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Below is the transcript of a CNBC Exclusive interview with TPG Capital Co-CEO James Coulter. The interview was first broadcast on CNBC's Squawk Box Asia on 23 September 2019. The interview took place at the Singapore Summit. If you choose to use anything, please attribute to CNBC and Nancy Hungerford.
Nancy Hungerford: Thank you so much for taking the time to speak to CNBC while you are here in Singapore. We appreciate it.
James Coulter: Nancy it's a pleasure to be here.
Nancy: I understand you have been speaking to some of your peers and speaking to others here just about the state of business at the moment and I'm sure one of the big questions you get. How does this low rate environment negative rate environment in many parts of the world changed the way you approach investing?
James: You know interesting enough there is two swing thoughts so we've had an investing as we look at the economy going forward. The first is one of the implications of low interest rates is that a dollar in the future is worth more than ever. So it implies that you should lead into growth which is one of the reasons to be here in Asia. And secondly as we're late in the cycle I think it's really a time to look bottoms up rather than top down. Top down. It's easy to get depressed bottoms up there's just an extraordinary amount of interesting things happening in company formation and entrepreneurship.
Nancy: They're just saying you say late in the cycle because one of the big questions out there at the moment is just how late and when does the cycle really turn. When you look at your portfolio companies that are across so many different sectors what do you see? Do you see signs of a recession?
James: Well certainly growth has slowed globally not going negative in terms of recessionary worries but we're not seeing the sort of optimism and forward leaning behavior that we saw in our CEOs just a few years ago.
Nancy: So do you think the Fed is taking the right approach?
James: Well I think I should never be quoted as an economist than someone who's called seven of the last four recessions. But I do think that we are looking at a base case which is something that wasn't supposed to exist. Low inflation, low growth low interest rates and it might persist for a while.
Nancy: You keep predicting that you've got to be right at some point. And this gets back to that story. How do you find growth? I mean you mentioned it's out here in Asia but is the game harder now because everyone is on this quest.
James: Actually I think it's a really interesting time to look for growth and growth lies in disruption. You're one of the things we've been spending a lot of time thinking about Nancy is a change in the nature of change. For most of my career, change in business a bit like evolutionary changes this was assumed to be Darwinian. Step by step slowly over long periods of time in the world of business. That was kind of Japanese change. What we're seeing around the world today is a new type of change where industries are radically remaking themselves. For decades you have albums and music coming to you in a physical form. There's a period of time of pure chaos and then we end up on the other side of that with Spotify and streaming that sort of industry changing groundbreaking industry evolution is I think a huge investment opportunity.
Nancy: Where are we in that area? I mean given that you witnessed and you benefited from Spotify right you benefited from Uber as well. Where would you say in that cycle an enormous change that we are?
James: I think were mid that change it's been going on for a while but I've not seen it. I don't see it changing anytime soon. Instead I see this idea of punctuated equilibrium will come back to the term moving across industries and across sectors. What do I mean by punctuated equilibrium? I commented before a Darwinian change turns out in evolutionary biology. People have decided Darwin was a little wrong. Things don't happen slowly. Instead change happens very quickly where 95 percent of all phylum are created within 5 percent of the fossil record. So in general these moments of quick industry change are spreading through the economy. Often tech enabled but much beyond that. For example we're seeing massive change occurring right now in biotech which we're not probably talking about as much as we should be.
Nancy: Is that an area you are actively continuing to invest in?
James: We have been one of the largest healthcare investors in the world for decades but today the most interesting part of that for me in an intellectual sense is the change in gene and cell therapy that's happening at a rapid pace. I've been referring to it as a smartphone moment in biotech when the smartphone showed up in technology we thought it just showed up one day. In fact there were 20 years of inventions that were required before the smartphone changed everything. There have been 20 years of changes in biotech ranging from gene therapy to genomic sequencing to (inaudible) discoveries all of which are coming at the moment that I think are going to shape healthcare for decades to come.
