80% of Bain’s Distressed Purchases Have Been Outside the U.S. (Correct)

Angelo Gordon is expanding further into distressed debt with a new fund UH that has a billion dollars That is the latest today. Bain Capital among the most active with respect to raising money UH successfully and deploying it. Joining us. We are so lucky to have Jonathan Levine, co managing partner of Bain Capital, normally based in Boston, but gracing us with his presence here in our Bloombgood Active Brokers Studios. Jonathan, your firm overseas so much of this debt billion dollar

there's an assets under management. Are you concerned about the amount of money being raised given the fact that there really aren't that many assets to buy? Well, I think you have to think about, uh, the world more globally. You know, ten years ago, if somebody were to ask us about the market, or were to ask us about credit, they would really be asking about the US buyout business and the US credit business. And really, UM, we actually manage a hundred and eight billion dollars, of which forty

one billion is in credit. But that credit is UM senior and junior, it's over, it's it's in UM Europe, US, Asia, Australia, and the credit asset class has become quite nuanced in terms of the types of risk you can take, the types of liquidity you can take in the geographies you participate in, and those are not as correlated as they were ten years ago, when the story was whatever happened

in US high yield was the entire story. So, Jonathan, were ten plus years into this economic cycle, you're the chief, I guess you know, chief credit investment officer. You need to really think about the quality of the credit where investment. When you think about the credit quality and deals that you're seeing, Now, how's it looking? So I think that the degree of difficulty has gone up. There's clearly larger

use of proformas. But I've you know, made it clear that not all proformas are are good or bad and pro performers. What are you talking about because forecast by the company forecast adjustments in earnings almost always for the positive. Okay, UM, So I have yet to see one where somebody said our numbers are going to be worse in the future than they are today. And they really take three types. They take tangible um upside to earning that you can

achieve and quantify. There's things that are dependent on growth, and then there's things what that I would call are highly ambitious market top type of behavior. So consolidating two factories clearly quantifiable UM. A software company that's growing quickly, you can't take last year's earnings and just grow, you know, run it out because there is some obvious growth things

like proform of future revenue synergies. I don't even know what that is, but I have seen that in a perform and you don't You don't take that um because there is some margin of safety in there. And if you take every possible good thing that can happen to the company, and then the sponsor pays for that in their purchase price, and then you borrow against that UM, your margin of safety if the economy slows down has

gone away. So one thing that people have said is that private equity sponsors, of which BANE counts itself among them. I know that that's not necessarily your day to day focus. As much as perhaps the credit investments UH that their sponsorship has led to a deterioration the a quality of some of the credit in particularly at the bonds and loans that companies are are issuing. Do you find that from the credit investor standpoint, I think that it is

very much industry specific, company specific and sponsor specific. UM sponsors like us have a hundred people who go in and work with companies and really only invest in companies where we can add value and help change the answer versus other types of investors who may be participating in the upside beta of the market. And UM. At this stage in in any cycle, UM, the marginal deal is probably not the best deal. UM. That does not mean that all the deals being done are troublesome, all the

deals being done are are are bad. You just need to make sure that you're investing in areas that can weather a cycle. Because I'm not saying whether there will or will not but it's certainly more likely than it would have been ten years ago. UM. Two, you want to make sure that you're in industries and business models that are sustainable. UM. And three, you want to make sure that you have a capital structure that can weather a storm. So which which industries are sustainable in the

next cycle and which aren't. Well, it's interesting, UM, it used to be that technology was something everybody was scared of, and technology everybody viewed as vaporware or internet concepts like from a one when the bubble happened. And really, when you think about technology, there's lots of different types of technology. As a lender, software businesses that are subscription business is really good. Razor and razor blade types of technology business

is really good. Um. What you have to watch out for is where people are taking equity risk with debt, business models that have to reinvent themselves, where there's massive amounts of capital expenditures that are required and you have to refresh the product on a very short life cycle. I'd know that. I just I don't know, go ahead fall no, So, Jonathan, I mean, you know what are the issues? You know, Geopolitical risk I know was always a part of the credit checklist you have to deal with.

