Global Financial Leaders’ Investment Summit: Conversations with Global Investors - Panel 1

Good morning everyone, good morning ladies and gentlemen. Congratulations, Paul, Eddie, Nora, for this very successful summit so far. It's so delightful to see Hong Kong opening up like what we are doing right now. Today I'm extremely honored to moderate this very distinguished panel of leaders in the alternative asset management industry. These are all veteran investors and they have been through many economic cycles. In the past day or so, we have heard many people talking about challenges facing the global economy. Top on everybody's list is high inflation rate, and then we talk about geopolitical risks. Now in the United States, inflation rate is now more than eight percent, and we know that the interest rate is about four percent, coming up from 25 basis points about this time of last year. I think it is probably just a matter of time that the economy in the United States will slow down sharply. We know that this year the economic growth rate for the country is suspected to be about one half percent, so we know there are challenges over there. However, the labor market remains quite tight; unemployment rate is three and a half percent, so it's questionable where the U.S. economy is going to be next year. Now if you look at Europe, the situation is much worse: inflation rate now is double digit, exceeding 11 percent, interest rate is still quite low at one half percent, and growth rate this year I think is probably at best one percent or slightly more than one percent. So indeed, inflation is a major challenge in the developed world. Central banks will keep raising interest rates, which may not be high enough to tame the inflation rate, but maybe high enough to push the economies into a recession. So we worry about it. But here we are in Asia, and if you look at Asia, you talk about high inflation rate. You ask the question: where is the high inflation rate? Just look at China, right? The inflation rate the last I saw was 2.8 percent, very tame. Versus interest rates: well, interest rates last year was five percent and this year is 3.65, so the monetary policy, as Governor Yi Gang pointed out yesterday, is accommodative, very different from the Western world. However, the Chinese economy is strongly slowing down. As we know, the target for economic growth rate was 5.5 percent, but in the first three quarters it registered about three percent. I would think it's still not possible to tell what the full year number will be. So we have challenges in that particular economy. Then you look at Japan: where is the inflation rate? Well, Japan's inflation rate is 2.6, so it's very low, and Japan is still trying to reflate this economy, whereas the interest rate in Japan is minus 10 basis points, right? It's still negative interest rate, and the Japanese Yen has dropped more than 30 percent in the past 18 months for all dollar-denominated investors. So if you think that Asia is attractive, well, you have to watch about your currencies, because the depreciation in currencies will have major impact on our returns. Now I mentioned these four economic regions: the United States, the EU, China, and Japan, because four of them represent about two-thirds of the world economy. The United States is about 24 percent of the world economy, China is about 18 percent, EU is 17 percent, Japan is relatively small at five percent, but Japan is very significant for the Asian economy. So looking at these four major economic bodies in the world, one question that comes to mind is: at this very moment, not tomorrow, not next year, not two years from now, at this very moment, which market of the four is the most attractive? Where would you bet your money? We know all the challenges, we know all the difficulties all around the world. So where would you bet your money? May I start with Bill? You sure you don't want to start with one of these other? The reason I started with you is because you are in the buyout space, you're in private equity, you know. I could start with Ben, he's in real assets, I know he's probably not going to be very keen on investing in real estate in China.

You know, in addition, remember private equity is kind of different than other businesses because we count on our limited partners to provide the money that we raise from them. I have 800 investment professionals around the world in all different kinds of classes and geographies, and their job is to find deals to do. But a private equity fund is invested over a period of three or four or five years, it's not invested all right away. So I think a couple of years from now, Europe will be on sale because it's so horrible there and likely to get worse. I'd probably think that would be an attractive market, but not yet, too soon.

