#23 - Melissa Ma: China, India, PE

25:45those government directions, at least in my experience, at least when I was a U.S. investor, don't seem to drive too much of investors either one way or the other. and in China, we have a saying, it's just now starting where perhaps people are going to be investing in the strategic direction, particularly on technology, where the government's going, that's still to be early. But for decades, we've always said, don't bet against the Chinese government, okay? So it might not direct you where to invest, Alex, but it's only gonna direct you where not to invest, okay? That makes sense. So in terms of investing, It seems that there's this swinging pendulum in China between entrepreneurs and the state.

26:27Where is that pendulum today? And is your sense that the philosophy and value system has changed recently? I do not think the philosophy and the value system has changed. Again, when you are working on 15-year plans, you certainly can't have pendulum swinging too much, right? But what I would say is the execution, the communication, and the coordination of what the government needs to do to move the economy forward has been very challenged and there have been mistakes made and they will continue to be mistakes made. It's been really hard. And let me explain why I think it's been so hard, right?

27:01It is because we're in completely unknown territory. Xi's government is in completely unknown territory, okay? Because over the last 20 to 30 years, the Chinese economy has changed so rapidly and the drivers of the economy have changed so radically that there is, as I said earlier, there's no playbook. So let me just give you an example. When we started Asian Alternatives, this was still predominantly a state-driven economy, meaning the state-owned enterprises, most people work for the state, the GDP, et cetera. Today, China is solidly a country and an economy that is driven by the private sector.

27:42I think many people might not understand how central it is, what a central pillar it is. It's estimated that over 60 % of the GDP growth every year is due to the private sector. Over 70 to 75 % of the tech innovation is coming from the private sector. 90 % or more of China's people today work for the private sector. In 1995, which was not that long ago, that number was less than 20%. Okay, right now, that's 20%. And today, and if you look at the number of businesses in play today, 90 plus percent are also our private sectors. So what's happened is that you have a communist party and you have a communist system that was trained and built on controlling an economy because they controlled the primary levers of the economy.

28:32That's not the case today because the private sector does. So I think ultimately what this pendulum is doing is it's about the government trying to figure out their way and what the role is in the economy, where, you know, many people viewed and felt like for decades, they just kind of stood out of the way and let people do whatever they wanted. Yep, that's probably right. But now it's to the detriment, right? It's to the detriment. So for example, they just recently had things like anti-monopoly laws, right? And for years, we did live in the tech sector, where these tech behemoths, I tell people, you know, Alibaba, in my mind, would never have gotten to the scale it has gotten to, and the market power got to had been the United States.

29:12And there are many aspects of that model and the monopolies that got formed that are squashing entrepreneurism, that are not going to allow the innovation that China needs, right? So I think at the heart of that tech crackdown was the right policy intention, but obviously the communication, the execution of it has been really harsh. So the pendulum, so people got really scared, right? Households got scared. We have a household confidence issue right now. private business sectors got scared. We have a business investment issue, confidence issue right now. All of that has led to obviously investor confidence issue.

29:47So the pendulum swung too far and now they're trying to move that pendulum back by being very proactive in reassuring both people as well as businesses' confidence in the private sector. And so we've had even starting as early, it's very early to see how that's going to play itself out, but very, very specific policy directives and supports for supporting entrepreneurship, private sector, et cetera, right? I think this is going to take some time to play out though. Until recently, China was clearly on pace to pass up the U.S. economically as the world's largest economy. Is your sense that that has changed?

30:30We hit an inflection point or Or are we still on that pace? Yeah. You know, Alex, it's a good question. I think there's two ways I look at it. One is it's just a purely numerical question, right? Who's going to have the larger GDP? And I could talk about that. But in many ways, it also doesn't matter. It's really kind of about where is global growth and where is global mass going to be. But let me do just talk to the numbers first for everybody. So, you know, China's real GDP growth rate last year was 5.2%. It is, they're targeting 5 % this year, obviously much slower than what we were used to as double digit growth in the last decades.

31:13However, you know, at this level, though, it still makes China the largest contributor to global growth. Last year, over a third of global growth, right, was contributed by China. and you know it's estimated that even with the you know any number of different sources you know looking at the next 10 to 20 years growth will slow to somewhere between three to four percent right but um if you know over the next between uh the next 10 years right if china continues to grow somewhere in that 3.5 to 4 percent average growth rate the math would argue that china will still become the largest, right? It used to be people thought it was 2030, now it's 2035 in the latest estimate.