But it just seems like maybe in the last couple of years of geopolitical risk, whether it's trade tensions with China or European risks with Brexit, how are you how are the folks at bane kind of factory that into your credit analysis? UM So, I think there's two things.

One is, the requirement for imagination almost exceeds the requirement for UM analysis because the sort of standard bell curve of what economic policy, trade policy, UM international treaties look like has gone out the window, and therefore outcomes I mean, if I'm sure you remember, you know, early on people were like, there is no way brexit will pass UM,

and that was the operating assumption. And then once bregg bregsit passed, the markets created for half hour and then bounce back because they're like, well it'll it won't get implemented, and it hasn't been implemented. So what we try to do is think of a um an array of outcomes and test our hypothesis against that. And obviously you can't protect against every downside, but certainly being more broadly being UM more broadly UM analytical about tariffs, trade wars, UM

immigration things like that are just a new requirement. So just in in about thirty seconds, which areas in the world do you see as the potentially most fruitful when it comes to distress opportunities? So uh, over the last several years, eight percent of our investing has actually taken place globally outside the United States. UM. The the ways that UH, different economies work through the crisis has resulted

in very different opportunities. And we've spent a lot of time working on non performing loan portfolios coming out of European banks which are ill um in need of capital UM and the Asian capital markets which UM as I said earlier about technology, it's not a thing, it's a lot of things provide a lot of diversity, whether it's distressed debt in in India, npls in China, or private

landing in Australia. Right right, Jonathan Levine, and thank you so much that we have to leave it there, but we're gonna definitely get you back in the studio next time you're in New York. But we understand happens often. Jonathan Levine, co Managing Partner and credit Chief Investment Officer at Bain Capital talking to us about the private equity world,

in the credit side of private equity investment. Well, when trade tensions between the US and China really began to escalate several weeks ago, one of the U S names that came right into focus was Apple. Apples certainly exposed to China, getting almost revenue from China. Plus they also manufacture a lot of their phones and iPads and things in China, so clearly some risks there. Let's get the latest from John Butler Johnson, senior Telecom Services and Equipment

annals from Bloomberg Intelligence. He joins us on the phone from Princeton, New Jersey. John, there's actually growing discussion that maybe Apple can source a lot of its products that were in China outside of China. How feasible is that do you think? Yeah, thanks, Paul, I think it's very feasible. The question is how much time does uh Apple's main UM manufacturer, called fox Con, how much time does fox Con really need to make that move? Um? In fact,

I suspect the move is already underway. You know, Apple is long overdue to kind of spread its bets, so to speak. And and there are regions like Vietnam, for example, which are lower costs to produce a good like the iPhone than China. How long would it take for Apple to move its supply chain, Well, it's hard to say, Lisa. I would say to really move a hundred percent of the iPhone production out of China would probably take at

least a couple of years, would be my guest. So wouldn't immunize them from some sort of very near term move by China? Not immediately, but again I suspect there's been some movement behind the scenes that we're not seeing. You know, the comment was made by a senior Fox con officials, so they probably he probably got the green light to say something suggesting to me the move is already underway. Lisa, just, you know, just to kind of go and show how the supply chain for Apple, how

intense it is, and how expansive it is. On the Bloomberg terminal, you can just type in the symbol for Apple, then put in the function SPLC for supply chain, and it is just it's amazing how many suppliers supply Apple than how many customs. Apple has truly a global company. So John, I think that one of the risks, you know, when you think about it. You know that. I guess a real concern would be, at least the most immediably

would be sales into China. Is there any sense that Chinese consumers, maybe just for nationalistic perspectives, might be pulling away from Western goods and Apple? Yeah, I mean that is spot on, Paul. I mean that's really what I worry about most right now. When I look at Apple and their risk um China. They don't break out sales by country, but I believe China is Apple's largest country by sales by iPhone sales. Um, my guess because it's probably um that's a that's a good point. It could

