Rerouting Trade, Private Equity Test

25:06developed. The real value is of all these industries coming along the corridor, establishing here and creating raw material for some other industries, semi-final products, creating all different things not only for Mexico but for the rest of the companies along the world. So that's the main idea today of the corridor. It's not only crossing cargo but also developing value added to the different cargo coming on it. So map this out 10, 20 years down the line. Where do you see this corridor and where do you see it positioned in global trade? Well, 10 years, of course, I see the corridor working together with the industrial parks, the train going every day and development zones outside the industrial parks because as we know the concept of industrial park is just the company establishing inside, you know, creating jobs and that's all.

26:10But here, for example, the companies that are going to establish here at the corridor, they have to also benefit the community around the industrial park in order to become a really, really development pole, right? And the federal government is working together with some regulation in order to help the companies to accomplish these important objectives. In ten years I see the corridor, of course, with the development of specialized terminals, cars, containers, bulk, anything required, like maybe a new train line that goes straight from one port to another one, maybe in less than three or less than four hours, moving from one side to another one.

26:55And at that time, I'm expecting to be more competitive or offering more competitiveness than we're offering now. So at the start, you said you're not trying to compete with the Panama Canal. But then in 10, 20 years, could you see a position where the corridor has expanded to a point where it does compete with something like the Panama Canal? Yeah, maybe at that time, we can talk about a more competitive alternative. Up next, for years, private equity was the path to higher returns than public markets offered. But that's no longer a given. What does that mean for your portfolio?

27:39Hey, everybody, this is Kevin. This is Nick. Hey, this is Joe. From Hey Jonas. You know, I recently learned that every 36 minutes, another child in the U.S. is diagnosed with cancer. Think about that for a second. Some of the bravest warriors you will ever meet aren't professional athletes or superheroes. They're kids in this fight. And every day, these young warriors face challenges most adults couldn't imagine. Yet they continue to show up with incredible courage, determination, and hope. That's why we're proud to support Hyundai Hope on Wheels. The past 28 years, with support from Hyundai, their dealers, and every new Hyundai sold, Hope on Wheels has contributed over$300 million to childhood cancer research, helping save more than 40 ,000 kids.

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29:05This is a story about beating expectations. For years, private equity has been an important tool in the investor's toolbox because of its ability to deliver better returns than public markets. Not to speak of what it's meant for entrepreneurs like Dan Namorow, who built his own electrical company, never expecting private equity to come knocking on his door. When I started my business, having an end goal was not even a thought in my mind. I had no idea about business, never for a second. If I was approached in year one by someone who said, Dan, you're going to sell this business in eight years for millions of dollars, I would have simply laughed at them.

29:49And then private equity arrived. First, I thought it was a joke. I thought it was a scam. I, within eight years, was going to almost 12x my EBITDA and become a newly minted millionaire. But that payday came with a tradeoff Dan says he did not fully understand. I do not want to disparage the company that acquired mine, but I can say that no matter what an owner thinks is going to happen, they need to take a step back and look at the reality of things. And what I mean by that is you are no longer in control of your business. It absolutely 100 % hurt not only my soul, but the soul of the business.

30:40Dan's experience is one founder's account of one deal, not a verdict on private equity as a whole. And for Namuro, timing was everything. He sold at the top when cheap capital and rising evaluations fueled demand for companies like his and justified high prices. Private equity buyers could pay those high prices because they could generate returns simply off of the financing. But all that has changed. The role of private equity is to provide, hopefully, outsized returns relative to what could be gotten in the public markets. It's to provide incrementally higher returns and therefore raise the returns on the whole portfolio.

31:22According to a report by Bain, private equity deals, fundraising, and payouts to investors surged in 2021, fueled by COVID-related stimulus. But then dealmaking slowed in 2022, forcing private equity managers to return fewer profits to investors. Steve Ratner has spent much of his career in and around private equity. He is now chairman of Willett Advisors, which manages the personal and philanthropic assets of our founder and majority shareholder, Michael Bloomberg. Ratner says changes in the market have made the case for private equity less straightforward for investors. There was a time when interest rates were near zero, where there was sort of a crying need for outsized returns.

32:04We now have positive interest rates. Has that reduced some of the attraction of private equity? Yes, in two ways. First, any time interest rates go up, the attraction of equities goes down. because if you can invest in a fixed income security and get an interest rate of X, and that's high enough relative to what you think you're going to get with the volatility and risk associated with equity securities, you're going to migrate toward fixed income. With respect to private equity specifically, there's an additional issue, which is that private equity is heavily financed with debt, and therefore when rates go up, the ability to make the numbers work, so to speak, on a private equity investment gets harder because, in effect, your costs have gone up.