Well, generally we hedge our equity position to the dollar. I don't know that I'd do that necessarily today, although I'm not a professional currency hedger. I like to make money on the performance of our businesses as opposed to the performance of the currencies. But I think the currency is likely to be weak as long as the Japanese economy and the people running it are focused on trying to increase inflation and keep their interest rates negative. They seem committed to that policy, and what balances those policies is the currency. The currency has had to weaken to compensate for that. One would say maybe that isn't going to change anytime soon; the currency will continue to weaken. So I probably would hedge the equity position and hope to make a significant gain on which I'd leave unhedged. The good thing about Japan is that the currency is infinitely hedgeable because the Japanese interest rate is so low. Hedging is a function of interest rate differentials between the Japanese Yen and U.S. dollars. Now with Japanese interest rates being negative, people pay you to bet against Yen, so you get positive carry by hedging against Japanese Yen. Therefore, it's hedgeable. I might add, and the other panelists know a lot more about some of this than I do, another advantage in investing in private equity in Japan is that you can borrow money so cheaply. The rates there are Tibor, the rough equivalent of Libor or SOFR, at zero plus one and a half or two percent. It's just cheap to borrow, and the leverage you can put on the transactions inflates the equity returns as well. It's free money, it's good leverage.

But Luke, you invest in public markets. Mangrove is leading as a manager by investing in the public market. People just mentioned in private equity you can keep an investment for three, five years or even longer, you can ride through the rough patches like what we're facing today. But in public market, you mark the market on a daily basis. So what's your take?

I would say trying to pick one thing today is a bad answer to the current investment problem. We're in a world where inflation has got out in some countries, we have a very different economic situation in China as you mentioned, we can come back to Japan. We have dispersion around the globe. In a world of dispersion, in a world of economic uncertainty, picking one thing and sticking with it is not the right answer to investing a portfolio. For investors, the last 10 years has been, frankly, as easy a world as you'll ever see. You just had to buy something, frankly as much of anything as you could, as much leverage as you could, everything went up. So it was a very easy world to be an institutional investor. That world's gone. We're in a new paradigm which I suspect will last years rather than months. In the new world, you need to be active in terms of your asset allocation. So you can buy companies and hold them for 10 years and transform them, and the private equity world can work very well. But if you're investing in public markets thinking there is one simple asset allocation in today's world, I would say is wrong. This year, clearly being short the interest rates, particularly U.S., has been a fantastic thing. Being long the dollar has been a great thing. Being short equities has been a great thing. There's been some big currency moves; the Yen has been a fantastic move. But you also have to look at what's happening to price changes over time. The interesting thing last night: the Fed. Honestly, I don't know how anybody could have been surprised that Powell was hawkish after raising 75 basis points. He's got to be until you have some sense inflation is coming down. But the market was surprised. The interesting thing is what you saw was a big sell-off in equities and not very much of a move in the dollar, not very much of a move in interest rates. It gives you a sense that the long dollar trade that's been, not against the Hong Kong dollar of course, by the way any bets against pegs is a dumb way to try and make money. They all remember the one time that they made money. If you happen to be the right way around on Swiss franc against Europe, great, but it's a terrible way to try and make money over time. You remember the one time it worked and you forget the 20 years it hasn't worked, or even longer. So we don't do that, you'll be pleased to know. But look, there are some currencies in the region where being long the dollar and short those currencies has been a fantastic move all year, but you can sense that trade's getting tired. So maybe that was what Bill was suggesting in the question of whether to hedge. So we run a very active style. Right today, yeah, I'm still long the dollar and short bonds and very happy with it. But do I think I'll have the same position by the end of the year? No, probably not.

So you don't think that any particular market of the four markets I just mentioned is the most attractive? You diversify geographically. Do you care to tell this audience how you are diversified geographically, how you have allocated your capital among the four that I have just mentioned?