be second to the US. It's hard to say. Again, they don't they break out sales by region, not country, So by region Greater China is just shy of of sales. It's around nine on of sales in the latest calendar year. So there's a lot at risk there, and there is I imagine there is rising um nationalist sentiment among Chinese consumers, and that can really dent sales of not just the

iPhone but other Apple products. So I want to ask you, John, we were talking earlier about how the tech sector text shares in the United States have rallied the most in the past six days since two thousand and eleven. And I'm trying to understand how much of this is driven by fundamental improvements in the backdrop geopolitical otherwise, and how much this is just a knee jerk response too. Well, I guess people have stopped freaking out now, you know.

My thought on that is a couple of things. Number One, Wall Street tends to look beyond the abyss a little bit, right, So, uh, this latest announcement by Fox con tells us that Apple can make moves to limit its exposure, and other tech companies can as well. That's number one, And I think number two, there's probably some hope that at the G twenty, the U. S And China can come to maybe even a short term agreement to take some of the pressure off, because, as you know, the US is as reliant on China

as China is reliant on US. It's a two way street and it's in no one's best interest to let this escalate beyond where we are. John, just real quick, what's the next thing that Apple investors should be looking for in terms of new product launches or anything like that? Also a great question. So this they tend to do the fall refresh event they introduce all the new iPhones in September. I think this refresh will be okay but

not great. But I'm really looking to for that new five G I phone, So I think next year is going to be a really big year for Apple. Would be my guest on the iPhone front, John Butler, thank you so much for being with us as always. John Butler, Senior Telecom Service as an equipment analyst for Bloomberg Intelligence. One area of the US equities that have underperformed are the A d R, the depository receipts of Chinese companies. I'm looking at Ali Baba a d R s which

are down nearly twenty percent. Our next guest says, that's a buying opportunity. Let's bring him in, Danton Goie. He has a portfolio manager of at Davis Funds, which overseas about two billion dollars, and he joins us here in our Bloomberg Interactive broker's studios. So you actually are starting to see opportunities emerge in these Chinese stocks, even though people are very concerned earned about the corollary effects of trade wars in addition to a slowing Chinese economy. Why, yes,

good morning, Thanks for having me. Yes, I think they are very interesting, specifically because of the worries now how depressed valuations and the stock prices are down, even though the businesses continue to be very strong, and it makes sense these businesses are focused on the Chinese consumer. They're not export driven, very little international sales, almost d percent domestic sales, and the Chinese consumer remains a very strong tailwind,

a very strong story. Uh. And the business confuses to be very strong even in the recent quarters when there's been worries about the U S trade friction. Revenues have been up two cours ago last quarter revenues at Ali Baba, for example, we're up fifty, so business is great. The balance sheets continue to be very strong, long term demand forecast remain good. UH. And right now the valuations are down, so to us as value investors at Davis, we think

it's a great buying opportunity. So give us a sense of how you think Chinese consumers are thinking about the trade issues as it go into consumer sentiment consumer confidence. Are you seeing any of those types of data points coming that might cause your consumer centric story to a little bit of a pause. Yeah, I think from the consumer point of view, it's not a huge worry. It's probably a bigger worry for Chinese investors UH and maybe

taking a pause and investment. But at the margin of course it is negative UH and so it's not a positive. We do think though, that in the sort of short terms, sort of the next two to four quarters, there will be a resolution UH to the trade war. Mean, of course, no one knows the future perfectly, but in this case, there's strong reasons why both parties, the US and China

want a trade of resolution. We are seeing a little bit of a slowdown in both economies UH being impacted, and this is something that they can both UH resolve on their own by coming to an agreement. So we do think that eventually there will be an agreement and this will be behind them. In the meantime, the companies, despite this are doing well. So some of the other companies other than Ali Baba, New Oriental Education and Technology trades onto the A d r H ticker e d

