Nick Rohatyn – Emerging Markets Multi-Asset Investing at TRG (EP.482)

What It Covers

Nick Rohatyn, CEO of the Rohatyn Group managing $7 billion in emerging markets, explains why traditional mono-asset class investing fails in emerging markets and advocates for horizontal multi-asset strategies. He covers benchmark flaws, currency management techniques, GP acquisitions as growth strategy, and why the current moment represents an inflection point for emerging market capital flows.

Key Questions Answered

• •Emerging Market Benchmark Problems: MSCI emerging market equity index concentrates 72% in four countries (Korea, China, India, Brazil), creating false diversification. Local currency debt benchmarks mix uneven durations across countries and embed dollar-euro volatility for two-thirds of bonds outside the dollar zone. Corporate bond markets consist of many small, illiquid issues with wide bid-offer spreads, making traditional indexing ineffective compared to developed markets.
• •Multi-Asset Class Advantage: Treating each of the top 20-25 emerging market countries as a three-body problem (equities, local currency debt, hard currency fixed income) and selecting the best-performing asset class per country yields superior returns. Being right just 60% of the time across countries would have produced losses in only one year during the fifteen-year emerging market bear market, due to extreme return dispersion within asset classes.
• •Currency as Risk Management Tool: Currency liquidity almost never disappears in emerging markets, making FX forwards, options, and swaps the most reliable risk management instrument. During the Brazil crisis, hedging loan exposure through currency instruments saved significant capital because you could trade one billion dollars of emerging market FX when equity and loan portfolios became illiquid. This capability requires integration between private equity and currency teams.
• •GP Acquisition Strategy: Post-2008 crisis, 95% of hedge fund allocations went to managers with over $5 billion in assets when only 1% of funds reached that threshold. Acquiring existing GPs provides immediate scale, diligenced track records, established LP relationships, and breakeven or profitable operations. Distinguish between arranged marriages (bank divestitures requiring clear oversight structure) versus love matches (independent teams requiring cultural alignment and shared vision).
• •Private Market Structure Failure: Developed market constructs imposed on emerging markets create mono-asset class funds (private equity OR credit OR infrastructure) in regional or sub-regional strategies. Deal flow cannot support this fragmentation. Combined with fifteen years of currency depreciation, this produces failing GPs and undersized funds competing unsuccessfully against US leveraged buyout firms, shrinking the industry despite private equity outperforming public equities in emerging markets.
• •Scenario Analysis Over Statistics: Standard deviation models fail in emerging markets where six-sigma events occur regularly. Use historical crisis scenarios (1998 Russian default, 2008 financial crisis) to stress test portfolios rather than relying on value-at-risk calculations. When explaining a commodity crash to the JPMorgan board, claiming it was a six-sigma event prompted immediate pushback about expecting similar events within ten thousand days—another crisis occurred one year later.