Yeah, look, I think that we're a believer in maximum diversification unless you have knowledge. There are some things that one can have real confidence in and some things not. I think there is nothing worse than being the European equity strategist. There's a very nice guy who's a friend at Goldman who every Monday has to write, I guess he does it on a Sunday, a note that says 'this is why now is the moment to buy European equities.' He's been doing it for 10 years and it's not been the moment yet. Gotta say, it doesn't feel the moment yet. I would agree from an equity market point of view that actually Japan is about the most attractive. I think if you were the central bank, there was a lot of conversation yesterday about the challenges different central bankers face. I would say for many, it's a very clear story but it's just whether they're willing to go through the pain to do what they need to do. In Japan, it's a very difficult story because they've had 30 years of deflation. The deflationary things are so embedded in Japan, and they have no wage inflation. The reason the U.S. has got to keep raising rates is you've got seven percent plus wage inflation with a target of two percent inflation. You've got to get unemployment up, you've got to get wage inflation down. That's the only way to get unemployment down. Japan has a different problem. They have historic, I mean for 30 years, had zero wage inflation, and you can't get sustainable inflation up to two percent without some wage inflation. They only have a once-a-year wage round. Japan likes to do things differently. That's the joy and the annoyance of Japan; they have their own way, they do it their way. Essentially, all wages in the country are set in March and April. So the central bank is stuck in a place where they have to keep the stimulatory position until we get through the wage round in the hope that there will be wage inflation, at which point they have to then get out of a position which is horrible. If the Yen has been a big move, when they let go of 10-year JGBs, they're not going from 25 basis points to 50 basis points. When they let go, it's going to go a very long way. You can see that in the 15-year JGBs that are one and a half percent now, and you could see how far the market wants to move. So they're holding on to a very tightened coil. I would say that would be the least attractive job, to be the central banker. By the way, it's available if anybody wants to apply, because Kuroda finishes in March and someone's got to take on the challenge.

I agree. I think Japan is in a bind because if you look at the United States, the government debt is about 32 trillion dollars. So one percent increase is equivalent to about 320 billion dollars. That's big numbers, 320 billion dollars from one percent increase in the interest rate for the U.S. government. But in the United States, federal government debt is only about 100 percent of GDP, and in Japan it's about 260 percent of GDP, the highest ever in the world. Think about one percent increase.

Well, I'll say a few things. I have a long shopping list. At Apollo, we oversee about 550 billion of a variety of assets: private equity, credit, and yield. But I think unabashedly the most interesting opportunity right now is U.S. credit. Certainly, we are in... yesterday's panel did a great job, James Gorman, about summarizing where we are. I was an econ major in college, I don't need to go through the backdrop. I would add one thing though. In the U.S., since the financial crisis, the backdrop of how the financial system works has changed dramatically. The advent of private credit from institutions, sovereign funds, folks like us, it's a large part of the market right now. The lack of confidence has created a vacuum. Right now, specifically, you can do a few things in credit. You can buy low dollar investment grade credit and have convexity for the first time in 15 years. I would argue the next 12 to 18 months, mid-double digit returns, 12 to 15 percent on that. You can be the provider of credit in large quality buyouts that Bill is doing or the folks at Blackstone are doing on the Emerson financing yesterday. You can arguably make 10 to 12 percent top of the capital structure, 20% LTV. The third thing you can do is, because of the overhang in the U.S. banks right now, which is around 100 billion of commitments they've made, contrast that to 500 billion in '08/'09. They are not making new commitments at the same time companies need to borrow money. Royal Caribbean Cruise Lines, they're coming into the market right now paying you eight and a half, nine, ten percent top of the capital structure, two or three times debt to EBITDA on a company that has a tremendous equity cushion underneath. So there's a variety of activities in credit in the U.S. I can also talk about equity secondaries. People talk about the denominator effect; very interesting business. Bill and I did compare notes. I'm also a big believer in Japan private equity. So if you ask me point blank right now, U.S. credit, private credit, investment grade discount paper, and a variety of other... I don't want to say rescue, but being able to work with the banks as they are not as fluid and as flush as they are. I can contrast that to what's going on in this region. Obviously, the strength of the HKMA and the banking system is extraordinary here, and the markets are not broadly developed such that these avenues and cracks don't exist for folks like us to operate. But this is an amazingly interesting time. It's going to be a cloudy storm. It's going to last, as Bill said, who knows. We're very poor at predicting, we're very good at preparing. The fact is, we were lamenting a year ago about making four and five percent. I can't predict the future, but if I'm making these high single digits, low double digits, and I'm getting current cash paid today, I feel very comfortable that my downside is protected and I'm going to do very well over time. This is the opportunity set right now. We are unabashedly very busy. We are actually putting a lot of money to work. The great irony in all of this, and I know both sides of the equation since we're in it, the great time to invest in private equity is periods like this where there is uncertainty and there's unfortunately not a lot of financing. Same argument with real estate opportunity funds. The irony is, much equity has been raised. The fact is, there's not a lot of financing for those transactions, so price levels will come down. But it will be an amazing vintage, '23, '24. These, I believe, will be great vintages, especially in the U.S. and Europe in due course. In Europe as well, I think it's going to be a bit later. Certainly, there's a lot to do right now in the U.S. We have a very large business in Europe that buys European non-performing assets from the banks. I believe they're going to go through a period of time like Asia did in the late '90s, either Japan or other Korea, other places that had to get their banking system in better shape. The collective ROE on European banks in the last decade has been sub-five percent. That has to be dealt with over the next three to five years. So again, back to your specific question: U.S. credit, a lot of sub-strategies, a lot of great partners in the room that are doing it with us, but unabashedly love that asset class. Equity secondaries because of what's going on with the denominator effect. Also, I'm happy to talk about distressed and Chinese NPLs and many other things, but to your point of specific question, that's where I'm an unabashed bull.