31:53So 2037, I don't really think it matters, but at some point, if they're able to maintain that level of obviously lower, but more stable growth, right? I do think the math will work itself out. However, I made a point earlier that I almost feel like it just doesn't matter, right? Because ultimately, regardless of what that, if that number is exactly three or four, what's not going to change is population growth and consumption growth. And that's ultimately what's fueling China's growth. And you could argue global growth. So just to kind of put a little bit of numbers behind this, China today represents about 18 % of the world's population.

32:29And I know we're going to talk about it later. We all know that India overtook China as the most populous country. But guess what? When both countries have over 1.4 billion people, population impact moves very slow. So even in 10 years from now, right, 10 years from now, it's still going to be, right, it's, it's going to just, it's still going to be 16 % of the population, right? So it's, it moves very, very slowly. But more importantly, the number, it's the number of people that are moving into what we call the consumer class, right? People that have an average of$12 or more to spend per day, right?

33:03That's where consumption gets driven. And so China's going to add about 240 million people to this new global consumer class. India is going to contribute a little bit more, about 300. But between the two of them, that's 55 % of people that are going to be earning more than a subsistence level that are going to start to consume non-discretionary items are coming from these two countries. And that contribution then ultimately to global growth means that even though China has a slowing growth rate and has a slowing population, It's just math. You know the power of compounding, right? So, you know, 18 % of the world's GDP today is from China, and that's projected to grow in 10 years to 22%, right?

33:45And global growth today, as I said, is about a third from China. It's still expected to be 27 % to 28%, just under 30%, you know, in 10 years from now. So the importance of China as an, I would say, to the world, but also when we think about it as an investment portfolio, I think regardless if it's the largest country or not is almost irrelevant. If we look at China economically today, some argue it's approaching a once in a hundred year economic storm. Would you share your perspectives on that? Once in a hundred year economic storm, I would not say that it depends on what you mean by storm. Okay.

34:21I would not say that this is the worst that it's ever been in China. Those of us that were there and I'm old enough to have lived through Tiananmen Square, right that was i would argue much worse low point than here uh if you go back even a little bit further right you know coming out of the cultural revolution i mean five percent of china's population died over an 18 month period of starvation okay so then when i talk about there being a very long history right this is not the hardest that chinese people have had to endure right however what i would say is that we are there's without a doubt as i said um earlier china has to make this transition, right?

34:59They have to make this transition from being a middle-income country to at least a moderately prosperous, higher-income country to get out of that middle-income track. And so we fondly call that at Asian Alternatives the new norm, right? There has to be a new growth model, right? There has to be a new growth model that China's going to finish. It cannot rely on the same growth model over the last 10 to 20 years. So let's just contrast, you know, in broad strokes, what is that transition going to look like? The old growth model was all about property or real estate, right? Well, look at what's happening to the real estate market today, right?

35:33And today, directly or indirectly, it's estimated, and there's difficult to get an exact number, but through construction and services, et cetera, expected that the real estate market still contributes about 20 % of China's GDP, which is why when it's so challenged right now, it is weighing on the GDP, right? So the transition they're trying to make is to become less reliant on property, more reliant on domestic consumption, more reliant on services, right, as an example. The old growth model was all about infrastructure projects, particularly driven by government's capital, low-tech manufacturing exports.

36:08We all know, right, the made in China, right, the history of the made in China, and the concept of growth at all cost, right? So, you know, this was great for as long as it could last, but that's the problem. It was higher growth, but it was not sustainable, right? And so what the economic plan that's consistently been renounced, but also you can see them moving with every policy in this direction, is slower growth, but what they call more balanced growth, right? What they basically mean by more sustainable growth. And that is a new growth model that, in addition to consumption and services, has to rely on more advanced manufacturing and exports, right?

36:49Green development, one of the reasons why China is so strong in solar and EV, because this push for sustainability on the climate environmental level was a must-have, right, given some of the health issues and pollution crises that China was going through. It just started much earlier. So greener development. And at the very top of this is really technology, right? In march of this year we had the two party what they call the two party congresses is the most important meetings of the communist party and a key message out of that is My interpretation again that their priority one two and three is now really about tech self-sufficiency And partly you could argue it's what's happening on the macro external factor But also if you think about go back to economics 101, right?

