Conference Presentation, Panel
Asia Summit 2015 - Treasure Hunters: Finding Value in Today's Market
Milken InstituteTom Finke, Paul Horvath, Rob Petty, Takumi Shibata, Hans Paul Birkner, Mike Milken, Chris Langer, Stefan Kostjusko
- Panel Premise: The four institutional managers (Tom Finke, Paul Horvath, Rob Petty, Takumi Shibata) frame their strategy not as "treasure hunting" for short-term windfalls, but as hard work to generate long-term value amid market nervousness.
- Market sentiment is currently negative despite potential gains, largely driven by the Chinese market's decline after a >100% rally and uncertainty regarding a potential 25 basis point Federal Reserve rate hike.
- Tom Finke (Babson Capital):
- Focuses on investing through the cycle across global fixed income, private credit, commercial real estate, and alternatives.
- Identifies Asia-Pacific high-yield and private credit as offering superior relative value due to fewer market participants compared to the U.S. and Europe.
- Dismisses the existence of a credible high-yield credit bubble by comparing current valuations to 2007 levels.
- Continues to allocate capital to high-yield credit and global private credit as core cycle investments.
- Paul Horvath (Orchid Global Asset Management):
- Argues the current environment is one of the toughest in decades, with most assets yielding less while carrying higher perceived risk.
- Identifies the $53 trillion asset base of the global top 30 banks as the primary "treasure chest" for value generation.
- Attributes value opportunity to regulatory capital requirements, specifically the Basel III shift from a 2% equity-to-assets ratio to a 9.5% requirement.
- This 7.5% regulatory gap on $53 trillion creates a $4 trillion problem for banks to address by 2018, leading to asset sales or risk-sharing opportunities.
- Proposes a contrarian strategy of partnering with banks to disintermediate "disintermediators," leveraging bank origination expertise rather than bypassing them.
- Rob Petty (Clearwater Capital Partners):
- Focuses on absolute return in the Asian credit market, estimating a $35 trillion asset class with 70% in loans.
- Reports current portfolio yields of 20% for top-of-capital structure deals and 18.8% average yields across direct lending platforms in China and India.
- Maintains a conservative 50% loan-to-value ratio with senior, cash-on-cash structures.
- Highlights that U.S. loan defaults remain at benign levels despite equity volatility, noting defaults spiked in 2009 post-crisis but have remained stable since.
- Identifies non-bank lending as the primary growth vector, with shadow banking in China growing at 74% over the last five years (now ~11% of the market).
- Notes that Asian banks cannot fund long-term infrastructure due to liability mismatches, creating an opportunity for direct lending and alternative capital markets.
- Takumi Shibata (Nikkei Asset Management):
- Predicts the next 25 years will feature unstable and dangerous geopolitics, necessitating a move toward conviction-based investing.
- Advocates for reducing portfolio dilution ("watering down" positions with indices) in favor of concentrated portfolios (e.g., 45 stocks).
- Cites high-conviction global equity portfolios outperforming by 6% and Asian equities by 8%.
- Warns against the 60/40 equity/bond model, predicting global growth will likely remain between -0.5% and 2% due to demographic shifts and "Japanification."
- Argues private credit is superior to equities in this context because it generates mid-teens returns without relying on global growth, provided the loan is at the top of the capital structure.
- Believes central banks will not shrink balance sheets or exit quantitative easing for the foreseeable future due to regulatory constraints (Basel III, Solvency II) and the need to maintain asset prices.
- Hans Paul Bürkner (BCG):
- Pushes back on the view of current times being uniquely unstable, noting that conflict-related deaths in the last decade are lower than any prior decade (e.g., compared to the Congo).
- Q&A and Specific Opportunities:
- Recourse in China: Enforceability is not the primary barrier; the focus is on securing top-of-capital structure positions in hard assets (property) where bankruptcy codes have been strengthened since 1997.
- Financial Institutions (FinTech/Non-Bank): Rob Petty identifies opportunities in non-bank financial companies, specifically in India's NBFC sector and Chinese asset management firms (e.g., Huarong, Cinda) acting as non-bank lenders for a developing market.
- Valuation of Financial Equity: While Chinese financial institutions may trade below book value (e.g., Cinda at 0.8x) during IPO delays, Petty argues their underlying ROE compounds at double-digit rates, offering future multiple expansion.
- Japan Market Outlook: Shibata characterizes Japan as nearing full employment with zero GDP gap, driven by government KPIs and consumption growth, presenting a five-year investment opportunity despite long-term social welfare risks.