U and then j D dot Com UH. Those shares, by the way, the A d R s have lost nearly thirty percent year to date, UH, so d U the new Oriental Education is sort of the outperformer here, only losing about twelve I'm just wondering. One question people have is the transparency of Chinese companies and concerns about really being able to dig into the finances given this sort of different accounting standards. How do you deal with that? Yes,

that's a good question. You know. One of the ways we deal with that, and that's with any company that we look at, UH. But in China specifically, we only invest in US listed A d R S or Hong Kong listed stocks and no local A share companies. The reason being that here in the US, of course, we have US GAP and in Hong Kong they use International

GAP UH. And so the listing standards, the acquire accounting standards, UH, the transparency requirements, the corporate governance requirements are much higher because they're listed here in the US or in Hong Kong. And so that's one way that you can. The other way, of course, is doing very in depth due diligence, which is what we're known for. And so we'll go and been following these companies for well over a decade now,

so we know all the key individuals. We've talked to all their competitors and suppliers, their customers, UH and get a good sense of who they are as well. But you know, of course there's always UH risks there and so we're always trying to match the numbers compared to what we are hearing out there in the broad economy or other companies, and so that's one good way, UH to kind of minimize risk. So, Danton, you mentioned the as one of the supports for investing in China down

addition to evaluation the these strong Chinese economy. We know it's slowing, but still I guess the the government is still talking about six six and a half percent growth. What is your sense of the economy in China right now in the next year or so. Yeah, it um it. It definitely is slowing and it's been on a sort of a down and trying. You know, used to be double digits, of course, then highest single digits. Now we're

approaching sort of more mid single digits. And even if you know, some people always want to put a haircut on it, and I think that's reasonable in terms of how much you believe the numbers. It's still is still good you know, everything you look at, and even if you look at uh, non government reported numbers, if you look at sort of trainloadings or electrical production or uh you know, miles driven or things like that, Uh, those

are all still very strong. And so all the sort of the non GDP numbers sort of correlate with still a growing UH economy in our senses that the government still has quite a bit of firepower in terms of helping the economy along its way. Meaning they have the ability cut rates, which are you know, tourner basis points higher than ours. They also have the ability to cut the reserve requirement at banks, which is the the amount of banks amount of money the banks that the cap

keep uh, and so it increases their lending ability. So they have quite a bit of firepower to help the economy. They've been doing that. It has had an impact, and so they do have that impact that ability over the next new year or two to continue doing that. Very good Danton Goie, Thank you so much. Danton's portfolio manager for Davis Funds, joining us here in a Bloomberg Interactive

Broker Studio week. Well, the markets are discounting at least two rate cuts this year and maybe more in But just recently we've had a couple of Wall Street economists say, not so fast to kind of square that circle. There. We welcome our next guest, Ira Jersey, chief US interest rate strategist for Bloomberg Intelligence, joining us from Princeton, New Jersey. Ira, thanks so much for joining us again. A couple of economists came out and said, gee, maybe the traders are

a little bit ahead of themselves. What are your thoughts? Yeah, I'm I'm very uh in that camp. Actually, I think that the market has gotten a bit of ahead of itself. I think that the UM, no, the Fed it while it doesn't want to disappoint the markets, it also has to focus very strongly on the incoming data, both here in the US and abroad. And while we've seen, you know, a few disappointing data prints, it's not obvious that the economy is falling out of bed and is likely to

do so going forward. So I think the market pricing right now for for a July cut is you know, is setting itself up for disappointment. I think, so, what in the data will the federals are point to to justify not cutting rates right now? And defying market expectations. Sure, so you know, I'm not saying that this is true, right, there's certainly a scope for some of the data to weaken over the next six or seven weeks before the

before the July FED meeting. But if you look at at where we are on trends and things like retail sales running above four percent year on year, that's reasonably solid, although not at the five percent it was last year, but it's still at a solid reading. Um. You look at a lot of the the inflation data we got this morning, for example, you still have a p p I X food and energy up two point three percent, and if you get you know, cp I tomorrow, that's

you know, close to two. Um. You know, those aren't the type of designer type of numbers that will give the Fed too much pause. I think the key and all of this, and and again they're going to be, you know, as data dependent as they can possibly be.

