CEO, Warburg Pincus
H.E. Mohammed El-Kuwaiz, Rishi Kapoor & Chip Kaye: Top Emerging Markets for Alternative Asset Growth
The panel "WHICH EMERGING MARKETS ARE THE NEXT FRONTIER FOR ALTERNATIVE ASSET GROWTH?" took place at the ...
About Charles Kaye
Charles Kaye, co-chairman and CEO of Warburg Pincus, has been active in discussing global private equity trends, with a focus on emerging markets. In late 2024, he participated in a panel on emerging markets for alternative asset growth, where he described the current moment as "complicated" and noted that the U.S.-China geopolitical dynamic "may be the most important question of the time." He also stated that "public markets are a little more broken at the moment outside the top stocks" and that private capital, at roughly 6% of global market cap, still has "a long way to go." In 2023, Kaye commented on the maturation of China's private equity industry, saying the "real key to sustainable success is diversification" and that "great investors and investing organizations aren't just made when times are good; they're made when times are difficult." He also discussed Vietnam, calling it a beneficiary of the "China plus-one strategy" and citing its "reasonably stable macroeconomic framework" and "depth of the entrepreneurial class" as attractions for continued investment. Beyond his business role, Kaye is co-founder of the World Orchestra for Peace. In 2021, he accepted the BraVo International Music Awards' "Orchestra of the Year" award on behalf of the ensemble, dedicating it to the memory of Sir Georg Solti, with whom he founded the orchestra. He noted that the orchestra's 650 players from 125 orchestras in 70 countries "give their services without any fee" and that he remains committed to "using music and the arts to make the world a better and more peaceful place." In 2019, he promoted an Oxford concert for UN World Peace Day, describing the orchestra as "a United Nations of musicians" with the goal of "how can we make the world a more peaceful one for our children."
Transcript (21 segments)
D
Dan0:00
Well, thank you very much for that kind introduction, and I want to also thank His Excellency for the excellent platform and for setting the stage for your next conversation. We're going to talk about which emerging markets are the next frontier for alternative asset growth, and I'm very pleased to be joined by an expert array of guests. Please make them feel welcome: His Excellency Mohammed Al-Elwan is the Chairman of the Capital Markets Authority, so welcome to the conversation. Rishi Kapoor is Vice Chairman and CIO of Investcorp, and Chip Kaye is the Co-Chairman of Warburg Pincus LLC. So let's dive straight into the conversation. Welcome to you all. First of all, Your Excellency, how is the CMA creating an environment for alternative asset growth in Saudi Arabia? You play a really key role in not just developing the industry but also stoking investor appetite into this space.
M
Mohammed Al-Elwan0:51
Well, thank you very much for the introduction, and good morning to everyone. Actually, if we think of the world of asset management as ultimately capital allocation, it's about two things: it's about the quantum of capital that's available and about the efficiency of that allocation to allocate it to the best plans, projects, initiatives, etc. And if you think of there being two ways to allocate that capital, via the public markets or via the private markets, there has traditionally been a bit of an overlap between them as one grows the other. And the alternative space has generally been affiliated with the private markets. So generally, when you look at this equilibrium, you notice that as markets become more efficient, the role of capital allocators decreases, and so they move from public markets to private markets. That's why you see in most developed markets, as markets have become more efficient, more of the activity in terms of capital allocation and asset management has moved from the traditional space in public markets to the private space in the alternatives. The interesting thing in Saudi is we are actually seeing growth in both of them in tandem. So we are seeing growth in the public markets, and I would argue it has been one of the most unparalleled growth rates in the public markets, simply because the rate of financialization of our economy has been possibly one of the most rapid in the world. But at the same time, when you look at the universe of AUM or assets under management in our industry, one of our fastest growing segments is the alternative space, whether you look at venture capital, private equity, real estate, etc. And the growth of these two segments in tandem is just a reflection of the quantum of capital and the quantum of investment that is required and that will be required for the upcoming period. And our expectation is that both are likely to grow even further.