37:31What are the factors of productivity land people capital efficiency or technology, right? We just talked about how land cannot be that driver going forward. People, they're not going to enjoy the demographic dividend the way that India is going to enjoy it. Capital, China has a much higher indebtedness today than it did 10, 20 years ago. So it cannot rely on the government just endlessly pouring money in. So therefore, technology is really the only, it's got to be the driver of this new growth model as well. If we look at the education system in China, it's the largest in the world and it produces some of the smartest people on the globe, many of whom come to the U.S.

38:10because of tremendous opportunities to generate wealth. But that dynamic may be shifting. How do you see that? This one is really hard to call, I have to be honest. And it's hard to call because there are domestic factors and external factors that are out of China's control that are now affecting this, whereas before it was purely about domestic. So let me talk just first of all so we can get some context, right? What did we see over the last 10, you know, the first 20 years ago, it was basically every Chinese parent's dream that their child would get to go to the West, right? Didn't have to be the U.S., but get to go to the West, get to go to school and get to work, right?

38:46And eventually you would bring your family over, you'd emigrate. Over the last 10 years, we've started to see much more what we call sea turtle or return, right? So many more returnees because they saw the opportunity set, not just culturally, but more importantly, financially, because remember, I told you Chinese are very economically pragmatic, right? For having, you know, it's their time, right? And for wealth generation, in that case, going forward, I think that there are two things that are going to be different, and how that's going to play itself out in the numbers, I think, are yet to be seen.

39:18So when I talked about domestically, we're seeing this movement, particularly around entrepreneurs and Chinese students and younger people, somewhat around sectors, right? So for example, if you want to pursue a career in AI, right? And you want to work for a global leading technology company, NVIDIA, OpenAI, Google Media, yeah, you're going to stay in the US, okay? If you are interested and you think your career is in blockchain or crypto, yeah, you're not going to go back to China, okay? If, however, like many, many, many people are, EV, green energy, solar development, I think it's very hard to argue despite, and we can talk about if you want, the tariffs that were just put on.

40:04China's role in the supply chain for the next multiple generations for green energy and EV is probably undisputed. They have. They have been going back. Other entrepreneurs where they feel like there are opportunities to serve underserved markets, particularly maybe with some government support, right? These are also going to be attractive. They're going to be attracting people back, right? The other factor that I think is a bit of a wild card here is really what happens. We're seeing it play out first in the U.S., right? Where are these macro geopolitical tensions going to play out? Is it going to meaningfully impact the flow of people?

40:47work visas, restrictions on technology, restrictions on universities, right? I mean, all things that I actually honestly find very troubling because I think that in the end of the day, global migration is what makes this world great and what really makes each country great. So I'm hoping this is not going to get too far out, but if it is sustainable and scalable, yeah, some Chinese parents are scared to send their children to the U.S. to study and others may soon be scared to come to build their lives here. Vice versa too, U.S. to China as well. Let's talk a little bit about geopolitical risks in China.

41:25They're elevated. A lot of investors are finding it difficult to underwrite that risk, particularly with the recent experience of Russian assets going to zero. How do you think about all that? Again, I come back to this dichotomy between there are two considerations, right? There's what's happening domestically within Chinese borders that drive certain investors' sentiment, but there's also the external, right? There's external developments that affect investor sentiment. So let me start first with the domestic one, right? And certainly that's where your point about Russia finds out. To me, this is a very simple question, right?

42:01Which is, if you believe that under Xi, ideology has overtaken economic pragmatism, because there is no doubt that China would not be where it is today. You wouldn't even had me on this podcast talking about China, right? Had China not been very economically pragmatic and we got the kind of growth, right, that we had in the last 10, 20, 30 years. If you believe that has stopped and China has now turned to ideology and ideology over economic pragmatism, of course you should not invest. All we have to do is look at Russia, right? Anytime ideology overcomes economic pragmatism, That is a recipe for disaster as an investor.

42:38We don't see any signs of that. Hopefully, I've talked earlier about some evidence that we don't think that that is happening nor going to happen. So as we talked about, China is going through this once in a decade, two-decade transformation it has to make to bring from a middle-income country to a high-income country, and there will be bumps in volatility. But if you take that long-term view, then we feel, you know, we would argue China's still investable, right? And that's really the question I think many people are asking, is China investable? So I think that is really the question that investors need to ask themselves, is China investable, is on that domestic question.