I think in this intermeding period from the June to July meeting winds up being the June payrolls report, Right, you got a rebound into the hundreds of thousands, So you get a hundred and fifty thousand pay rolls and suddenly everyone's like, okay, maybe you know, May was a blip and and we're really on this more hundred and fifty thousand trend, which is fine. That's what you need in order to continue to have the unemployment rate stable,

if not falling a little bit. Further, So, Eira, when the Fed does finally begin to ease, how do you think it will look? Yeah, so, so I think when they ease, you know, the I think the rates mark it in particular, is set up to uh to potentially steepen a little bit. And typically what happens when the Fed does start to cut interest rates um, the yield curve steepens and you wind up with some optimism that you're going to have inflation going up at some point

in the future because of the easier monetary policy. But I think at this this time we might not get the type of typical curve steepening that we've gotten in the past. So in the past you've had curves that that's steepened a hundred two hundred two fifty basis points um. I think that we get significantly less than that this time, probably probably about half of that. And the reason being that we're starting from a much different uh point in

terms of how much the Fed could actually cut. They haven't made the typical policy mistake of continuing two hike interest rates when the curve inverts. In fact, they stopped basically as soon as the curve inverted. So um, so they're not making some of the mistakes that that they've typically made the past. So therefore there's not as much to go the other the other direction. And you also mentioned in your recent research piece that people are starting

to price in another round of quantitative easing. Did I read that correctly? Yeah? So, so the the one of the things that j. Powell mentioned last week was that we will at some point get to the zero lower bound again, which just makes sense. I mean, if we do have any type of kind of meaningful and prolonged economic downturn, the Federal Reserve cuts interest rates, you know, eight times, and the next thing you know, we're at the zero lower bound again. So what is then the

next action. It seems that that um, quantitative easing would wind up being one of the first things that that the market would expect the Fed to do after cutting interest rates. So therefore, you know, again it's one of these things where if they're gonna be buying a whole lot of tenure notes and thirty year bonds, is going to be harder for the curve to significantly steep in an environment where the FED might be buying a whole lot of of treasury securities. So I hate to ask

you this question, but I'm going to ask it anyway. Ira. The President this morning once again was tweeting about the FED and trust rate policies. Just give us a sense, once again, kind of how you think the FED, if at all, pays attention to such tweeting. I have a funny feeling that they put their hands on their forehead and lean forward on their desks and say, oh, my goodness, not again. Um. But at the end of the day, you know, the FED wants to be as independent as

it can be. We know from there's a lot of academic studies, both from conservative and liberal think tanks and and and academians that suggests that an independent central bank has better long term economic outcomes than central banks that are influenced by policymakers. Because the thing is elected policymakers, um, you know, like a president or like members of the House of Representatives. They care about the next election. They don't care so much about you know, where are we

going to be in five or ten years? So um so, rather than worrying about the short term gains that you might get from you know, interest rate cuts, the FED is going to look through that and say, Okay, what what policies can do we need to do in order to sustain the current recovery and then at the same time don't overheat. So we have to you know, maybe step on the brakes even faster in the future, which

which would be a concern potentially in some situations. Now, you know, the current situation might be a little bit different, but certainly a year ago when they were hiking interest rates, it seemed that that that was a risk that was on the table at the time I read. Jersey, thank you so much for being with us as always. IROD Jersey, chief US interest rate strategist for Bloomberg Intelligence. Thanks for

listening to the Bloomberg pen L podcast. You can subscribe and listen to interviews at Apple Podcasts or whatever podcast platform you prefer. I'm Paul Sweeney, I'm on Twitter at pt Sweeney. I'm Lisa bram Woyds I'm on Twitter at Lisa bramwoits one before the podcast. You can always catch us worldwide on Bloomberg Radio