D
Dan3:05
It's been absolutely fascinating to watch the development of the public markets here as well. The Tadawul is increasingly sophisticated, a number of new products coming to market as well. What will drive the next wave of growth, not just in the public markets but in the private markets as well?
M
Mohammed Al-Elwan3:21
I imagine that the biggest wave of growth is likely to come from just the pipeline of investments and financing needs that are required. And this is what His Excellency Minister Fahim talked about in his introductory remarks today. If you look at the quantum of investment that's required in Saudi from now to Vision 2030, estimates reach about $3 trillion, and that requires a lot of capital. It requires public capital and it requires private capital at the same time. I think it also requires local savings as well as international savings.
D
Dan4:01
I wanted to bring Rishi into the conversation on this, because Investcorp of course is very active in the emerging markets and has a very big focus on the MENA region as well. What's your investment approach to the region in 2025 and why?
R
Rishi Kapoor4:16
So as you said, Dan, we are from the region. We are created by the region, by shareholders and investors from this part of the world, and of course now we are for the region as well. Although 40 years ago when we started, it was all about deploying capital into the developed markets. Of late, it's been much more balanced in terms of developed and emerging markets, in particular those markets that provide the fundamental foundation for attractive long-term value creation and growth. So let's take the Kingdom for instance, and let's compare and contrast that. The building blocks of the Kingdom versus what defines an attractive market: Is there a deep addressable market of midsize businesses in private hands, founder-owned, family-owned businesses that are keen to attract private capital alongside them, grow, create value, and possibly monetize that value either through a listing or a monetization event otherwise? The answer is yes. And in particular, the economic diversification plans that the regional economies have, led by the Kingdom, underpin that explosion almost of midsized businesses. Is there stability in the underlying framework for policy, regulation, and currency? The answer is yes. Is there supply of talent and capital supporting that growth? The answer is yes. Are there exit opportunities emerging in the ecosystem to monetize those investments through either a listing or secondary sales, etc.? The answer is yes. You put it all together, that gives us the ideal framework for deploying capital. Therefore, no surprise that one of the most pivotal initiatives for Investcorp over the last few months or so and leading into 2025 and beyond has been the launch of our Saudi-focused, we call it the Saudi pre-IPO fund, but that's a little bit too narrow a definition. It's really a fund primarily focused on investing in midsize businesses in the region, particularly focused on Saudi, that have the potential to create value over a medium-term horizon and also monetize that value. Looking at sectors, it's all about business services, going back to that explosion of small and midsize businesses driven by the economic diversification plans. It's all about transportation and logistics, just given the location of the region itself and the pivotal role it plays in global supply chains. It's about healthcare and social infrastructure, including education. And it's about the consumer. The region is blessed with a young, digitally native but relatively wealthy, well-off consumer base that is looking to consume goods and services increasingly internally. Leisure, sports, entertainment, travel, tourism, all of that drives an explosive growth in domestic consumption that you can lean in behind and create value. So that's how we are planning our outlook for regional investment. And all of this also being accelerated by the PIF's recent decision to pivot investment back into the Kingdom, having spent a long time investing internationally. That's going to be an accelerator of economic growth domestically. We can touch on that as well.
D
Dan7:49
But Chip, coming into the conversation here, what's the Warburg Pincus view on the MENA investment outlook for 2025 and how are you actively deploying capital here?