Nancy: But what about the rise of 5G technology not be another example here. One of those punctuated equilibrium moments and you really have to take advantage of do you think we've yet seen the investment world really take advantage of the policy changes?
James: I think the idea of high speed for everything all the time is something that we're still exploring. I'm a little more interested in how that's going to happen because as we look at the tech markets there's a new player in that evolution and she's powerful and she's called geopolitics and the idea of how geopolitics is going to affect tech evolution is one of the questions I'm really taking back with me from Asia.
Nancy: And perhaps there is no bigger geopolitical consideration in the US-China trade fight at the moment. How does that impacting the way that you invest in tech and in China?
James: Well in technology first of all I think we have to begin to talk about a world that is a two or three tech stack world. What do I mean by that? I live in San Francisco and the technologists basically thought that network effect would overcome everything and the tech would be delivered on a global basis. But as politics have come into the picture we're beginning to see very different setups for the tech marketplaces in Asia and in the US. Uber isn't in all markets. Google isn't in all markets and this world of two tech stacks I think is going to be a fascinating set of investment opportunities.
Nancy: That present challenges for entrepreneurs even perhaps stunt innovation. If you're talking about a divide you know what's in the call splinternet?
James: Yeah I think Splinternet out is a great term for it. It will create both problems and opportunities. First of all it will be hard to scale anything globally because as you begin to go for global scale you're going to run into political boundaries. But if you look way back into history, one of the most interesting times in European history was when Europe split into many city states. They competed with each other and new technology came out of that. So it may be that having more competition across different parts of the tech value chain may actually drive innovation.
Nancy: There's another political dimension impacting innovation at the moment and that is what we started to see more and more of as you get closer to the elections coming from the Democratic side at the moment. There are calls to break up the attack. That's something Elizabeth Warren has said. Overall the current administration too still is looking at more regulation of tech. Does that concern you?
James: I think that what we're seeing is predictable and has both some opportunity and some danger. Why is it predictable? I've been talking a lot about the concept of societal seatbelts. Whenever there is a new technology, it takes society a while to catch up. It was 60 years after the Model T that we had mandatory seatbelts. It was 50 years after the Wright brothers that we had an FAA. We don't have 50 years as a society catch up with what's happening in technology. So as these tech markets grow just as in any new technology or market evolution society and government will step in. The challenge for the companies is the rules are not yet clear. And my view is that government and the company should come together to create a set of rules that will work for both while protecting the rights that I think must be protected.
Nancy: When you're in a period of punctuated equilibrium though, is it difficult for politicians for policymakers to keep on top of the pace of innovation?
James: Yes I think the problem that we often have as we speak two different languages Washington and Silicon Valley sometimes need translators but this has happened before in history. If you look back to the era of John Rockefeller in the early nineteen hundreds at first it took a while before Washington caught us up in terms of trust busting but eventually Standard Oil was broken up and that was probably the best thing that happened to John Rockefeller because the pieces became worth much more than the whole.
Nancy: While we're on the topic of the language of Silicon Valley and one of your big investments Uber didn't do as well when it actually came to IPO as many would have hoped were you disappointed?
James: No it's a long game. We're long term investors there have been rumors since the early part of this decade. No. If you look at tech companies over time in particular the winners it takes a while for market expectations reality and performance to combine. If you remember, Amazon was flat for maybe half a decade before people understood what it could be. So it's still early in the game in terms of the market's understanding of Uber and we're looking forward to see it play out well.
Nancy: Can you give us any guidance on our Airbnb as to where they stand currently?
James: Yea it's a great company and we're really very much behind the management team. They will make their choices as they had in the past and we trust them to do so.
Nancy: No inkling on the date then.
James: No inkling on the date.
Nancy: I want to go back to the question which is the US China trade tensions is a big geopolitical risk. Has that changed the way you approach it from China or the broader Asia-Pacific region.
