The United States has postponed the debt ceiling by three months and Steve Pagliuca, Managing Director of Bain Capital Private Equity spoke to CNBC-TV18 about what is means for US politics, US growth and global growth, investment opportunities in 2013 and where India ranks on that list. He was slightly cautious on India and feels investors were still concerned about the myriad policy and corruption issues that India faces and that was discouraging them from investing in the country.
Pagliuca remains concerned about the US economy and feels there is cautious optimism about Europe at the moment.
Here is the edited transcript of the interview on CNBC-TV18.
Q: How is the mood in the US and Europe looking like?
A: The mood is optimistic on Europe. Italy is making progress. Mr. Monti spoke yesterday and it sounds like they are making progress. The banking system is getting better, but they are not out of the woods yet. We have got to substantive reforms on the fiscal policies. As we have seen in the United States, it is very hard to get a balanced fiscal policy even with one country and one system. It is more difficult with 17 countries. So we are not out of the woods yet.
I would say there is cautious optimism in Europe. In United States it is very frustrating. We keep kicking the can down the road, which happened last night again. I am involved in this Fix The Debt Coalition which is a group of business people going to Washington to try to explain that why it is so important for our place in the global economy to have a path, not immediately, but have a path to get our budget balanced.
Right now, in the United States we collected 17 percent in taxes last year. We spent 24 percent for Gross Domestic Product (GDP). That is a trillion dollar deficit. The issue is about the magnitude. When I first worked in 1982 the national debt in United States was USD 1 trillion and there was a big outcry. It just crossed USD 1 trillion in 1982.
In my working career, in last 30 years it has gone to USD 16 trillion, so that has been 16 times. Who is going to pay for that? It is the future generation. We really have to find a way, even over a 7 or 8 year period, to have those lines crossed. Have 24 percent spending come down? Historically, we spent between 19 and 21 percent and we balanced the budget. It was about 21 percent taxes 21 percent spending. If we just drew a line and said by 2021 we would have 21 percent spending and 21 percent taxes, we would have a balanced budget.
It seems like a simple concept, but very difficult to implement because the politicians do not want to make the trade-offs. They are scared of not being elected.
Q: I know it is a slightly general question to ask. What I really want to know is where do you see the investment opportunities? I guess that is specific to different market, different industries. Tell me what are your favourite picks - areas, geographies, sectors over the course of this year and areas that you think will throw-up considerable opportunity for funds like yours?
A: If you look at the metrics of the world you have Europe, United States, South America and Asia. Asia will continue to be a faster growth market, albeit it will not be the race it was before, but I think the Chinese will not cut back on investment and really need to grow their economy.
I think that will be a good investment opportunity in China, in all of Asia. In the United States we are having a comeback for sure. The question is, are we going to resolve these fiscal cliff issues and that will really be a spur towards investment. I think South America to me is still early and some prices have been high and it is going up and down. So I think that long-term will be a good investment, but maybe in the short-term there will not be so many things done there next year.
Europe has been behind the United States in fixing the banking system and taking the appropriate write-offs and they are starting to do that now. It means there will be some opportunities to grow pan-European companies and there will be more opportunities or private equities. But, the overlay is each of these things have to succeed on its own merit in a slower growth environment across the board.
With deleveraging of all these economies, you have to find companies that can gain market share. They will not have wind at their back. So all of our models try to find companies we can transform, gain share from their exports, new products and new geographies. That would be the focus of Bain Capital. The private equity industry and Bain Capital leading the way has really created value-added staffs on vertical market basis.
We have experts in financial services, technology, healthcare and it can add a lot of value and help transform these companies.
Q: India was the toast of Davos four years ago when the world economy was tanking and India was still growing between 8 or 9 percent. We lost all that momentum. Let me in a sense conjoin that with what Bain has done in India. You have about three or four investments, one that went foul, so three out of four investments in India. Some of the more recent ones were bigger ticket sizes, but that is still a very slow pace of investing. Is India not that appealing anymore?
A: India is part of our pan-Asia effort. Our fund is focused on India, China, Japan and Malaysia, so it covers a wide swath. We are doing deals throughout the region and it is not only India. On India, what I said is it can be an appealing market. The problem in India has been in the last two or three years, there has been a loss of confidence in the governance, the court system, the application of the rule of law and the way business is done.
Here at Davos, when I talk to investors, most of the investors are shying away from India because of the uncertain political and regulatory environment in India.