The US Fed has apparently begun the process of monetary tightening. There is some concern about a recurrence of taper tantrums and outflows from emerging markets such as India. In addition, recent events in Ukraine have caused a collapse in markets around the world. How do you think these developments will affect India? And, to what extent do these developments affect an investor like Brookfield?
I’ll step back from that question first and put everything in context. Interest rates were zero and were taken down to zero. And they’ve been in America for two years. And, so, even if we see 8 or 6, 25-basis point growth, we’re talking about another three quarters of shorter rates in the US, one-and-a-half, two percent, maybe two and a quarter. These are incredibly low rates in an economy. So yes, the Federal Reserve is going to raise interest rates, they should raise interest rates, and it’s going to happen. But, despite this, rates globally are going to be extremely low for alternative investors. And yes, there are some things and some places where people’s money will sink. And the stock markets today are adjusting globally and it’s changing some markets globally, and that’s all natural. And, actually, that’s a good thing because the stock markets were probably pretty high in some places. There was a spread between value and growth stocks. Now, this means on a global scale, as interest rates go up people are buying bonds; They can earn two-three quarters on the long-end by buying long-end Treasuries and feel they won’t lose any more money. Capital will flow from emerging markets. So, it’s disruptive to flows, but I think what we should put in perspective is that, in the long term, interest rates are going to be extremely low, regardless of short-term changes or divergences. This means money is still going to flow where you can get term premiums or where you can get additional premiums from emerging markets.
Therefore, some analysts believe that one of the mistakes the US Fed could make in the entire process is tightening too fast. What are your thoughts on that?
I’m not a macro economist, but the central banks in the United States and most of the world have an incredible group of macroeconomic individuals who are very skilled. And it’s not a place they haven’t been before. So, they have a lot of history to watch. And I think they will make the right decision looking forward.
I know you said you are not a macro economist. But do you think inflation is due to temporary supply-chain shocks caused by the pandemic by people buying more goods than services? Or, is this the start of a longer trend?
I find that people often like to group ideas or concepts, and there are often 50 colors they can be. And there was no doubt that the economic engine of the world had stopped. And it’s made big changes to supply chains, people’s jobs, the movement of goods around the world, and all that stuff. And when things just stop, it’s very difficult to start over. And because of that, we’re looking at a significant amount of supply-chain issues, not demand issues. So, I would say (it is) fleeting.
How does an event like Ukraine add to that mix?
These types of political events cause uncertainty in the markets, and people want to move to more fixed securities. So, you’re going to see more buying of US Treasuries, you’re going to see more buying of things that are in that direction with less risk. But, in the fullness of time, be it pandemic, war or recession, or you name it, there are setbacks for the world but we always go through it.
So let me come to Brookfield. What is your view on the outlook for commercial real estate in the light of work from home or hybrid setups post the pandemic?
I think what you are talking about is office real estate. And, I would just say that globally, we have a very large office portfolio. And what we are seeing today is that either companies are back in offices, or they are going to be back in offices soon, or there are plans to be back in offices. With the decline of COVID-19 around the world, offices continue to reopen almost every week. And, more importantly, when we’re talking to global CEOs, they have no plans to run the workforce from remote locations today. It is possible that they will give more flexibility. It is possible that they will operate their offices or build offices a little differently. But, the bottom line is that most things are going back to the way they used to be.
There has been a certain amount of disengagement between China and the US due to geopolitical reasons. And most multinationals have a China-plus-one strategy. Now, India would like to be a ‘plus one’. What is your view on the prospects of India emerging as a potential rival to China in a wide range of industries?
India is an incredibly attractive place to invest. We have been very fortunate to be involved in India in a big way over the past decade. And India has many advantages – English language which is really important for global companies, rule of law, and workforce that is enterprising. I think India has many big advantages. And I encourage everyone who is listening to it, to take advantage of it at this time, because I think you will continue to build the country in a great way.
PE deals hit historic highs in 2021. PE funds are also sitting on an estimated $2.3 trillion of deployable funds. Do you anticipate that strong PE and M&A activity will continue into 2022? Or, will some of the issues we discussed — supply chain shocks, inflation, potentially higher interest rates — make investing difficult?
Perhaps the most important thing for private equity groups is putting money at work. And the trouble is, when you can raise a lot of money and the valuation is high and you have to put it to work at that time. But given that significant cash has been raised and valuations are falling, this is a great opportunity to put money to work. So, I believe there are some great opportunities now, there will be some areas where it doesn’t work out. But, many people believe that at this point in time, the returns will be higher over the long term than you would otherwise get because you are taking businesses private, or otherwise at lower multiples.
You have invested in Reliance’s pipeline, Jio’s tower business; You have a huge real estate portfolio but you haven’t invested any money in the Indian startup ecosystem yet. Would you be willing to support these technology platforms going forward?
Our growth investment business revolves around the $690 billion of assets we have globally. So, when we find a product that we can influence the economy of our businesses, we invest in it through our development fund. We haven’t invested in India, but we have a big team in India. And when we get some opportunities, we’d love to be able to put money to work and help entrepreneurs with their businesses. And so, I doubt we’ll have some opportunities to do that over the next few years. And we’re excited about it.
If I am not wrong, you have invested 20 billion dollars in India. What kind of investments can we see in India in the next three to five years?
We have $100 billion in capital today to invest in opportunities. We don’t have any fund that will probably put more than 20% in India. But, we have no target as to which one we should invest in.
Real estate and infrastructure are difficult sectors to navigate. How has been your experience with Brookfield so far?
I don’t think there is any problem between us. When you’re asking a question like this, you have to think about more than 15 years. But all I want to say is that our playbook is to visit a country, learn the market, introduce ourselves to entrepreneurs, meet banks, become a local player and invest in opportunities when there is little capital in the market. And, one thing I would say about India is that it lacks, generally, a large amount of foreign capital to do enough things. And that has allowed us to be able to put a significant amount of money to work in India. Whatever we have done, we have been treated well. And, so, we’ll continue to build out our business.
However, it took a long time to complete the tower deal with Jio.
the answer is yes. But I would say it was a big transaction that had regulatory issues. But in the end, we got the approval. This happens in every country in the world in which we operate. Therefore, one should not think that India is the only one which has some regulatory issues; I can tell you that in the USA, or Canada, or the UK, or other places, we have similar issues getting approval. We think we are among the highest quality of investors, but that sometimes takes time. And we are long term patient investors and I think if one does well, India will be a great place to invest.
One of the major programs of the Modi government is to improve the ease of doing business. So, given that you have worked in many areas in India that are not considered so easy, would you say that it is becoming easier, that there is more certainty than it was a few years ago?
We invest in 30 major countries around the world, and we don’t need to invest in any one country. And we don’t need to be there. We try to choose countries that are big enough that can be meaningful to us, have a good respect for capital where we can operate with standards that require us to work from a global perspective and with our institutional clients. should do. And, we can stay for the long term. The capital market can go up and down. And I would say India has done all those things and over time it has become better and easier for us to work. Now, it has become easier because we are more experienced and our people are better, and we understand the country more and hence, we can fit into the system. Still, I think it has improved and the government is trying to open up and streamline it, and I think they are doing a good job of it. With regulation, no one is ever happy. They have always wanted easy regulation, but we have been able to operate across the country.
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