Asia Summit 2015 - Global Capital Markets: Taking Stock of Recent Developments

Event Context & Logistics

• The Milken Institute Asia Summit 2015 concluded with a final panel on Global Capital Markets moderated by CNBC anchor Martin Martinson.
• Total Assets Under Management (AUM) represented by the four panelists (David Bonderman, Josh Harris, Michael Milken, Michael Kim) was estimated at approximately $470–$480 billion.
• Milken Institute announced plans for the 2016 Asia Summit and listed upcoming global conferences in Los Angeles (May 2016), London (October 2015), New York (November 2015), California (December 2015), and a Global Health Summit in Washington (March 2016).

Assessment of Current Market Conditions

• Not a Crisis: Panelists David Bonderman, Josh Harris, and Michael Kim characterized recent market volatility as a necessary adjustment rather than a systemic crisis, noting China's real economy is growing 6–7% despite stock market corrections.
• Stock Market Dynamics: The Chinese stock market was down 50–60% from recent highs but had previously surged 268% in the six months prior; it continues to outperform Western markets despite the bubble burst.
• Global Growth Baseline: The base case for the global economy remains low growth (2.5–3%) with zero interest rates, driven by quantitative easing in the U.S., Europe, Japan, and China.
• Tail Risk: Josh Harris identified "increased tail risk," warning that a hard landing in China could reduce global growth by 100 basis points, as China accounts for 35–50% of world economic growth.
• Liquidity Environment: Michael Milken highlighted that liquidity is at record highs, with U.S. individual net worth in cash having doubled since 2007 and Japanese corporate cash holdings representing 40% of GDP.

China-Specific Analysis

• Economic Shift: China is transitioning from an infrastructure and export-driven model to a consumer-driven economy, with domestic consumption growing at double digits (10%).
• Currency Management: David Bonderman and Josh Harris anticipate the Renminbi will eventually strengthen, though the central bank may use reserves to stabilize the currency in the short term to manage capital outflows.
• Investment Inefficiencies: Michael Kim noted that China still offers significant pricing inefficiencies, citing an example of acquiring a logistics business at 7.5x EBITDA versus a 14x industry multiple.
• Transparency Challenges: Michael Milken warned that a lack of transparency in Chinese bank balance sheets, specifically regarding Non-Performing Loans (NPLs), remains a critical barrier to assessing the true health of the banking system.

Regional & Structural Investment Opportunities

• Deleveraging Arbitrage: Josh Harris identified the deleveraging of the global banking system, particularly in Europe and Asia, as a primary opportunity; banks exiting the market create supply-side arbitrage for private equity and non-bank lenders.
• Capital Structure Gap: Apollo and other firms see a unique opportunity to fill the "middle capital structure" in Asia (mezzanine/high-yield), as the region's credit markets are a fraction of the U.S. size relative to its economy.
• Demographics as an Engine: Michael Kim emphasized Asia as the demographic center of the global economy, noting that North Asia (China, Japan, Korea) houses the world's three largest economies by GDP.
• Healthcare & Aging: The panel highlighted the aging population and increased life expectancy (70% increase in Southeast Asia over two generations) as a guaranteed growth driver, particularly in healthcare and elder care sectors.
• Financial Technology: Access to modern financial technology and systems in Asia is viewed as a potential catalyst for growth, currently lagging behind U.S. standards.

Strategic Approaches to Market Entry

• Localization Imperative: Successful investment in Asia requires local presence or full localization to navigate cultural nuances and secure control of businesses, as emphasized by Michael Kim.
• Relationship vs. Transactional: The panel distinguished between the transactional nature of debt/trading and the relationship-heavy nature of equity private equity, where long-term "drinking" and networking are often prerequisites for deals.
• Education as a Driver: Panelists noted that Asian middle classes spend significantly more on education (15% of income in Korea) than U.S. counterparts, viewing it as a primary consumer product and a driver of future innovation.
• Cultural Synthesis: Michael Kim argued against full Westernization, advocating for an "Asian form of capitalism" that blends Western efficiency with local cultural and political structures.

Forward-Looking Statements & Predictions

• Interest Rates: The panel consensus suggests zero-interest-rate environments will persist for the long term due to central bank coordination and the inability of the Fed to raise rates significantly without destabilizing the global economy.
• Consumer Shift: China is expected to become a leader in environmental efforts, electric vehicles, and bioscience, shifting focus from raw GDP growth to the quality of life.
• Currency Wars: Josh Harris warned of potential secondary currency devaluations in Japan and Korea as a reaction to Renminbi weakness, potentially triggering a currency war in export-heavy regions.
• Investment Focus: The overriding strategy for 2015–2016 is finding alpha through risk-adjusted returns and arbitrage in volatile markets rather than predicting macroeconomic directions.

Audience Interaction Highlights

• GDP Redefined: An audience member from China argued that the slowdown is a positive shift toward well-being and consumerism rather than a failure, critiquing GDP as a flawed metric that ignores quality of life.
• Healthcare Investment: Panelists agreed that China is rapidly increasing bioscience investment, positioning the country to lead in healthcare solutions for its aging population.
• Population Dynamics: The panel discussed the long-term impact of the one-child policy, noting that while the population is aging, the focus is shifting to the welfare and health of the existing, wealthier middle class rather than population numbers.