32:48And so you can't pay as much for the company and still make the kind of return you were hoping to make. Stephen Kaplan, a professor at the University of Chicago Booth School of Business, has studied private equity for decades. As you know so well, markets go up, markets go down, rates go up, rates go down. But as you look at it, to what extent was private equity doing artificially well because we had historically low interest rates? I mean, approaching zero interest rates. Did that distort the process? I don't buy that so much. Private equity really outperformed for a long period of time in all interest rate environments.

33:28And I think the late 20-teens rates were low and maybe that was a help. But the private equity firms also benefit from improving their companies, and the public markets also benefited from the lower interest rates. So, you know, it's sort of as an apples to apples comparison. That's why I like just looking at how the private equity does relative to the public markets and the S &P 500 in particular, because the S &P 500 is going to be affected by many of the same things. According to Professor Kaplan, an analysis of U.S. buyout funds shows that private equity largely delivered on its promise of beating public markets for decades, from the 1990s all the way through 2018.

34:20But since 2019, that pattern has reversed, in part because big tech's remarkable rise has pushed public market returns higher, and in part because the higher prices generated during the boom days have made it harder for investors to get their money out. The ultimate goal, by and large, is to sell the company at some point. That has become more difficult in recent years, perhaps in part because of the increase in interest rates. Certainly, we talk to limited partners who say, wait, I'd like my money back now. And the general partners say, oh, no, no, it's too soon. Like to hold on for a while. What's the problem with exit right now?

34:56The deals in 2020 and 21, they paid high prices. Then they got hit by interest rate increases. And those deals are not doing so well. And I think a number of the private equity firms don't want to sell because they think if they hold it longer, they'll be able to get a higher value. and as a result, they're not selling. And so realizations or what they call in the industry DPI, which is distributed capital per invested, is on the low side. And that's what LPs are complaining about, rightfully so. PitchBook reports that the backlog of companies held by private equity firms has now reached over 33 ,000, up from only 19 ,000 a decade ago.

35:48And with less support from cheap leverage and rising valuations, private equity firms are increasingly being judged on what they can actually do with the companies they buy. Andrew Weinberg, founder and CEO of the private equity firm Brightstar Capital Partners, says 2022 represented a fundamental shift. I think 2022 is an inflection point for our industry. If you look at the prior 20 years, if you bought something and grew at a few percent a year and took on some leverage and had multiple expansion, that was a great return. And I think the Bain Research Report did a great job of chronicling this and then said, OK, here's the new norm post 2022, which is the old 5 % growth is really now a 12 % bottom line growth to achieve the same return that one did before.

36:34I love it personally because I've been waiting for this market. I've been waiting for a market where the investor can differentiate between the manager that is purely focused on leverage and multiple expansion to the manager that is focused on operational value add and the application of AI. So in terms of being ready for this environment, we've built Brightstar to be ready for this environment. We have a deep team of not only investors, but operators who have experience in the space to do it. And I think what the investor is going to end up seeing is a much bigger differentiation or distribution of returns from managers based upon who has built their firm for this environment.

37:13As performance pressures for private equity funds grow, investors increasingly focus on issues like how they get their money out and what fees they're paying. Jason Tyler, president of wealth management at Northern Trust, helps wealthy families and family offices navigate the changing investment landscape. Now the fund sponsors are coming up with, first of all, they're trying to get to new investors that didn't typically have either the interest or the ability to invest. And so they're trying to create more liquidity. And that will attract investors that don't feel comfortable having their money held up for eight to ten years.

37:51That attracts a smaller investment size. And then conversely, a lot of the largest investors, a lot of the ones that we have as clients, their historical ability to invest, they'd say, well, we don't want to pay the fees that these funds have. So we'll be more patient and we'll look for ways to invest directly into companies. Well, now the private equity funds are saying we'll find that opportunity as well. Maybe a client, maybe an investor can invest in our fund, but if they do that, we'll give them an opportunity to invest without the same fees directly into the company. Investors historically don't like to pay fees or at least like to pay the lowest fees they can.

38:31At the same time, are some family offices or ultra high net worth people discovering actually it's not that easy and it's pretty expensive even to do it yourself? And it's a great way to frame it because a lot of investors think, well, I love the investments I've had, but why would I want to pay the fees here? And so a lot of what the top private equity funds do is they're explaining to their investors all the hard work they're doing to source and then do research and their investment thesis and due diligence on companies as a value add. so that direct investors acknowledge and have to appreciate that there is work that's being done by the funds that they're not able to do alone or even potentially with the family office staff that they've hired, which oftentimes are great, great, very strong professionals, but they just don't have the resources of a large private equity fund.

