at intermediaries and fund-of-funds as the way to get into Asia?

It depends. In the case of the Columbia Endowment, the overall endowment manager spends a lot of time here finding managers himself, and has a team who does that. Other large LPs may go through funds of funds, but I think people are going to find that there's no substitute for actually knowing the right firms. There are opportunities for region-specific PE firms to really market themselves to the US LPs directly, rather than just to fund-of-funds managers.

Q:     Do you think that there's been a sea change in the quality of the Asian firms?

A:    That's really true. You can't paint with a broad brush, because obviously in any industry, some firms will be successful and some not, but the attractive opportunities here in business have lured back some of the best young business people.

A decade ago, most of the students at Columbia Business School we would have had from the Greater China area would have liked to remain in New York or have gone on to London after graduation, got experience, maybe come back, maybe not. That's not true at all now. The desire is now to come back to Asia as soon as possible.

There's a large pool of young, well-trained investment professionals, many of whom have had experience with very large global financial institutions. The pool of talent is definitely here. The issue here is less whether there's a lot of investment talent as how do you grow the management talent; not necessarily the entrepreneurs but the talent in organizations. That's probably in shorter supply.

Q:    Is there also a role for financially experienced professionals in the new infrastructure of the region?

A:    That's right, particularly given large-scale family investments in the region. If you only want to write a check to Carlyle or KKR, that's not such a long due diligence process, but if you are going to do this more granular approach, the need for investment professionals who can sort out, for family offices, "who should be my China partner, my India partner?" is going to be significant.

Q: What do you think of the RMB fund constellation?

A:     It's certainly important for China. It is a very good innovation; it will also cause some of the global PE firms, to the extent that they're here, to really have focused offices, not just fly people in from time to time.  They will really have to have a presence here. 

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• Topics
• North America
• Fundraising
• LPs
• Performance
• Renminbi fund
• The Carlyle Group
• KKR