Nick Rohatyn argues that applying the developed market private investment structure (e.g., a single-country private equity fund) to emerging markets is a recipe for failure. He contends that limited deal flow forces poor capital deployment, while a 15-year bear market in EM currencies has decimated returns for these rigid structures.
The proposed solution is a flexible, multi-asset strategy that analyzes each country across its three main liquid asset classes: equities, local currency debt, and hard currency debt. By identifying which asset class is best positioned within a country's specific economic cycle, investors can significantly improve returns and mitigate risk.
A core tenet of the thesis is that the past 15 years were defined by a massive concentration of capital flowing into the U.S. at the expense of EM. Rohatyn believes this era is over due to increasing U.S. unpredictability, which will force global investors to diversify and redirect capital toward emerging markets.
In a fragmented market populated by small, often failing, single-strategy managers, achieving scale is essential for survival and attracting institutional capital. TRG has actively pursued a strategy of acquiring other asset managers to build a diversified, global platform capable of executing its complex multi-asset strategy.
Standard deviation-based risk models are ineffective in EM, where crises are common. Rohatyn advocates for scenario analysis and emphasizes active currency management as the most critical risk tool, noting that FX markets often remain liquid even when other asset classes freeze.
Keep pulling the thread on Nick Rohatyn.