39:28There's little doubt that private equity is here to stay. But as financing becomes more expensive and exits take longer, the market could be narrowing the field and rewarding firms that can prove they bring more than capital to the companies they buy. What you're going to see is some of these private equity firms perform. Some of them don't perform. They're not going to get more money. In some cases, they will. And that's the capitalist system. But whatever the pressures on private equity firms, For people like Dan Namorow, who are selling, the question isn't whether private equity is beating market expectations, but whether the price they're receiving beats their own expectations.

40:12The sale of his electrical business gave him the means to start over, which he's now doing from a beach in Costa Rica, a pretty comfortable way to beat expectations. Coming up, for nearly 70 years, Cuban emigrates have been waiting to return and invest in their native country again. As yet another economic crisis looms, may this just be that time.

40:43Hey everybody, this is Kevin. This is Nick. Hey, this is Joe. From Hey Jonas. You know, I recently learned that every 36 minutes, another child in the U.S. is diagnosed with cancer. Think about that for a second. Some of the bravest warriors you will ever meet aren't professional athletes or superheroes. They're kids in this fight. And every day, these young warriors face challenges most adults couldn't imagine. Yet they continue to show up with incredible courage, determination, and hope. That's why we're proud to support Hyundai Hope on Wheels. The past 28 years, with support from Hyundai, their dealers, and every new Hyundai sold, Hope on Wheels has contributed over$300 million to childhood cancer research, helping save more than 40 ,000 kids.

41:21But we're not done yet. We need your help. Together, let's bring every warrior home. Learn more at HyundaiUSA.com slash Hope on Wheels or ask about Hope on Wheels at your local Hyundai dealer. Hi, I'm Barry Ritholtz, inviting you to join me for the Masters in Business podcast. Every week, we bring you conversations with the people who shape markets, investing, and business. I speak with CEOs, Nobel laureates, market innovators, and legendary investors. Whether you own stocks, bonds, real estate, commodities, even crypto, these are discussions you absolutely need to hear. Subscribe to the Masters in Business podcast on Apple, Spotify, or anywhere you listen.

42:06This is a story about hope triumphing over experience. Once again, the Cuban economy appears to be on the brink of collapse in the face of tightening U.S. economic sanctions, this time without the potential for help from the Soviet Union or Venezuela.

42:27We're not investing in Cuba. It would be a loss. The only way I'd live in Cuba is if the Cuban system collapses and Cuba becomes a democracy. When communism falls, I would return to Cuba. The section of Miami known as Little Havana is home to over half of Cuban Americans whose families fled the Castro revolution nearly 70 years ago. And even as Havana, 200 miles to their south, struggles, many remain hopeful that things can and must change. Cuba's in a lot of trouble because unfortunately for them, it's run by a bunch of incompetent communists. Being communist is bad. Being an incompetent communist is like the worst.

43:09Before the revolution in 1959, Cuba had the third largest GDP per capita in Latin America. Today, the Economic Commission for Latin America and the Caribbean estimates that the country has the lowest nominal GDP per capita in the region. Because of the U.S. sanctions, they've just been starved of finance for so long. I think every sector, pretty much every sector, is open to investment. Emily Morris is a research fellow at University College London. There's a lot of uncertainty about Cuba right now. I won't ask you to predict what will happen, but give me a range of scenarios that might happen.

43:46OK, well, the first scenario is, I suppose, the intended scenario for the actions that have been taken by the U.S. You create such a lot of hardship that somehow the population turns against their government or the government is forced to resign. And then you have a change of regime and you have a new political system and then you have the restoration of capitalism. The second scenario is that the U.S. continues to create more and more hardship and the situation just gets worse and worse in Cuba. The third scenario is if you went in and took out either the president or Raul Castro, who's 95, and then somebody else would step in.

44:26And then the fourth scenario is what they refer to as greater military action, which would be to ramp up the pressure by using U.S. military to damage infrastructure and all the rest of it. Again, unlikely to achieve the objectives. Some who hope for change in the Cuban economy point to President Diaz-Canel's proposed reforms. In the non-state sector, the list of prohibited activities will be narrowed. There is also a set of regulations to encourage foreign direct investment. They concern the right of superficies, removing obstacles, the use of bank accounts, and foreign direct investment approval timelines.

45:21In June, Cuban lawmakers passed 176 sweeping free market reforms, including the expansion of foreign and private investment, the decentralization of Cuba's economy, and liberalization of factors such as tourism, banking, property, and agriculture. We've had this statement by the Cubans, which is an interesting one, and I think we should, you know, take it seriously. But this is an acceleration. It's much more explicit, and it's an invitation to Cuban-Americans to invest in Cuba. It includes privatizations, a wider opening to foreign investment, and the actual withdrawal of the government from central planning system.