James: It has. You know there really are three things I'm worried a lot about. First we touched on which is technology so how society and technology will come together. The second is trade and the third is trust. And those two go together. We have an international system set up on trust and trust is in many ways frame and probably the best example of that is what's happening in trading know for us as bottoms up company investors what that implies is that we need to change how we're thinking about Asia from cross-border Asian investing to within border agent investing. What I mean by that is in the early days of Asia it was about Asia out exporting. Today we're investing in Asian healthcare which is a very inter Asian market. We're investing in education something that is very high on the list of parents in terms of their spending patterns in Asia. So this idea of investing in consumption Asia rather than export Asia is a way to think about how to insulate yourself as best you can from the uncertainty. You know it's not that the trade war is good or bad in our view it's just that we don't know what it is yet. And that means we should stay out of the neighborhood where it can affect us as best we can.
Nancy: Do you think some of the aims are good though that helpful to your business. When you look at throughout the years having a business in China that aims to trying to reach here when it comes to fairness changes and intellectual property transfer and really just leveling the playing field. Is that welcome?
James: I would say that fairness in business and a set of rules that are both ways expressed and kept to are always good. You know where our job is to find the best investments we can, play to the table where we know where the rules are when the rules are uncertain or not enforced the right way. That makes our job harder. I hope that this will sort itself out in a way where we know what the rules are and we know how they're enforced.
Nancy: Do you worry that you could get to a place that where the US and China leaders on both sides digging so deep and that uncertainty does hit the consumer. And then there really is no investment you can make that is somewhat inflated from this fight?
James: The thing that I'm even worse at than predicting recessions is predicting politics. So again our way of dealing with that is essentially to find areas where it's what's happy at the company level not what's happy at the geopolitical level that will drive our returns.
Nancy: The relationship with the U.S. side. I'm just curious about your observations and how dramatically things have changed when it comes to doing business in China when you first started.
James: First started when we first started. We set up our business in 1992 in San Francisco and we looked first Asia. Most of the people in private equity set up in New York and look first to Europe. So we opened our first office here in Shanghai in 1994 and it was a very different market. We were bringing capital we were bringing expertise and today there is plenty of capital and plenty of expertise in our business in Asia. So we have to bring as a global perspective to these markets and a long term view as to how they will evolve. And I think there's still a ton of opportunity but it's certainly evolved since the days where it was all about the export market.
Nancy: And one thing that you're looking forward to or focusing on Asia I should say is the idea of impact investing. I know your recent rise find that is the focus. What role can Asia play?
James: You know around the world. We're really looking at a new era that we're talking about as an era of and. For much of my career business thinking was dominated by a 1962 treaties by Milton Friedman. We talked about profits being the sole Social Responsibility of Business. I think we've entered the post Friedman era where today it's profits and social responsibility and often the discussion is and or discussion. I think we have to very much focus on the concept of and. And it's not a U.S. or European or Asian concept. It is a global concept and I think Asia is certainly playing its part. We launched the world's largest social impact private equity fund a few years ago called Rise. We're now raising its second iteration and we're finding fabulous interesting investments across Asia. We're doing milk investments in India roofs rooftop solar and solar in India we're doing financial inclusion across Asia and in particular in China. And this idea of mission driven capital and mission driven entrepreneurs creating special opportunities is playing out strongly.
Nancy: The idea of Milton Friedman's social responsibility concept when I understand is really that corporate is their only social responsibility is to maximize profits presumably because of that fact the shareholders and any ideas. Not that we're a big bad corporate we don't want to save the world. It's just that the shareholders then have better return. They can decide whether they want to pursue philanthropic pursuits. The company can still have philanthropic agendas but they keep an eye on the prize so to speak. Why doesn't that work?
