The Art of Contrarian Investing
Robert Petty of Clearwater Capital Partners counts on one sure thing and that is the constancy of uncertainty    
          
Robert Petty is the Co-founder and Managing Partner of Clearwater Capital Partners. Since founding the firm in 2001, Petty and his co-founder Amit Gupta have used their backgrounds in credit-oriented investment strategies to invest across cycles, sectors and geographies, building an Asia-focused business that is now one of the largest credit-investing firms in the region.    
     
In an interview with the Hong Kong Venture Capital and Private Equity Association, Petty said he was proud to run Clearwater’s entire business from Hong Kong. “My partner and fellow co-founder and I both live and work in Hong Kong so we love this city. It’s the world’s most efficient business city.    
     
“The other thing that is fascinating about Hong Kong is that people from all across the world come through this city and we have the ability to engage with them. So it enables a multicultural, cross section of teams. Our team here, for example, is made up not just of Hong Kongers because we are in an environment that welcomes people from all nations to integrate. So it’s a very international city.”    
     
In terms of credit-oriented investing, Petty said that opportunities in the credit markets of Asia outside Japan are being driven both by regional economic growth and pressure on financial institutions to reduce the percentage of non-performing loans on their balance sheets. These factors make for uniquely difficult and interesting times for credit and debt investors, he added.   
     
“We have been doing this for 15 years and the one thing that is constant is volatility, the constancy of uncertainty. Stable and steady is not the constant in Asia. But in environments like this, investing on a contrarian basis, when people don’t like the markets, is exactly when you should step in,” he said.    
      
“We invest across Asia, not just India and China. But two to three years ago no one liked India. Nobody wanted to invest in it but that was exactly the time when it was right to step in – you have to think contrarian. Today we are taking some of our chips off the table in India, having had three large and successful investments, and conversely investing more now into China. Everybody sees the issues in China, and we should be cautious. But 6.9% growth in 2015 is a good thing. Slower growth is a good thing in China. We need to keep this 11 trillion dollar economy at a growth rate that is manageable. Getting to modestly lower growth in the coming years is a good step.”     
     
Outside of the regional economic giants, Petty sees three opportunities for firms like Clearwater: first, direct lending; second, helping banks with stressed assets; and third, the public market space. The latter is particularly appealing right now, he said. “Public market pricing can be compelling for some companies in stress where it’s possible to buy in at 50 cents to the dollar. Entry price is a big mitigator whether in the equity or credit world.    
     
“With respect to the opportunities we see in the direct lending space, where many banks have pulled back, private credit is really the only alternative. You can cut deals and structure deals that are interesting. We haven’t yet seen the workout or non-performing loans world in a compelling disposition mode. Perhaps it will take another quarter or for some institutions a further year for the writedown to hit an acceptable level and banks to sell. But it is coming – we have begun to see it.”    
     
While Petty sees pockets of opportunities in particular geographies – India and China, for example – he is quick to emphasize the importance of thinking in terms of industries. “We certainly think geographically but I would say we really think industry and sector first, as sector changes have ramifications that can play out in any geography: for example, the commodity downturn and its ripple effects regardless of geography, or the Pan Asia energy grid creating coal opportunities in Australia and selling opportunities in Indonesia.”    
    
Another development Petty watches closely is financial institutions. “In particular, non-bank lending platforms, as providers of alternative capital, can be compelling businesses as banks slow lending growth and retrench overall. The trends of non-bank lending that we have seen in the US and Europe are only just beginning to occur across markets in Asia ex-Japan. Furthermore, financial technology or fintech – its rapid evolution and implementation across the finance industry – is changing access to capital by enabling alternative lending platforms from peer-to-peer to corporate lenders to now run world class systems, and most importantly, roll out better and more efficient risk management systems” Petty said.   
   
“If we’re talking about peer-to-peer lending platforms, we have looked at a number of them. They are great businesses and will change the consumer lending cost proposition, which matters in the consumer world. But in the corporate world we see other platforms developing. I will simply say there is room for both. We are corporate lenders but fintech in reality is going to have a greater impact on the consumer world.”