43:15The external question, particularly as it relates to U.S., this is a whole new territory, right? Because this is about whether or not the United States, in feeling, continuing to feel threatened by China are going to impose restrictions, right, on outright investors as we, you know, have potentially could see through the executive order or the industries and types of companies that we want invested, right? And that to me really comes down to investor by investor, right? This is where not only as, you know, there are going to be things if the executive order comes out, all U.S. investors, you, me, everybody's going to be affected.

43:52But even if it doesn't come out, right, there are headline risks that I think that, you investors, other investors, depending on their governance and their risk appetite, are going to have that have nothing to do, honestly, with the investment thesis. If we zoom out and look back a couple decades, it seemed that the US and China were on a path of cooperation. And at some point, we potentially hit an inflection point where the trend is now towards conflict. Would you just talk about that change in sentiment and what happened? Yep. So I would personally push back on the word on conflict. I was blessed, I would say in many ways, honestly, blessed to have been a delegate to APEC, the Asia Pacific Economic Corporation, which happened here in San Francisco in November.

44:41And I really felt like that was a watershed event in the fact that it's not that, you know, we're ever going to go back to the way it was. But I think that Xi and Biden, and I believe that this is ultimately the U.S. and China, put a floor in their relationship, right? Right. They essentially agreed that conflict, war. Right. Is not good for either country. They are both the number one, number two economy. Right. And regardless of whether number one or number two, even if you look at the numbers out to 2060. Right. Almost 50 percent of the world's GDP are going to be controlled. Right. By these two countries.

45:15If you add India in there, then well over 50 percent. Right. And, you know, established economic superpowers do not benefit from disreverance. like that. Okay. So I think that the word that has been used is about rigorous competition. I mean, we are going to definitely continue to see some very intense competition. And I certainly hope we don't, you know, go to the other C word of conflict. Now, stepping back to answer your question, Alex, in many ways, it almost could be predicted. There is, I don't know if you've, if you're a student of Graham Allison and the Thucydides principle, right? He's a professor or at Harvard, and he studied all the conflicts going back in time, like hundreds of years.

45:59And he basically looked at whenever there was a rising superpower threatening an existing superpower, right? How many times did that erupt in conflict? And I think there were roughly like 17 or so different cases you could look back in the history of the recorded world, right? And in 14 out of 17 times, it did actually erupt in conflict. conflict and the longer that the superpower had been in place, the more inevitable that there was going to be some kind of conflict. Well, we know where the United States stands, right? I mean, we've had the longest reigning superpower from a military, political, as well as economic perspective than, you know, one of the longest in the history of time, right?

46:41A recorded time. So many people would argue that this was inevitable. Now, I don't think this is going to be a military conflict. I think this is getting played out in a new, you know, what they call economic imperialism. And at the heart of that economic competition is technology. So there's no surprise that technology is at the middle of the maelstrom right now in that US-China conflict, right? And that makes sense. Would you talk about some of the investment opportunities you're finding currently in China? Sure. First, I have to go back to, remember, we talked about our risk philosophy being all about risk-adjusted returns, right?

47:16Our risk premium for China has definitely been increasing, right? And when we do these risk premium numbers, you can actually see it in the numbers. So we first increased two years ago our risk premium for Chinese investments due to domestic factors, what we knew were going to be increasingly challenging, volatile macroeconomic environment as China makes this transition, right, to this new growth model. Last year, we increased it yet again because it seemed, for external factors, it seemed like this, particularly with, I don't want to just say the U.S. because obviously the EU and other countries are part of it, but certainly being led by the U.S., that that tension was only going to continue as well, right, as this competition had ended up.

47:58So with that, I want to say, right, you know, so, you know, if we look at the risk premium or the return target that we're looking at today for China, even higher than when we started COVID. So, you know, then really the reason I tell you that is because it really sends you, then you have to be disciplined, right? You really have to look for areas. What are going to be the sources of value that are going to get us those outsized returns? And when I look at the, and by the way, it's less, right? So the scale and the pace of our investments in China today is lower. We don't think it's zero. And we think that China needs to be part of any global portfolio.