James: I think it does work in some ways. It's the timeframe that we express it over. So one of the issues with Friedmanism is it might work over very long periods of time but over shorter periods of time the idea of maximizing profits to the to the failure of your other responsibilities might work for a quarter or two but does not work over the long term. So as long term investors in private equity I think we've always looked in the post Friedman world where we never live quarter to quarter. And by keeping our social responsibility, we can build our company for the long term. We don't have to talk about war somehow in the public market. We got into this war where it had to be all solved within a quarter. If you look at a long term basis I think and is clearly the operative proposition.
Nancy: And do you find that your peers have a similar attitude because another issue here may be if you accept that principle, does it put you at a competitive disadvantage?
James: No I actually think we're at the nexus where I'm seeing the change. So first of all this concept I think in investing was originally called ESG environmental social and governance and I remember the first time I heard that term in the early 2000s I had someone explain to me. And I said Oh we've just been doing that for a decade. That's something we've always done. So the idea is not the new one but this is the first time I've heard at conferences in the business roundtable a real engagement on this issue of how are we going to discuss the Social Responsibility of business in a world where trust is breaking down. I think people are increasingly looking to their employers and to their companies to provide social impact that maybe they're not seeing from the other actors.
Nancy: Is there a struggle when it comes to defining what counts as ESG because different people have different values and we've heard Warren Buffett talk about the fact that he can't take a position on companies that sell guns for instance because it's not up to him. I know that's a different story because he owns a public company essentially or is involved in the public company but at some stage people have different religions different values and social enterprise doesn't necessarily mean one thing does it.
James: You know I agree with Warren on many things. I disagree with him on this. You know we don't do guns we don't do inappropriate video games and we don't do Juul. We believe there are things that we just will not do. And I believe that investors can choose who manages their money and they're looking for people with values they may or may not agree with them but they want people that have values and express them. So I think we're in an era where this idea of it's not my responsibility is no longer going to be acceptable and people will have to make choices about what's important to them.
Nancy: You mentioned Juul and that's another good example of how values or at least knowledge of what's good and bad can change because vaping initially was thought as a good way to help people who are addicted to tobacco to be off of it. And now there's so much other evidence or at least early evidence of the problems of vaping. First thing you must feel quite vindicated that you didn't invest in Juul.
James: Listen there was a lot of people who may have made a good returns on it but early on you really didn't have to do that much work to see where the usage really was. It was a particularly hard piece of work to do. But if you do the work and you have your values the decisions become more straightforward.
Nancy: Also on the impact investing side I mean you cited surveys where an enormous amount of younger workers want to work at a company that promotes social responsibility. People want to be invested in these funds but still it's not just one percent of a huge pool investment that's dedicated to impact investing. Why is that?
James: It's tiny. I think there's been a lot of confusion about what impact investing is. And you touched on one of the key issues is until we can measure impact well in a way that gives people confidence it's going to be hard to be definitive that you're delivering. And if you can't measure it how do you know you've really achieved it. One of the real I think entrepreneurial aspects of what we've done at RISE, is we spent literally two years coming up with a new measurement mechanism which we've now created a company and opened it up to other investors to use this methodology is it perfect? Probably not. Is it a step in the right direction? Absolutely. And we need metrics to prove impact.
Nancy: We talked about Juul as being one of the better decisions I'm sure especially in this environment. When you look back at your career, what are some of the bigger mistakes because you talked a lot about your successes. But when you speak to other investors who are just getting started I mean what do you them?
James: You know I think my biggest mistakes and we we've all made them in our industry is when we focus on common wisdom and not uncommon wisdom. Whenever you get carried by the crowd it is when you tend to get in the most trouble. You think about TPG, we started our firm as airline investors the worst industry and I've ever been involved in and that ability to go where others haven't. And to look at things in a different way has always served as well. And if that different view of the world has ever gotten clouded that's when you get in trouble.
Nancy: How do you have the courage at a time when everyone was saying continental are you kidding me?
