PEI: Are there certain areas of the world that KKR is more excited about than others, in terms of private equity investing?
George Roberts (GR): I think they all are unique – it just depends on what your stomach for risk is. You know, the farther away you get away from the United States, obviously the greater the risk is – the greater the returns are, too. Although, I’d be remiss if I didn’t say we feel it is a very good time to be investing in the United States too.
One area we’re not now in is Latin America; when we can find the right group of people that are experienced there, we [will] have somebody from KKR that will go down and work with them. We are approaching this prudently – making sure we have the right person/team in place. This is no different than how expanded into Europe and Asia. We look for the best local partner with the right expertise and we want to mix that with the right KKR people to ensure that the growth our firm is culturally consistent and fits well with the local culture.
If anybody had said two years ago that unemployment in Germany was going to be 3.5 percent, they’d have been laughed out of the room.
PEI: Is it difficult to translate the traditional, US-style private equity control buyout model to emerging markets?
GR: Well, you can’t do them there, so there’s nothing to translate. You have to be a minority investor if you’re going to invest in China and become a value-added partner to an entrepreneur. Singapore’s different – we actually own two companies in Singapore (and so is Korea, where we own another one). We’ve done one large control buyout in India, but … [typically] in that country, you’re also looking to be a minority investor.
PEI: How do you confront challenges like ESG policy implementation when you aren’t the controlling shareholder?
GR: Well, you have to pick your partner right in the first place. And the thing about a number of these emerging markets [is], it’s not who has the money, but many of these companies look and say, ‘Okay, who can help me?’ And that’s how they make the [partner] selection. That’s why Sinochem picked us to help them [expand] Far Eastern Horizon’s financial leasing – they figure we could help them in lots of ways that they couldn’t achieve as a great big SOE.
PEI: You mentioned Latin America heating up but a lot of people feel that parts of Asia are quite frothy – is that not also a worry?
GR: Sure. As I mentioned, your best investments are not going to be with people that just want your money. They’re going to want something else. And if they want something else and you’re a minority investor, you’re going to be able to negotiate a decent price. And if you can’t do it, you don’t do it.
PEI: In the parts of the world where KKR operates, which macroeconomic issues are of greatest concern?
GR: Well, you’ve got to start with the US, because that still drives what happens in the rest of the world. So what do we have in the US? We’ve got big, big deficits – they can’t continue. We’ve got relatively benign inflation, a very slow growth economy. We’ve got consumers, which are 77 percent of the economy, whose homes have lost nine years of value creation, if there was any. You still have very high unemployment, by a lot of standards. States have big deficits.
Having said all that, we’ve got a lot of faith in the political process in the country, and that we eventually will get it right. I think we’ll start to address the right issues in this country. But it’s going to be a while. And we’re in for another two, three years of slow growth. That having been said, we know from experience that this kind of volatility can also be a good time to invest—managements tend to prefer private capital in times of market uncertainty and tough markets can also help to differentiate strongly performing companies from weak ones.
PEI: What does that mean for the rest of the world?
GR: If interest rates remain so low in the US and we continue to print money, the Japanese yen and the euro are going to be higher priced versus the dollar.
PEI: How would that affect the way you approach deals?
GR: What we typically do in terms of currencies, whenever we make an investment, we’ve hedged out what that is, so we’re not taking currency risk on our equity investment. And the debt’s always priced in local currencies, so [it’s] matched that way.
What I think we really focus on is what the drivers of growth are in the businesses we have, and take on the overlay of the economy they’re in. If anybody had said two years ago that unemployment in Germany was going to be 3.5 percent, they’d have been laughed out of the room. But that’s what it is. And that’s with a very strong euro and Germany’s export-driven economy.
PEI: Is Europe, or are other regions, a concern?
You have pockets in Europe that are doing quite well. The Northern countries are doing pretty well. France is doing pretty well. And the UK has taken the bitter medicine that I think will help them come out the other end of it in a couple of years.
China basically drives commodity prices. What happens there will impact other places.
In each economy, there’s something else that drives it and you try to do your best and figure it all out. We look at these sorts of issues all the time.