48:31But we also completely acknowledge that the risk is higher and you need to get compensated for taking more risks. So the number of opportunities that are going to give you that with some degree of confidence is less, right? So the allocation to China will probably be going down. So where am I finding those investment opportunities is where am I finding those potential outsized returns? So three areas, valuation, sector, and manager. So let me talk about valuation. You're seeing it first in the public markets. We had month after month of net outflow in the Chinese public markets in Q4. And every quarter of this month, or every month of this year, we've seen rising inflows.

49:14And this is by the initial wave of people coming back because it's just too cheap to ignore. If you just look at the tech companies alone, the Chinese tech brand names, Alibaba, Baidu, Tencent, JD, they're trading at 14 to 15 times PE. I'm going to say that again, 14 to 15 times PE. You know where the Magnificent Seven traded, right, this last quarter? An average of almost 40 times, 40 to plus times, right? So, you know, that's just one example. So we are seeing that play itself out as well on the private equity side, both at the deal level as well as looking at it as well as on the secondary level, right?

49:53We are seeing some decade record low valuations and the pendulum clearly swinging back in the position of asset managers or those people that have capital. So that's one. It's just purely price. The second is on sector. And this is where you asked me before about how do you think about what the government's doing. Here we believe that before you didn't want to bet against the Chinese government. I think in many ways going forward you need to bet with the Chinese government and with their plan. So we've developed kind of a red, yellow, green, just a very simple framework for as we think about future investment opportunities because we think they do need to align with the national policy priorities.

50:35So in the green area, right, the green, these are sectors that we think you should overweight because they're aligned with the national priorities or they're playing to China's strengths. Examples include decarbonization, right, anything having to do with kind of green energy. Tech innovation or localization. Digitization, particularly on the industrial level. Innovative drugs, critical healthcare infrastructure, domestic brands, right, they want to produce in China, they want to consume in China. you know and of course in the technology side anything that in my mind that will help the deep tech space right things that will help china's self-sufficiency chips quantum computing ai robotics right you know the list can go on and on even before this recent kind of political wave i would say most of our managers were moving in these areas because these were the higher growth areas but certainly now with these being aligned with the national priorities seems to be pretty clear direction.

51:33You have yellow sectors, yellow light sectors, where you want to be cautious on sectors that are heavily regulated, like financial services, you know, maybe some areas of education, but it doesn't mean that you avoid them all directly. You have to just be very careful which subsectors and which companies. So for example, you know, after school tutoring, private school education, when that whole crackdown happened, we thought this was going to be the death nail for education. In the end, it was only that after-school tutoring business that got impacted. Nothing else got impacted, and the education sector is still very thriving today, right?

52:08Finally, I will say that there is what we call the red light sectors, right? These are sectors that are incompatible with the socialist value system or now are potentially subject to U.S. sanction risks, right? Which is very hard to predict, by the way, right? Hard to predict. But nonetheless, at least on the domestic side, there are things like improper media, improper entertainment, excess consumption, vaping, things like that. Okay. Why don't we transition to India? You touched on it a little bit and you also referenced the fact that India recently passed up China as the most populated country in the world.

52:45Some experts contend that India is the next China. How do you see it? I just think it's so funny whenever people say that. Because first of all, anybody who's ever visited, spent time in, or really knows the Chinese or the Indians very well will tell you, both the Indians and the Chinese will tell you, India is not the next China. Okay. The next China is China. It's this new China, right? It's this trend. It's new norm China that we've talked about. And India, the next India is also India going through this massive transformation, right? Right. India's attractiveness right now. And while it's drawing so much investor attention, Alex, is not because it's the next China, because it's the new India.

53:28Right. And it's, you know, and so let me just kind of tell you why, just a little bit more factually. Right. Why India is just not a replacement for China. Right. I get this question all the time. Right. Is I get a couple of questions. Right. Is India a replacement for China? No, because first they're at radically different scales. Right. China's GDP is over 19 trillion dollars. India's GDP is barely$4 trillion in 2023. And if we look at it, as we kind of went through the numbers earlier, where China's going to go from 18 % to 22 % of global share GDP over the next 10 years, India's also going to grow, but it's going to grow from 3 % to 5%.