I'm not quite sure if everybody understands what denominator effect means in private equity. See, our institutional investors, the limited partners of private equity firms, would allocate capital among or between, let's say, public equity and private equity. Let's say if the rule is they allocate 80 to public market and 20 to the private market. In today's market conditions, the public market has dropped quite significantly. Then they look at their portfolio, all of a sudden the public market has shrunk from 80 percent to, let's say, 70 or 60 percent, then their private equity book has expanded from, let's say, 20 to 30 percent, even 40 percent. All of a sudden they're out of whack, and they will have to reallocate. That's the so-called denominator effect. Because the public market value has dropped, they will have to reallocate by selling in the secondary market their private equity positions.

Sorry, how about you? You did a great job. I think the point that I really want to make here is we're all doing a lot of economic prognostication, which is very important, but I would really urge investors to be students of how the markets really work. What I mean by that is how companies finance. We've been in this decade-plus of the advancement in the equity markets of technology ETFs, which create market structure challenges. If you are a thoughtful investor, understanding that dynamic and using periods right now of uncertainty to your potential advantage, you use the luxury of your liquidity or the long duration of your capital to be providing capital in periods of vacuums. I think there are a few big lessons. I'm just going to go off script for a moment. Certainly, what is perceived or what has been perceived as safe, like long-dated UK governments that have gone from 102 to 38 this past nine months, that liquidity that people perceive they needed is unnecessary. So thinking about this market structure and how you asset allocate and how you invest, I think is a critical point to remember in these periods of uncertainty.

Thank you. May I turn to Ben, who is head of Macquarie's real assets management, a big investor in real assets: real estate, infrastructure. We have just talked about some specific markets that are particularly challenging, but what's your pick?