46:04In this very difficult context in 2026, the balance seems to have tipped in favor of those who favor market reforms. but they have a credibility problem. Pavel Vidal is a professor at Pontificia Universidad Havariana in Cali, Colombia. He is Cuban-born and worked at Cuba's central bank and the Center for the Study of the Cuban Economy until he left the country in 2012. We need to see how they move forward with these reforms to effectively demonstrate that these aren't temporary reforms. mere cosmetic changes or announcements, but that they are genuinely willing to change the ownership structure, the mechanisms of the economy, and that the state will withdraw from the economy, giving more room to domestic and foreign capital.

47:06But where some see the promise of the announced reforms, others are deeply skeptical.

47:16Particularly some Cuban-American investors eager to return to investing in their home country. They are afraid as a communist dictatorship of the entrepreneurial class having actually freedom and actually having essentially an opposition that can challenge their government. Andro Nadarci Leon is a Cuban-American hotelier whose Lion Grove has substantial real estate investments in the United States. They're never going to allow for any meaningful amount of private market activity. They're completely lying, you know, and it's a farce. These steps that they're taking with these supposed reforms, they're doing it to buy time.

47:53They're doing it because they're trying to run out the clock on the Trump administration and the efforts of President Trump and Secretary Marco Rubio. That's what they're playing for. The Cuban people know it. We just want them to be a nicely run country. We're going to let our people go back and let them invest in Cuba if they'd like. Essential to President Trump's plans to open Cuba up to U.S. investment are the heavy sanctions he has imposed. Sanctions that have hit the Cuban economy hard, including one of the most promising sectors, tourism. Since May, hotel groups including Melia, Iberostar, Blue Diamond and Archipelago International have either pulled the plug or curtailed operations.

48:36And the number of visits last year were down 62 % from the country's peak in 2018, the lowest in 20 years other than during the COVID-19 pandemic. The offering of services in Cuba is obviously significantly limited by how broken that economy is. And so for many years now, the tourism market in Cuba was not a market that had five-star properties. properties, I mean, upper upscale luxury was not really something that you saw in a significant way in Cuba. It was a lower rated market. The good thing is that there is a significant amount of existing properties there, existing assets, and existing infrastructure within the tourism industry.

49:18I think it requires firms like ours going and acquiring those properties, reinvesting and reimagining and upgrading those properties, and also bringing the operating conditions of those properties to a world-class scale. And so that's the lens through which we're looking at investing in Cuba. Surely there will also be the development of brand new resorts. I think there will be an opportunity for the development of branded residential product, right, which often is joined together with resorts or other types of hospitality properties. And so we think the future is very bright in that sector, without a doubt.

49:53And it's a very important pillar of the economic recovery of the island. Tourism seems to be a sector, at least initially, that can generate opportunities, especially if travel restrictions for U.S. citizens are eased. They could provide the natural market for a boom in visitor arrivals, as happened, for example, with the easing of sanctions and travel restrictions during the Obama administration. Vidal says at this point, the Cuban government isn't looking to places like Mexico or Chile to inform its economic policies. It most often cites Vietnam or even China. As Cuba seeks to rebuild its economy, are there lessons it can learn from other Latin American countries?

50:52Normally, the models the Cuban government tends to look to are Vietnam and China, especially since they are making economic changes and so far have not mentioned political changes. So that transformation model, well, that's their preference. I'm not saying that's the model that will prevail. There are factors that would hinder the possibility of carrying out reforms along Vietnamese and Chinese lines without political changes. So I think Latin America's influence, its democratic institutions, and the rule of law offer lessons that will have to reach Cuba at some point. Cuba is very close to Vietnam.

51:49They've had experts coming over. They explicitly say that they're studying or they're following the Vietnamese model but adapting it to the Cuban reality and so on. They're looking for a Vietnam model, a very different kind of economy. The Vietnamese model or economy at the time of the beginning of the transition was very rural. Cuba is a very urban society. It's a very externally dependent economy. So, you know, the conditions are different, but the idea of following a transition path towards a mixed economy is clearly and explicitly stated now by the Cuban government. But some of those who know best say that for real economic reform, Cuba will need to change its entire political system away from state control.

52:35It is not clear what model is supposed to guide this proposed transformation in Cuba. In fact, that's a problem. They want state-owned enterprises to retain a significant role, along with significant state intervention in the economy. That would be more of a Scandinavian-type model, where market reforms are expanded, but the state continues to play a significant role in regulating economic processes, which would mark a departure from Latin America. For Cuban Americans, it's been a long wait to see conditions on the ground change enough to bring them back. There's been hope for some 70 years, and at least so far, the experience has not risen to the level of those hopes.

53:33But make no mistake about the appetite to return. You know, myself, I think the entire Cuban exile community has been dreaming about this day to be able to support our brothers and sisters and see our country be reconstructed and see our country become a beacon of freedom, a beacon of economic prosperity and hope for the entire region.

54:03Thank you.

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