KKR Finds Growth in China

BI: A Wall Street investor is trying to cash in on one of China’s most pressing problems

"We're seeing opportunities in private equity that really don't show up in the public markets," Scott Nuttall, KKR's global head of capital and asset management, said in an earnings call on Tuesday.

..."I think looking at the public market, especially in places like China, really, what you've got us a lot of SOE, state-owned-enterprise-type companies that it's not really where we spend our time. I'd say one big theme has been for us investing in growth companies that are basically exposed to the growth of the middle class and the rise of the consumer. And we're finding a lot of opportunities off the beaten track. We have a big team in China where we see those opportunities."

His optimism is bolstered by KKR's Asia II private equity fund's latest performance, which saw a 36% gross internal rate of return as of June.

There are always pockets of growth, even during depressions. Since credit is politically controlled in China, there are industries starved for capital. Xi and Li proposed reforms to get capital moving into the right areas, but at the first sign of a transitory bump, the Chinese political machine doubled down on its failing growth model. Private industry is more starved than ever at the same time there's a credit bubble threatening the currency. Remember at the peak points in the U.S. credit cycle, you hear stories about stupid companies with terrible business plans receiving hundreds of millions of dollars from venture capitalists. Every good idea is funded and excess credit flows to the bad ones. Or in housing, every good credit has a mortgage, so they gave $1,000,000 NINJA loans to illegal immigrant gardeners. In China, the money pours into infrastructure investment, real estate and SOEs.