Conference Presentation, Fireside Chat, Interview
Young Leaders Circle: A Conversation with Weijian Shan
- Sean Weijen (PAG Chairman & CEO) describes his 1969–1975 forced labor in the Gobi Desert as a defining, horrific segment of Chinese history necessary for understanding modern China.
- Conditions included temperatures dropping to -20°C/-30°C in unheated dugouts or self-built huts with no fuel other than dried cow dung.
- Labor requirements included digging frozen lake roots and hauling 500kg of reeds daily on ice sledges to paper mills, often with only two meals a day spaced 8.5 hours apart.
- Weijen attributes his survival and eventual success to self-education during the Cultural Revolution while many peers became "lost" without formal schooling.
- He read banned and random texts found in villages or salvaged from bonfires, including chemistry textbooks, insect encyclopedias, and French/Russian classics.
- His motivation was a philosophy of "always prepared," believing that if he failed to seize future opportunities, it would be his own fault.
- PAG currently manages approximately $32 billion in assets, focusing on private equity investments across Asia with a specific emphasis on China.
- A key case study involves an investment in China Music Corporation (now Tencent Music Entertainment), where PAG invested $60 million to secure >50% ownership.
- Three months later, Tencent invested at 3x the entry price; the company later went public on the NYSE with a market cap of $25 billion, driven by 800 million monthly active users.
- Weijen argues that China offers superior private equity opportunities due to its massive, uniform market enabling the scale required to compete, unlike smaller markets like Singapore.
- Regarding the US-China trade war, Weijen asserts economic imperatives will eventually prevail despite current geopolitical friction.
- Data indicates US exports to China dropped 24% (first 8 months of the year) compared to a 4% drop in Chinese exports to the US, widening the US trade deficit by ~8%.
- He estimates the US economy suffered a debt-weighted loss of ~$79 billion (0.4% of GDP) in the first 8 months, averaging $620 per household, largely due to tariffs on consumer goods.
- China mitigated tariff impacts by substituting US imports (e.g., lobsters) with cheaper alternatives from third countries like Canada, effectively lowering import prices.
- PAG's investment strategy in China specifically targets the "good economy" (domestic consumption) while avoiding the "bad economy" (export/industrial overcapacity).
- The "bad economy" sector suffers from 45% GDP investment ratios, massive overcapacity, and squeezing margins due to rising labor costs and currency appreciation.
- The "good economy" strategy focuses on businesses with meaningful entry barriers (e.g., licensed pharmaceuticals) serving the growing middle class.
- PAG achieves 20–30% IRR in China without the leverage often required in the US market to generate similar returns.
- Weijen projects a structural slowdown in China's GDP growth from double digits to 6% or lower due to demographic shifts driven by the one-child policy.
- The retirement of the large "lost generation" (who had high savings rates) will precipitate a drop in China's national savings rate, forcing a shift from investment-led to consumption-led growth.
- While growth rates will decline, he does not foresee a recession in the foreseeable future given China's low per capita income (1/6th of the US) and ongoing development needs.
- In response to questions on macro risks in private equity, Weijen outlines distinct hedging strategies for different markets.
- He rejects hedging macro risks within a portfolio, stating the only hedge is not to invest in countries with weak currencies or high interest rates that make hedging too costly.
- For India, PAG invests in outsourcing firms where costs are in local currency and revenues are in hard currency (USD/EUR), creating a natural hedge against rupee volatility.
- Weijen views China's political system as functional despite not being a liberal democracy, noting that "democracy is a terrible political system" but "there is no better system than that."
- He maintains the Cultural Revolution should be remembered as a "catastrophe," citing the 1978 Communist Party resolution, arguing that forgetting history risks repetition.
- Weijen contrasts Western and Chinese investment mindsets, noting that while standards for underwriting (e.g., "would you do a deal in China as you would in Kansas City?") should remain consistent, execution must account for local economic conditions.
- He emphasizes that private equity cannot hedge against macro risks due to illiquidity, unlike public markets where positions can be shorted or sold.