54:10And similarly, when you look at their contribution to growth, so when people also look at me and say, oh, India's going to be the next economic driver of growth to the world. Okay, definitely not in my lifetime, and maybe not in my children's lifetime, because that's really slow, right? That's really slow from a scale perspective. Got a long way to go. Got a long way to go, right? Yeah. And a horse race between the next China and the next India. And adjusting for their starting point, which would you pick in terms of their growth relative to their recent past? This is one of my least favorite questions because I have to answer it with the answer that I hate the most.

54:48It depends. Okay. You know, I'm an attorney as well. Sorry. And attorneys always answer questions with it depends. Okay. It's not yes or no. There's a gray area. I am not an attorney and I hate to use that answer. It depends because it makes me sound so wishy-washy, but it really does. And it doesn't depend on if you like China or India. honestly, it depends on what are you trying to maximize for, right? If you are trying to maximize for outright dollar return, right? Outright dollar return from Asia. Okay. I don't want to say globally, right? China. China is still your better bet. Again, it's just because of the quantum, the scale, right?

55:32Of dollars of return that are going to have to come from China, right? And so So, you know, again, if you are just trying to pick one off and, you know, one off investments and you're just trying to get the highest IRR or the highest multiple, I still think China has a very good shot, but you could probably just play India. But if you are like most of our institutional investors and you're trying to create 10, 20 year billions of dollars of wealth generation, return generation during that time period, right? You know, hopefully you don't have to pick one or the other, right? I think that's also, you know, very few have to do that.

56:09I think you need both. You clearly need both, right? But if you put a gun to my head and you said you had to pick one, then the risk-adjusted probability would probably still be on China. And India is the world's largest democracy and its population is 4x the US. And many argue that India has massive potential, but it can be difficult to get things done there. How do you think about the rule of law and the current leadership in India and its support of capitalism? Yeah, I would say the same way that China is because of its government, right, and because of Xi and under Xi going through a massive transformation that it must make in order for it to solidify itself for the next couple, you know, its economic prosperity, the next couple of generations.

56:56While India is riding a high star right now, it has the same risk. It also has to make that transition, right? So, you know, just to put this a little bit in context, yes, India today is the fifth largest economy in the world by GDP. But it has been for the last couple, you know, last two years. And we think it will continue to be the fastest growing major nation for the next decade. It's going to grow at six to seven percent. Right. That's impressive. And because of that, it's going to very quickly be the third largest economy. It's going to be, you know, U.S., China and India. Right. And for good reason.

57:28Right. For good reason. They have, as you said earlier, they had the most populous nation, but they also have the highest youth population. So they're going to enjoy the demographic dividend, right, for a couple of decades. From a geopolitical standpoint, and this is where I do give Modi credit, he's done a really good job of positioning India as a sweet spot, right? Balancing its position with the West in one side and with China, Russia on the other, right? Trying to balance the political with the economic. right? And is well-placed to really gain share, global trade share, global investment share, right?

58:06As, you know, amid this shifting technology and supply chain, right, that we're going to see, right? On the domestic front, however, in order for India, I think, to really maintain that, they also have some challenges they've got to overcome, right? At Asian Alternatives, we like to say that India is the most unorganized economy that we have in Asia. And I don't mean unorganized because people go there and they complain about the roads and logistics, et cetera. It's highly unorganized in a couple of areas that you need to be organized in order to be able to have sustained growth, particularly at that level.

58:42So for example, they don't really have a kind of a very formal salary or wage structure. 80 % of the workforce is still in a very unorganized sector, no insurance, low wages, inefficient labor practices, right? So that's why they just hit the 2 ,500 GDP per capita mark, right? Which is, you know, from a developmental economics, an important part where you start to kind of see some consumption coming in, but that's still a very low GDP per capita. Tax, for example, less than 2 % of businesses pay corporate tax last year, right? How are they going to grow if less than 2%, right? And a similar number of people and, you know, maybe not that quite low, but a very small percentage of people actually also paid income tax, right?

59:27So, you know, these are just a couple of the very big structural factors that have got to, you know, get organized, right, in order for this economy, you know, economy to grow. If we think about it from an investment standpoint, does India offer fertile ground for attractive investments or is there markets not sufficiently developed yet? No, absolutely. We do think India is an attractive investment opportunity overall. We've done that for a while. We made our first commitment in, in fact, an India venture in 2006. So we've been investing there for a very long time. But what I would, so it is developed to create opportunities.

