by [email protected]

The world economy looks stronger than it has in recent years with almost every region expected to improve its performance over 2017. And much of Asia, as usual, is slated to turn in some of the strongest numbers. To gain a view of where private equity may heading in China and Southeast Asia, [email protected] asked Kosmo Kalliarekos, managing director and chair of portfolio management for Baring Private Equity Asia (BPEA), for his views on a range of related topics, including the view from his own firm. Baring, founded in Hong Kong in 1997, today has total committed capital of more than $10 billion.

An edited transcript of the conversation follows.

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[email protected]: What areas of the region is Baring most involved in? How do you see that evolving?

Kosmo Kalliarekos: BPEA is one of the few local private equity funds with a truly pan-regional presence. We have 145 people across eight Asian offices in six countries covering Hong Kong, China, Southeast Asia, Japan, Korea, India and Australia, and our latest fund has investments in all of those geographies. One of the biggest benefits of being pan-regional is that we have the ability to allocate capital to the regions, sectors or investments that we feel offer the best risk-adjusted returns at any given point in the cycle. We can adjust our strategy in response to macro or political events if required.

But private equity requires you to invest for the long term – our funds have a 10-year life and individual investments will generally be held for a four- to five-year year period or more — so that means we’re taking a long-term view on those countries. We don’t see that strategy evolving much in the coming years and we’ll look to construct diversified portfolios in all of our funds, but the individual country weightings will inevitably change depending on the vintage.

One area that has become a meaningful part of our program are what we call “cross-border” deals, which can be either Asian-headquartered companies looking to expand outside of Asia or global companies looking to grow within Asia. Given the higher rates of growth within Asia and the increasingly large and sophisticated Asian companies that are able to compete globally, we see this as a trend that will most likely increase in the future.

[email protected]: Tell us about the opportunities for PE in China. With major economic plans on the boards for the years ahead, such as “One Belt, One Road” and the transition from an export-led to a consumer-lead economy, it would seem many new avenues are opening up.

Kalliarekos: China has always been important for our funds, and as the largest economy in the Asia Pacific region it is simply too big to be ignored. If you look back over our 20-year history, China has been a big component of our returns, especially in our earlier funds.

But there has been a huge evolution in the market over the past 10 years so what you’ve seen is a change in the drivers of those returns. It used to be high-earnings growth rates of companies because the country itself was growing at 10%-20% nominal GDP growth, and when you combine that with multiple arbitrage through inefficient capital markets, it was relatively easy to generate decent returns. That has all changed today. The country is still growing, but at 6% it’s not giving you the same tailwind that it was in the past, and as a result you need to work a lot smarter and harder to achieve your returns – control deals, operational value creation, bolt-on acquisitions, DCM (debt capital markets) – not just relying on the market to do the work.