James: It's either the courage or the naivety. Hey you know I think at the end of the day what we realized in Continental was that airlines weren't going away. And the mistakes that have been made in continental in our ability to reshape the airline to add value to what it was really meant to the continental we were investing It was not the Continental that people knew we could create something new. And that idea of investing in the future and what it could be not and what it was is. I think the concept that carried us into continental and gave us the courage to approach.
Nancy: What idea of today that you have?
James: You know I'm very focused on this this new moment in biotech. So if you look at ahead I think there is about to be a third era in pharma. The first year was the molecular era and the second year was the antibody era. We're now going into an era of cell and gene therapy and it's not very well understood but as we're looking at it we probably invest almost a billion dollars over the last year. We're seeing absolutely extraordinary step forwards. So we tend to be very focused on society on technological change but I'm fascinated by what's happening in biological change at the moment.
Nancy: Just on the airline issue though it's interesting that airlines have changed some light over that time horizon but since we are talking about this incredible period of technological change, passenger experience for flying hasn't changed all that much. Why is that? I mean why aren't we seeing I know Richard Branson and few others are working on faster travel and what they're doing in that space investment too. Well I do think that it is do you still see opportunities in the sector.
James: You know we haven't invested in airlines for a number of years in part because we invested during the 90s early 2000s when we were in this moment of punctuated equilibrium where there was a series of airline mergers and changes in service et cetera. I think we're now in one of those periods of stasis in airlines where things are going along pretty much the same. And so we see less opportunity. There will be another year at some point but I'm not seeing enough change now to get excited about the industry. What did happen over that period of time is that it did bifurcate where the cheaper seats got cheaper and the more expensive seats I don't know if you fly on Emirates or some of the super high end airlines. Got more serious and more luxurious. So there was a change but maybe not enough for the marketplace.
Nancy: I want to get that for flight from here back to the east coast in the US. You didn't say you were interested in media as well. And as a news network here, Comcast obviously is our parent company which you follow so closely what is going on direct to consumer. But journalism you said to me specifically as an area of interest to you. Why?
James: Well it's interesting to me just my curiosity investment point of view because it hasn't sorted itself out yet. So if you think about music who would have thought that the answer on Spotify we thought it was going to be single downloads and instead we had streaming if you would have thought about movies and TV, who would have thought of Netflix streaming services. And so we've gone into this period of time in journalism where it's not yet sorted itself out. On one hand you have immediate things like Twitter happening and on the other hand you see venerated properties like Time and the Atlantic going to individual Silicon Valley investors. So I'm fascinated how that's going to work out. And in particular the piece that seems to be evolving is the concept of subscription journalism. In the early parts of the Internet, it looked like it was going to be ad driven and increasingly you're seeing specialized subscriptions grow in the in their importance.
Nancy: Can I just conclude by asking you since we're sitting here in Singapore. I know you travel across the region. What have you seen lately in Asia has excited you most?
James: You know I am very excited by what's happening in Southeast Asia. And in many ways the environment is flattering this part of the region. When we talk about Asia, those of us who are here and know that we're really talking about some quite different economies different points in their evolution. And usually the discussion of Asia seems to fall into China and India but a forgotten piece of it is what's happening in places like Indonesia. You're in Singapore and in Vietnam in that part of the region right now is really interesting.
Nancy: You say the environment we are in, is that in part because of companies moving out of China coming to Southeast Asia or is there more to it?
James: Well the current trade situation is certainly accelerated. But even before the tariff discussion there was a general trend of global manufacturing out of China. And what that has exhibited is only an acceleration. And those countries are seeing some of the rapid movement to the middle class that we saw in China happening right in front of our eyes. So from Thailand to Vietnam there's just some really interesting things going on. And we're making some interesting investments around this.
Nancy: Keep an eye on that. Jim Coulter Thank you so much for speaking to CNBC. Appreciate it.
Communications Manager APAC, CNBC International
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