1:00:10However, what I think right now is important, Alex, is that people need to make sure they're scaling it appropriately, right both in terms of you know amount of money that they're putting in where they're putting it who they're putting it with but also to be realistic about the pacing right about the pacing of this we're not likely to see the kind of hyper growth and the hyper scaling that we saw over the similar compressed time frame in china so let me give you a little bit more color right from an underlying opportunity set from an investment perspective per se the aperture has opened up. We definitely see more investment opportunities here than we did even, let's say, five years ago.

1:00:48And that is a credit to what the government has done, right? We have political continuity and stability, which has made a huge difference because India is an uber democracy, some sometimes say too democratized, right? The physical and digital infrastructure development, right? But most importantly, digitization. They've put hundreds of millions of people in these rural areas on the grid, right? You couldn't organize yourself if you didn't have people on the grid, in a way. And with that, the second thing they've also done is, you know, corporate governance and investor protections have always been very difficult and it's made foreign investors kind of weary.

1:01:25So there have been a number of landmark reforms and upgrades in legal structures that have made foreign investors feel a little more comfortable. And last but not least, you know, as somebody who does private equity and venture, to me, it is all about an ecosystem for investments and for exits, right? So we have much higher availability of experienced founders now, management teams. Digitization has allowed companies to scale faster. And our issue with India has never really kind of been the multiples or it has never really been the unrealized. It's really been the realized, right? That's been our issue.

1:01:59That's why we haven't put more money to work is because the DPI or what we call distributions to how much paid in capital is one of the worst that we have out of all of our Asia buckets right to date. But that is also slowly but surely improving as well. We're seeing a broadening of the IPO markets. We're seeing more secondary players. So secondary exits are coming up. We're seeing both more strategics, particularly the domestic conglomerates coming up, providing strategic venues. And in fact, just last year, India's stock exchange became the fourth largest in the world by market cap, which is something that we never would have thought a number of years ago.

1:02:37So hopefully that kind of trajectory on the back end of the ecosystem will continue. And are there any particular segments where you're finding great opportunities? Yes, I wouldn't say that it has necessarily changed dramatically, right, from what we were doing before. But I would say the aperture maybe has increased in the number of types of opportunities we can look at a little better. First, from a stage perspective, we had been focused predominantly on the venture side, the early stage venture, but we are starting to see more and more opportunities on the growth and the buyout side. And a really pleasing development we've seen over the last couple of years is control.

1:03:16So we are seeing, we are solidly seeing a buyout or more control environment, you know, possible where it was not possible in the earlier days. From a sector perspective, you know, as I said, as they continue to organize, right, Remember I said the biggest issue is this India is an organized. As the organized economy transition starts to continue, right, there are new sectors, literally new sectors that are opening up to private investments or really foreign investors that we didn't, that were not really there before. So let me give you a couple examples. So first on consumers, right? The fact that this digitization I talked about earlier is bringing, you know, people from rural areas like tier two cities, tier three, four, five, six cities in India.

1:04:00Online means that there is more e-commerce, direct-to-consumer, Indian brands, healthcare services available, right? Just, you know, a middle class, you know, growing, think the things that are growing middle class buys, right? That certainly is a rising opportunity. Second, because of the digitization, the financial services area is much more interesting, right? It's very underpenetrated in terms of all forms of financial services, banking, insurance, savings, credit, right? And so barely just scratched the surface there. And finally, we have to talk obviously about technology, right? The digitization of traditional industries, right, has brought about B2C opportunities, SME opportunities.

1:04:49But in addition to just digitizing the traditional sectors, we've also started to see an emergence of new tech as well, right? Space tech, some of the deep tech, and also, you know, a lot of India going global, for example, like in the SaaS area. So I think there are many chapters still here to be written as well on the tech side. If we look outside of China and India at the rest of Asia, are there any countries or market segments that stand out? So, you know, when you look at our portfolio construction, about 80 % of our portfolio today is predominantly a North Asia portfolio. And that obviously is concentrated in China.

