The new crucible of competition

It’s not every day the investment community kicks off a conference with a re-cap of the prior evening’s hockey scores. But then it’s not so often that LPs and GPs descend en masse on Canada.

But aside from the hockey talk, French spoken in the hallways and the occasional “Eh?”, the annual Quebec City Conference, envisaged as a sort of neutral ground for global institutional investors and fund managers, could have been held anywhere, really. Attendees had come from around the world to the city’s Château Frontenac to discuss topics of global relevance.

Chief among those was the economic recovery of Canada’s southern neighbour. Glenn Hutchins, co-founder of Silver Lake Partners and a former special advisor on economic policy during the Clinton administration, discussed the US public policy response to the financial crisis, the need to repeal Bush-era tax cuts and what a “path to fiscal solvency”, one that would “engender the kind of confidence that would bring out private investment and job creation”, might look like. The US must find a non-partisan way to move forward, continuing some level of stimulus over coming years but also enacting a plan for fiscal responsibility and “like Ulysses tied to the mast, make it happen”, Hutchins said.

The Silver Lake man also spoke about the importance of emerging markets, and the incorrect notion among Westerners that they are “just like us” but growing more rapidly. While people have observed that economic activity and employment have increasingly gone to emerging markets, many fail to realise that corporate activity has undergone the same shift, Hutchins said. As an example, he pointed to the top 10 global companies by market capitalisation: 10 years ago, seven were located in the US and none were in China; today, four are located in the US while three are located in China.

“It used to be that to be a global company you had to forge your business model in the crucible of competition in North America … and then once you were successful there, [you] took it outside [to] the world and essentially sold the same products and services,” Hutchins said. “Today, what you’re seeing is companies that are growing up … whose business models are being forged in the crucible of competition in the emerging markets.”

He was not alone in emphasising the importance of emerging markets – and the need for business models tailored to them. Jim Coulter, co-founder and managing partner of TPG, told delegates TPG had “opened its mind” to the returns potential of emerging markets in 1995 and subsequently learned many lessons along the way.  “If you think you’re going to take your business model from the US and into emerging markets, you’re going to get killed,” he said. “It is a totally different private equity business.”

Among the lessons he shared with the crowd was that money was not necessarily a differentiator for private investors. “The emerging markets you want to be in have high savings rates and relatively high liquidity,” he explained.

Coulter also told investors to “forget leverage”, select local partners with great caution and above all, be prepared. “It is still the frontier even if markets have emerged,” he warned.