C
Charles Kaye8:00
I think, you know, broadening the conversation a little bit, I'd say one of the challenges for investors and investment allocators around the world has been kind of US dominance over the last five or ten years. So if you were to look, for example, at the MSCI ACWI and you simply took out the US, it'd be like 60% of that number. So kind of US and obviously US tech has been this large driver. And I think if you talk to a lot of investors, you'll sort of hear lots of US bias around their portfolios. Kind of this, there's always sort of been this set of India files that have sort of played there, and India has been one of the few markets over the last five years that would actually have dollar returns greater than the US. There's this intrigue about what's happening in Japan, and then there's kind of this broader sort of set of ambiguity about where around emerging markets there's also to play. And you know, you look and that emerging market story from a decade ago has played out in some places where it hasn't translated into growth as much as people would have thought. You might say there's pockets of that in Africa or Latin America. There's obviously been the China story that sort of is going on around all of this that has made it harder in certain parts of Asia to translate what has been real growth into investing return. But I think as you look ahead, that fix, that US dominance, we may be at a moment where it transfers a little bit and you sort of see another generation of emerging markets sort of arise where there are these, as Rishi described, this combination of deep entrepreneurial talent, kind of hard and soft infrastructure development, kind of an active dialogue between business and entrepreneurs where you have the seedlings to translate that local entrepreneurial drive combined with capital, whether domestic and foreign, to kind of drive growth. India's been a classic example of that for a long period of time, and I think you're seeing some of those kinds of elements play out across the region as well.
D
Dan10:02
So we're going to take a deeper dive into exactly what the investment opportunity looks like, but this is FII, so I wanted to maybe just talk real here just for a second. The government and the CMA have done really extraordinary work to develop the ecosystem here to make it more enabling for global investors. But what's the delta here? What do you two need to see from the government and Saudi authorities to deepen your engagement moving forward? What's missing? Chip?
C
Charles Kaye10:29
Well, I think as I referenced, when I look at places around the world, there's sort of a mental checklist in my head about: Do you have this well of deep entrepreneurial talent? Do you have the makings of people that in sort of history of commerce and the like? Do you have a basic macro stable framework where you can sort of plot what sort of a five- or ten-year trajectory looks like versus sort of history of unnatural volatility around things? Do you have, as I sort of referenced, this hard and soft infrastructure? So it's the physical part of it that enables commerce, but a lot of it's the soft elements. Capital markets probably being maybe one of the most important drivers of that. And then I'd say, do you have a place that has a constructive dialogue where again it's the ability to, and there's sort of a pro-growth, pro-development flavor to it? And I think Saudi in particular has embraced that, and you've seen pretty dynamic change here over the last few years, and I think you're seeing that play out in other parts of the world as well. You're seeing that play out in Vietnam in its own way. So there are other pockets in the world where that's playing, but I think those are the things that people are looking for, some combination of those in order to attract private capital to it.
D
Dan11:49
Rishi, what more do global investors need from Saudi Arabia?
R
Rishi Kapoor11:53
Yeah, so I mean, I think by the way, Dan, I don't think it's a question of missing as much as it's a question of continued evolution, but more importantly laying down the proof statements, the proof points. We started investing in the Kingdom in 2007. We were, I think, the second or the third, Your Excellency, institution to be licensed by your Authority to invest in the region and in the Kingdom in particular. And what we have seen firsthand now, this has been our own experience, is a continuous evolution of the capital market but of the regional investment framework led by the Kingdom. When we started, we had no proof statements in terms of exits. We have since then listed, taken four companies public on the Tadawul, and with good success. That is very comforting to investors, not just from the outside but from within the region as well, from within the Kingdom. The second thing related to that, in terms of what our investors from the outside are looking for, is precisely that bit, that support from the domestic investor. That is so confidence-inspiring. The fact that the domestic investor, that is by definition closest to the market, understands the market the best, is willing to put capital at risk and support that value creation opportunity that clearly we all see, provides in turn a validation almost to the foreign investors. And I think the PIF in particular, in pivoting to supporting the development of the local economy through inflow of private capital and partnering with firms like ourselves as they have on a couple of occasions already to invest in the regional private sector, I think is an ideal foundation for developing and maintaining that confidence of the foreign investors. So it's really about continuous evolution and journey, not really much that is missing from the ecosystem today.