Thank you, Shan. First, let me say Finance Secretary and Eddie, thank you so much for the last few days. As someone who was a long-term resident of Hong Kong, the excitement around the city, the excitement in our office to see people that are here talking about these sorts of issues has been great. I think everyone is thankful, and it certainly feels like we're back. So thank you to you. I've sat across the table from Shan in other circumstances, and he sets good homework. So I have thought about this, Shan. I know you don't always think I've thought about your questions in other deal meetings and other things, but I have certainly thought about it today. I totally get the Japan trade, particularly if you're looking at it from a private equity point of view. I think if you're looking at it from a real assets point of view, we've spent 20 years trying to find good deployment opportunities in Japan, and we're still trying. So that's the market. While I get the currency trade and I'd love to have a bigger position there, unfortunately that's a little bit more challenging for the many things that we do around real assets. I'd say the most exciting market right today is the U.S. I think about things like the Inflation Reduction Act, which I'm not sure will reduce inflation, but it has created a lot of investment opportunities and a lot of positivity around real assets in the U.S. I think that's also matched by the fact that we are seeing a lot of innovation in the U.S. beyond just traditional renewables, as economies and states transition and think about what's next, both in terms of adapting their current energy mix but also retooling their cities, and then thinking about the sort of renewables 2.0 around things like hydrogen and storage and other things. So I think if you're a U.S. dollar investor today and you're thinking about where can you deploy capital in a market that's incredibly competitive and innovative, I think it would be the U.S. If you have a look at what's happening specifically in infrastructure, last year was for the top 100 infrastructure managers the biggest fundraising year on record. So I think we're starting to see infrastructure somewhat come out of the shadow of private equity, which has really been, I think for us, the standard bearer asset class around the world for the sorts of things we do because they're very similar. We're now starting to see a real need for private infrastructure capital around the world. That's exciting, one, because we've got more great managers providing more choice to clients, it creates more competition in the market, but most importantly for communities around the world, it's capitalizing capital to address the most important issues that we're facing: rebuilding nations after COVID, helping with energy security, energy transition, and addressing really big challenges like how we actually get to net zero by 2050. At the moment, the U.S. is leading on that, and for other reasons in terms of access and currency, that makes it a really attractive market. The second market, which no one's talked about today, but the second most exciting infrastructure market in the world is clearly China. Again, the scale of opportunity in China, the very positive policies around renewable energy, but also the investment around things like hydrogen and scaling up hydrogen and reducing the cost is very real in China, unlike it is in many other markets. What is often lost is, we all read certain media outlets and there's still a debate going on in a lot of those media outlets about will hydrogen ever be investable, yet just to the north of us, people are building scale hydrogen businesses together. They've passed that Rubicon. So what's exciting about markets like China is that a lot of real asset asset classes which in some other markets are still considered to be at their early stages are starting to become scale, and that creates a whole new set of sectors. I think it's akin to digital data centers in private equity funds and infrastructure funds. No one really had much exposure to data centers 10 years ago. If anyone's been pitched a private equity fund or an infrastructure fund in the last couple of years, front and center is data centers because it's become a main, a scale asset class. So that's exciting. While I think digital infrastructure still offers a lot of opportunities, particularly in places like the U.S. and China, I think it's interesting that we're starting to see a whole range of new asset classes become scale, and that will present opportunities particularly for investors who are not so worried or stressed about yield today. There are a lot of investors who have a real need to manage for yield right today and have an issue around liquidity, but those who can allocate parts of their portfolio, allowing for the denominator effect, to longer-term assets over five to ten years, I think they're the asset classes in the markets that are particularly exciting.

I agree with you. I think infrastructure is a white space perhaps around the world. There are opportunities in the United States, in China, talking about energy and clean energy, talking about data centers using clean energy. PAG itself is a big investor in data center business. We also control the largest producer of industrial gases in China, producing oxygen, nitrogen, hydrogen, and so forth, noble gases. The prices went up several times this year, and those are the gases for the semiconductor industry. But when we took this company private in Hong Kong, it used to be listed on the Hong Kong Stock Exchange in 2017. It didn't have any new energy business, clean energy business at all. This is a company which generated one billion dollar EBITDA cash flow last year, so it's a very big company. Today, clean energy including hydrogen represents 25 percent of their revenue, so it's going up in China very, very quickly. This company has 40 markets here in China. That underscores your point. But you're talking about infrastructure, you're talking about data centers, you're talking about clean energy. Another side of real assets investments is real estate, commercial real estate, residential real estate. I don't assume you think that real estate in the United States and in China are also very attractive in this environment, especially in the United States where interest rates are rising.