1:05:27And then the next two largest markets would be Japan and Korea. So let me just briefly touch on that. They are from a dollar perspective, obviously, smaller than our investments right in China and India, but still very noteworthy. And particularly in Japan, And we've been focusing on the smaller end of the buyout side where we've seen some really strong returns. And this is really driven by the two big fundamental challenges that Japan has had and we know will continue to have. It's demographics, right? Aging and shrinking demographics. And it's predicted, for example, by 2050, if they continue on the demographic trajectory they are, they don't somehow try to turn it around with immigration or getting people to have more babies.

1:06:10there's going to be upwards of a 20 % gap in the workforce. Can you imagine that? For every business, you're going to have one in five employees are gone that you need. That's a lot. Second issue that Japan perpetually has has really been around productivity. What's getting better is productivity index among the OECD countries and developed countries has always the lowest. So our buyout opportunities really kind of play into this and try to take advantage of these transformations that need to be done in order to tackle the demographic and productivity issues, particularly four types of deals that we've been really focused on.

1:06:54Succession deals, you know, that's obviously straight out of the demographic playbook. The average entrepreneur or owner, private owner is over 60, is almost 70, Alex, right? It's one of the oldest people still working in these entrepreneurial, right? Single succession, you know, lack of succession situations. Consolidation, right? Where, you know, going back to its history of all the Japanese conglomerates, right? You know, continuing to need to have carve-outs, right? That's our third area, carve outs and then take privates. So we think these are all legs, of course, that are going to continue to endure.

1:07:33They're not just kind of short term opportunities. And then in Korea, also here we play in the buyout space as well as have recently been making commitments on what I call the venture or the venture in the growth space as well. A couple of key themes here that are driving our investments here go back to, again, some of the issues that, you know, Korea has. One, which is it's two-chable conglomerate-driven, right? The chables. The chables today still represent over 50 % of the market cap. Four, four top chables, sorry. The top four chables are over 50 % of the market cap. So the current government is obviously trying to streamline the chable structure.

1:08:14That's creating some carve-outs, corporate carve-out opportunities for us, trying to make Korea less manufacturing driven, right, more services driven. That has created a number of interesting industry roll-up deals and some VC and growth deals. And last but not least, just continuing to look at Korea's role in the technology ecosystem, particularly on the R &D side, consumer electronics, right? Those kind of opportunities, you know, we've been looking at pursuing through some venture and some growth deals as well. Melissa, you shared some excellent insights about Asia. Are there any final high-level perspectives you'd like to share about investing in Asia with our audience?

1:08:54Thank you. I mean, yes, I guess really we are going through, in my 30-year career here, investing, living, being a part of Asia. As an investor, I honestly don't think we've been through more polarizing, challenging, confusing times, right? So I really guess I would just leave a couple of big, big picture thoughts, right? First is that Asia is not a monolith, right? And so how you make money in China is completely different from India, completely different from Japan, right? And so as much as people want to lump it together, it really are those individual, you have to understand how money is made and lost in each of these specific contexts.

1:09:38That being said, they are also very interconnected, okay? So just because the US is pushing back, it does not mean that that is the end of Asia, right? What we saw last year for the first time was the growth in exports inter-Asia overtook the growth in exports, right? And the amount of exports that were going to Western countries, right? And that I think is only going to continue, right? That's only going to continue. So we can, sure, we have a whole other podcast, Alex, you should bring on somebody about global polarization and what that map is going to look like, right? But this is all part of what we're seeing as a rise of what they call the global south, right?

1:10:17It's going to take time. And it doesn't mean that there's decoupling. I don't say that. I just think there's going to be increasing polarization if the political elements continue, right? And so with that, I guess we just, you know, I'll leave with just asking your investors what I ask of my investors, which is really need to be patient, okay? We are just at the beginning of a story that is not, we don't, we have no idea how that, I don't say no idea, we have, we do not know how this is going to play out. Right. But during that time, particularly for a U.S. trying to have a balanced view, it is also been a time where I've never found the media, both in the U.S.

1:10:54as well as China. You know, I blame both sides to be as imbalanced as I've ever seen it. So you have to be open-minded and you have to, you have to work hard. You have to be really diligent to try to get that balanced view. So really appreciate podcasts like this and allow that step in the right direction. Yeah, this was great. Melissa, I appreciate your time and for sharing your insights today. Thank you. Thanks for listening. We hope you enjoyed this episode. Please visit our website at insightfulinvestor.org to access past shows and learn more about our podcast. If you have questions, feel free to email us at info at insightfulinvestor.org.

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