D
Dan13:55
Your Excellency, respond to this as well, because as you were just alluding to, we've seen a lot of work going into improving trading volumes, improving liquidity in the public markets, more products coming online as well. But what else do you need to do to attract international listings, to bring in more foreign investment, and to make Saudi Arabia match fit as an emerging markets hub?
M
Mohammed Al-Elwan14:18
So Dan, maybe I can connect this to something that Rishi said earlier on the importance of having a capital market as an end point for capital to flow from the beginning. Because if I start a new business, if I incorporate a new project, I need to visualize what the exit looks like. And while not all businesses exit via the public markets, that is usually the base case for most of them. In our case, the big story of the capital markets is both increasing the size as well as opening it up to international investment. So international investment has moved from virtually nothing five to six years ago to now slightly over 400 billion riyals. And actually, a lot of the points you mentioned in your question are really the building blocks of it. It's about liquidity, it's about confidence, and it's about customizing the market to the local particularities of the economy. And let me give you an example. So if you look at the structure of our capital markets in Saudi, historically they are concentrated ownership. And when you have a market that has concentrated ownership, that is very different from what you see in a developed market when the largest investor represents 5 to 6 or 7%. What does this mean? This actually means that you in some respects combine the benefits of transparency, disclosure, governance that you have in the public markets, as well as the big anchor investor, sponsor, long-term oriented investor that has always been the calling card of private markets. So this almost looks like it's the best of both worlds. Now, you can ask the question, and actually as we've opened up the market to international investment, we have seen this reaction: the combination of transparency, disclosure, and anchor investment is a good thing. But there is a but, and the but here is this combination can be quite dangerous if you don't have minority shareholder protections, because the big anchor investor can basically direct the business at the expense or to the detriment of minority investors. And that is why actually in Saudi we have probably become one of the most Draconian markets in the world in terms of governance, disclosures, and minority shareholder protections. And it is not because we want to fit to some international standards; we need to fit our funding model to fit the structure of our economy. And that combination has actually been proving very successful.
D
Dan17:14
Absolutely fascinating. And I also wanted to talk a little bit more about the investment strategy here from both of you and the year ahead. I asked you about your outlook for the region; I want to know specifically how you're investing in this macro environment and as we see, of course, a lot of uncertainty in the global public markets right now as well. Rishi, first to you. Investcorp has a pretty diversified approach: private equity, real estate, credit management, infrastructure. When you assess the outlook for the year ahead, what's your highest conviction bet and why?
R
Rishi Kapoor17:48
You know, how many children do you have, Dan? How many children do you have? You love them all. Unfortunately, I have none, but okay. So in that case, the question is to be directed at probably me, but anyway, you love all your children. And for us, for me personally, all of those four business areas at Investcorp is like a child, and you love them all. In terms of conviction asset classes, I think that's probably less relevant relative to the conviction themes. And those conviction themes are actually fairly consistent, believe it or not, across multiple regions, whether it's the United States or the region or even Asia, India, Southeast Asia, and so on. And those themes are predominantly revolving around business services, going back to particularly technology-enabled services. We keep talking about the hype of AI and the potential as well, but one thing that is inescapable is the fact that AI enablement is going to lead to massive improvements in productivity within business services, and that technology enablement within business services is a massive theme for us across the board, including the region.
D
Dan19:00
You're not worried about the hype though? I mean, everyone is...