In answer to your question, I think Jim touched on before, real estate is a small part of what we do, and we primarily do opportunistic real estate. So it's really finding thematics around the world where there's not enough inventory and where capital is required, and addressing that need, as opposed to having sort of core funds of residential or property real estate around the world. But I would agree with you, I do think real estate in certain markets, particularly if you're looking at long-term core portfolios, is difficult to invest in at the moment, particularly where we find ourselves from a funding point of view. So I don't think that's particularly attractive. But there are other aspects to real assets that I do think provide attractiveness outside of real estate. One of those is agriculture. Agriculture as a real asset class is incredible, really exciting. There are a few reasons for that. First, food is not particularly correlated to GDP. People need to eat, and there is actually a scarcity of high-quality food supplies to the world. While the world continues to want more almonds, more raspberries, more blueberries, more Wagyu beef, more red wine, more Australian lobsters, there's actually fewer providers of it and less arable land that's providing it. So first of all, that's a really interesting asset class for people to think about. If I want to have an allocation to a real asset but real estate doesn't make sense today, which I think we can all understand the reasons for, there are other asset classes that are really interesting. The second thing about agriculture is the fact that technology has really changed what you can do from an agricultural point of view. A little bit like your point about the gas businesses that you own in China and we own in other markets around the world like Korea, if you think about our farm today versus 10 years ago, the technology has changed significantly. So not only can you use that land to produce proteins or to produce vegetables and other products, you can also use that land for carbon abatement, you can also use that for renewable energy, particularly with the increased improvements in transmission technology. So what once was a farm with say one revenue stream, you've now been able to pivot and create three or four revenue streams. The important thing about those revenue streams is you're actually having an impact often from a net zero point of view. So we're farming much more efficiently, we're able to use that land much better than ever before. That's also in a lot of communities around the world, whether it be in the U.S., whether it be in South America, China, or Australia, that's also a great story in terms of economic inclusion. Often where those farms are positioned, there haven't been a lot of jobs, and we're able to create more jobs using that land than ever before, and that's actually helping communities, rural communities, rebuild themselves. So from an impact investing point of view, in the sense of wanting to get great returns for clients from real assets but also have a positive impact for everyone in your community, there are lots of assets that are now presenting that that we just didn't have the technology or the wherewithal 5, 10, 15 years ago.

Very good point. Let me change here a little bit and come back to you, Bill. PAG is also in the private equity business, and I have observed over the years a great difference in how we do business here in Asia and how business is conducted in the United States. In Western markets, financing typically is very much available for acquisition business, for buyouts. Going back to Jim's point, in the United States for example, in Europe, when you do a buyout, you typically can borrow six times or even seven times EBITDA or cash flow of the target company to do your acquisition. So you combine your equity capital with a lot of borrowing to do acquisition. Therefore, when the interest rate is very low, buyout activity is very high because you're like in Japan, money is free, and you can leverage your equity capital to do very large acquisitions. Now Jim just talked about providing private credit capital to buyout firms at double digit interest rate, or high single digit, or low double digit interest rate. In view of the fact that senior financing is becoming increasingly scarce, banks are withholding credit, do you think that buyout activities in this kind of market in the Western market will slow down? Now compare it with in Asia, for example, we manage about 50 billion dollars, which of course is dwarfed by the AUM of Bill or Jim. But in China, where we also have rather large exposure, the average leverage multiple in terms of leverage we have is just two times, because financing is not so much available. So you generate returns in a country like China by tagging along with economic growth. You can still generate private equity type of returns without leverage in China because economic growth rate is rather high. In the Western market, where the growth rate is typically two to three percent, without leverage you wouldn't be able to generate 20, 30 percent returns for private equity investment. Now in Japan, without leverage, you won't be able to generate 20 percent returns at all. So now the interest rates are rising and credit is much less available, how does that affect the buyout market? How does that affect private equity investments?

Yeah, and I would add to Bill's point, we're not in the market share game. We're not on the sell side at Goldman or Morgan. We want to do good investments. So with my private equity hat on, there will be six to nine months of price discovery, and there will be that private family, third generation company in Japan or in the U.S. that wants to sell. Yes, it might have been worth X, but you know what, let's not wait around, we can invest it and make more money. So again, to the point, these financing markets, there's a dislocation, it's going to cost more money, but eventually prices will probably come down because the returns we're going to be disciplined. Good investors are disciplined right now. But the cost of it, I've rarely seen a buyout that made a lot of sense at seven percent financing and it didn't make any sense at nine. You're talking about the wrong company. So I think there's going to be a period of a lot lower volume but very interesting transactions that if you can put them together, you'll do well.

And Shan, I can just add one point. I totally agree with what Jim's saying. I think the other thing we're also about to see is, I think we've made the point on the panel already today, over the last 10 years there's been a rise of a whole range of managers who have only ever invested into a market where you had easy money and you had expanding multiples. But if you've been doing this for a long time and you're on vintage six or vintage eight, you've seen this before. So you've got more experience and probably a bit of scar tissue of knowing when to say no and sit on the sidelines and when to say yes. I think this will be the time, as people start to choose managers and continue to allocate capital, we'll see an unmasking of what's a good manager and what's a great manager with the right investment culture. Because it's not when things are easy that that stands out, it's when things are tough. Particularly in a world, as Jim says, where there will be more scarce opportunities, it will come down to who's willing to pay a certain price, but it'll also come down to your network and the ability that if people want to do business with you because they can trust you to do business because you can get banked and the like. So I think that'll be a really interesting next phase of investing, which I agree will probably last for not one year but for multiple years. But I think that will mean that we will have some shakeout as well in the asset management industry.

The current economic conditions, market conditions, very much remind me of 1997 Asian financial crisis. Many of us remember that. In 2008, the so-called global financial crisis, yesterday Mark Carney used the term 'the Atlantic financial crisis' referring to the 2008 financial crisis. He was right because that financial crisis very much affected Western countries, the United States and Europe, many banks failed, but it didn't really affect Asia at all. In 1997, 150 banks failed in Korea alone, and in Japan a number of banks failed, like Long-Term Credit Bank, Nippon Credit Bank, all failed. Throughout Asia, there were many bank failures. But in 2008 and 2009, to my knowledge, there was no bank failure in Asia at all. So the 2008 crisis didn't really affect Asia as much as it did Western countries. In that particular year, China's GDP in 2008 went up 9.6 percent, the next year 9.2 percent, whereas for the United States in 2009, GDP came down 2.6 percent. So we went through a number of economic crises in the past, and from my personal experiences, I made a lot of money in those downturns. The economic crisis, my second book 'Money Games' talks about the acquisition of a major bank in Japan, and my third book is going to talk about a major acquisition of a controlling stake in a bank in China. So I remember that the founder of TPG, David Bonderman, once said to me that if a deal is structured right, this type of market conditions is probably the best time to buy. It seems to me, Jim, from what you have just said, you agree.

I completely concur. I think it's very easy to get caught up. I do have an underlying confidence that inflation will be tamed, whether that's '23 or '24. I think the demographics around the globe, it will be tamed. So how are you pricing it, how are you protecting yourself? But I think the great investment platforms, the great LPs, the great sovereign funds, if they look back at these periods of dislocation, I know I was experienced before coming to Apollo, and many of the post-Korea, Japan restructurings, they were incredible opportunities to buy franchises that were literally once in a generation. I suspect you're not going to see that in the U.S. I think the U.S., the greatest present of all time for private equity is covenant-lite debt. The worst present of all time for distressed investors is covenant-lite debt. While defaults will be higher, and I know because I'm in both businesses, the reality is defaults will be higher the next couple of years. But I think again, this lack of certainty, this lack of confidence, this is when you want to be putting money in the ground. We don't celebrate on buying companies, we celebrate when we sell them. So this is truly an amazing time.