R
Rishi Kapoor19:02
I am worried about the hype, which is why I'm not investing in the hype. So I'm investing in the actual practical use of the apps based off of the platform rather than into the platform development itself. That's one. Second is the whole space of transportation and logistics, underpinned by a major theme around supply chain resilience. That's a big theme applicable across the globe. We're investing behind that, whether it means investing in logistics and infrastructure assets and distribution centers, whether it means investing in supply chains, the whole works, and enablers of that space. In fact, two of our investments in the region, including Trucker, are exactly all about transportation and logistics. Third is healthcare and software services, infrastructure services including education. Big theme driven by an aging population, a growing demographic, and the focus on delivering quality healthcare at affordable price points. Otherwise, the cost is getting a little bit too heavy. That is a big focus for us across the globe; we are investing behind that. Last but not least is the consumer, particularly in emerging markets like the region and markets like India, Southeast Asia. As I was describing earlier, what you want to capture in addition to the liquidity premium when you're investing in private assets is the growth premium when you're investing in emerging markets, and that growth premium is substantial in the consumer space. So those are the four broad themes that represent the highest conviction areas, back to your question, Dan, for us, and we are leaning in behind those across asset classes, whether it's private equity, infrastructure, real estate, or credit.
D
Dan20:47
Okay, very interesting. And Chip, over to you. Investors are of course trying to price the election risk for next week as well. I know it's something you're probably thinking about behind the scenes. Lower for longer oil, geopolitical headwinds, global rates. I know you in particular have just raised $4 billion for your Capital Solutions Founders Fund. What is your highest conviction bet into next year, and as you assess the outlook, these risks on the horizon, what sits on top of that list right now for you? What are you most concerned about as well?
C
Charles Kaye21:18
You know, as investors, there's always this temptation to think we can see the twists and turns coming, and the reality is that's pretty rarely true. I do think we sit at a complicated moment where we've had exceptionally low rates of interest for an extended period of time, essentially since the global financial crisis until the post-pandemic surge, and now we're sort of seeing where they settle. And the answer to that question is going to dictate a lot about asset pricing. The beachfront property is all traded okay, but there's sort of that mass market that still is waiting to see where the pricing levers are and how that plays out. You clearly have the geopolitical dynamics, especially between the US and China, where you've got the two largest economies in the world, 40% of GDP, that are at odds a little bit, and how that turns out I think is maybe the most important question of the time, and it sits in the middle of things like climate and the like. And lastly, I think as you were referencing, you've got the tech. We've had this extended tech revolution, the next wave of which is AI, and where you see, as you described, the hype at the moment is US markets are the most concentrated they've ever been. We have three trillion-dollar businesses. The top 10 companies are 35% of that market. So the markets are kind of making that bet, and the interesting question will be: how does that really play out? Might we all miss? Is there a turn coming? I find it fascinating recently that Goldman Sachs had come out with a report, whether it's right or wrong doesn't matter, speculating the next 10-year equity market return in the US was going to be 3%, and it sort of didn't get a lot of play, which is a sign of a little bit of the excess exuberance, triumphalism happening in the US. But I think there are interesting things happening in other parts of the world. We talked about it here in Saudi, and I think it's happening in other parts of the region and in other emerging markets where that story of the last 10 years didn't play out as well, but you're seeing pockets of innovation that are translating into more interesting opportunities. You're seeing changes in capital markets, some of them here as His Excellency described, I think are quite interesting. You see this symbiotic relationship between public and private markets evolving. In the US, strangely, one of the phenomena is that public markets are a little more broken at the moment. Outside the top 100 stocks that trade a lot, you haven't seen as robust an interchange between private and public markets. All that said, at the end of the day, I think one of the core points made in the beginning is fair, which is that private capital still represents a relatively modest share of aggregate global stock market cap, it might be 6% or so, and so I think that trend still has a long way to go. And I think the advantages firms like ours have is to focus less on trying to predict the future exactly, what's going to happen, go find the talent, entrepreneur, go build a business, and then you will find a way to navigate through all of that, as opposed to thinking we can predict every little twist and turn coming, especially in a market that is as uncertain as this one feels.
D
Dan24:36
So challenges and opportunities on the horizon, as cliché as it sounds. I hope you've enjoyed the conversation. Ladies and gentlemen, please thank them again: Chip, Rishi, and His Excellency for joining in today. And I'll ask you all to turn your attention to the main stage and the fabulous Anna Stewart from CNN. Anna?