What about public markets? I know there's this sort of thing that private markets are great and public markets are maybe... But maybe there's a thing of this price discovery in public markets and they're telling you something. One of the solutions to the denominator effect is maybe people in private markets to mark things to where they're now funding things rather than where they used to do them, and then you'd suddenly find the denominator threat went away. I think the bigger picture is people have got used to the idea that economic problems are short, maybe sharper, they go away quickly, that buying dips has been the answer. Jim's right that there will be a moment where there are opportunities to buy things super cheap. But inflation in the U.S. is only going to go away if they enter a significant recession. The real question is whether the Fed has got the stomach to drive it this time. Today, we have twice as many job openings as we have unemployed people. To get rid of inflation, you've got to get rid of wage inflation. You get rid of wage inflation by having twice as many people looking for jobs as there are available jobs. Putting that in context, that math would get you to something that looks like 10 percent unemployment. I don't think central banks really have the stomach for that now. But we're either going to have significantly higher economic inflation remaining, which creates significant volatility in asset prices. You look at the '70s, over a 10-year period there was a zero return to a real portfolio, zero real return to a portfolio of bonds and equities. It was a lot worse in bonds and better in equities. You get real defaults, and out of that we will create a distress cycle at some point. But I think we should recognize that to deal with the economic problems requires some real pain. Sitting on a portfolio invested the way it's been for the last 10 years is going to be painful. The person who owned that UK sovereign debt piece, the one and a half percent of '62, they know about paying, going from 101 to 38.

What you're saying is we need capitulation. I agree. Listen, if you're an investor right now, capitulation is an even more enjoyable market. Yes, it's going to be a nasty fight to tame inflation, no doubt about it. I know that we have 30 to 40 private companies I get to serve every month, and the reality is CEOs are in a slowdown mode. They're stopping hiring, they're stopping expansion, they're stopping digital ads. It's not going to be a 10-year process to slay inflation. It will happen in the next 24 to 36 months. It will happen. The world happens much sooner. I was around in '94, I was around in '87. What's happened the last six months, four months really, in the bond market, the bond vigilantes are so far ahead of the monetary authorities in the West. That will happen. By the time we recognize that we are in a recession, the market will have anticipated that, and bond levels will be lower in the U.S.

I think the challenge today is somewhat different from the 1997 Asian financial crisis and the 2008 economic and financial crisis. In 1997, the market and the economies quickly bottomed out, and we knew that you couldn't get any worse. In 1997, going back to Korea, the stock market dropped 49 percent, the currency dropped 65.9 percent, so combined in U.S. dollar terms, the market dropped 85 percent in just one single year. On October 23rd, 1997, the Hang Seng Index here in Hong Kong dropped 16 percent in one day. So we knew that the market was bottoming out very, very quickly, and therefore it was somewhat easy to conclude that it was time to be contrary, it's time to buy. Today, I think the challenge is that we know the inflation is high, we know that central banks are raising interest rates, but interest rates are still negative in real terms. Inflation rate is eight percent, interest rate is four percent, so you still have negative four percent real interest rate. Chances are the interest rates are not going to be high enough to put inflation rate down, to tame the inflation, but chances are the interest rates will be high enough to push the economy into a severe slowdown or even recession. I think in the United States, it is a very interesting situation where the labor market is very tight, but in Europe, I think a recession is almost a certainty. So there is still a long way to go where the bottom will be found. I think that's a challenge for us to figure out whether or not this is a good buying opportunity. But in the time remaining, I would like to give the audience opportunity to ask all these brilliant minds about whatever you have on your mind.

He's talking about us. I think I'm looking at the one minute 27 on the clock. I'm looking for the brilliant minds. We need brilliant questions. Short question, well, if there are no questions, that means you have addressed all the questions that everybody has in mind. Anyhow, I would like to thank this distinguished panel for your wisdom and for sharing your thoughts and your experiences. This is extremely illuminating, and we thank you very much. Again, we thank HKMA and Hong Kong Stock Exchange for holding this great event. We're very happy to be here, which signals that Hong Kong is open and we're ready to do business. Thank you very much.

Thank you very much, Mr. Weijian Shan, for your able guidance for our panel. Gentlemen, our photographers are standing by. They would love to take your picture if they have that opportunity. Don't leave the stage, Jim. Thank you. If you just hold in there, we're going to get all of you to take a photo. Fantastic. There we go. Ladies and gentlemen, we will be taking a short break, but it is only a short one. Listen for my voice to call you back. Due to health concerns, we are not going to be serving coffee, but there is bottled water to keep you hydrated during the break. Keep an ear out, and we will be calling you back for our next panel very shortly. Thank you very much.