YouSaid · the spoken record

Toby Rodes

lines on the record: 71
first: 2024-09-23
most recent: 2024-09-23
sittings or episodes: 1
sources: podcast

Every line below is reproduced as it was said and linked to the record it came from. Nothing here is summarised or generated. Directory · Search · Corrections

“I learned it, but I didn't know that I learned it. I learned to ride a bicycle when my mother put me on top of a grassy hill and just pushed me down the hill. And it was one of those bicycles where the rear wheel is connected directly to the pedals. So as I was going down this hill, the pedals started spinning faster and faster. And I had to take my feet off the pedals. At the bottom of the hill was a parking lot, and the parking lot had those cement bumpers. So all of a sudden I realized I had an eight-inch gap that I had to shoot. The lesson I learned was it's okay to be marginally in control. As long as you have confidence that you can shoot the gap.”
2024-09-23 · Capital Allocators · Toby Rodes - Unlocking Value in Japan (EP.407) · IDENTIFIED FROM THE TRANSCRIPT · source
“I won't say who told me this, but it was three pieces of advice. The first was never work in a cost center. The second was never join a company that's just merged. The third was do your taxes, because if you do your taxes, you'll vote. I'm pleased to say that I've broken the first two, and that worked really well for me. But to this day, I still do my taxes.”
2024-09-23 · Capital Allocators · Toby Rodes - Unlocking Value in Japan (EP.407) · IDENTIFIED FROM THE TRANSCRIPT · source
“Said, so what's the semiconductor content of a base station? And is this going to drive semiconductor demand? So first time you'd ever asked for a data point. And that's the foundation of a relationship that today I cherish and gave me the confidence that I could push through some of those cultural barriers that seem daunting at the time. That was the first test that I passed and probably the most important.”
2024-09-23 · Capital Allocators · Toby Rodes - Unlocking Value in Japan (EP.407) · IDENTIFIED FROM THE TRANSCRIPT · source
“Investment floor of the research group, and nobody thought a foreigner could bring any informational advantage in the Japanese equity market. And I was seated purposefully by the head of research next to Wakabarsan, who was the axe on Japanese semiconductor stocks, famous for three days of being awake and getting information. He was truly a titan of the brokerage industry. Informationally, intellectually. That's when I realized, oh my God, that's my pace car. That's the person that if I can prove to him that I can be helpful and valuable, then I've proven something to myself and to this entire company. It took six weeks. He saw me grinding away on the Dokomo IPO and being a downstream beneficiary given his sector coverage at 2.30 in the morning, he came over and said.”
2024-09-23 · Capital Allocators · Toby Rodes - Unlocking Value in Japan (EP.407) · IDENTIFIED FROM THE TRANSCRIPT · source
“I first have to say my wife. And the answer there is coming home from a day at work, she looked at me and said, did you have one of those days? And I said, I had one of those days. And she said, do you really think it's time for you to do something on your own? I said, it's time. She said, you should do it. And I'm giving you 18 months to do it. If you're going to do this, I want you to give it your all. I want you to have an end point and I don't want it to always be around the corner. So she put a time horizon on my ambition and I had to show results. That's a really important partnership that helps bring great clarity to something as hard as starting your own company. I think the second is a mentor in Japan. An engineer. When I first got to Japan almost as a stowaway found my way into an investment bank, I was the only foreigner in the”
2024-09-23 · Capital Allocators · Toby Rodes - Unlocking Value in Japan (EP.407) · IDENTIFIED FROM THE TRANSCRIPT · source
“People that waste time. Ben Franklin famously said that life is just composed of moments in time, and anyone who's wasting your time is wasting your life. And I remember reading Ben Franklin in college and thinking, hmm, I promise to do as little harm to others and their time. And I hope to have that favor returned to me.”
2024-09-23 · Capital Allocators · Toby Rodes - Unlocking Value in Japan (EP.407) · IDENTIFIED FROM THE TRANSCRIPT · source
“I love Air Jordan five shoes. I wore them for the first time in 1991. And something about connecting with Michael Jordan through those shoes, I'm a sucker for it. Nothing creates more startup impromptu conversations than being anywhere in somebody coming up and saying, wow, nice shoes. I've even had someone at O'Hare Airport offer to buy the shoes off my feet. These are my pride and joy.”
2024-09-23 · Capital Allocators · Toby Rodes - Unlocking Value in Japan (EP.407) · IDENTIFIED FROM THE TRANSCRIPT · source
“Offshore sailing. It's a passion. It's simple to explain. When you're offshore and you're on day two, you've managed to get four hours of sleep every day and you're handing off navigation and trimming and sailing at night to another team of people. You create a really high trust team. You work really hard. It's an adventure and your world becomes incredibly small. It's 11 people in the space of forty feet. You're a little quirk and you can see other people that you're competing against. But when you get to your destination, you get into that harbor sometimes at three in the morning. It's a feeling of elation that's hard to describe.”
2024-09-23 · Capital Allocators · Toby Rodes - Unlocking Value in Japan (EP.407) · IDENTIFIED FROM THE TRANSCRIPT · source
“These blockages are getting removed. Kanami capital today can make a bid for a company and expect every part of the unsolicited bid chain from investment bank, share transfer agent, Japanese bank and lender to provide financing services to get it done. This is different.”
2024-09-23 · Capital Allocators · Toby Rodes - Unlocking Value in Japan (EP.407) · IDENTIFIED FROM THE TRANSCRIPT · source
“I have been thinking about Japan a long time and only What speaks to bang the table more than that? We no longer have to beg cajole and hope. We just show up with capital and buy up until this market for control. The market really wasn't functioning. Japan was a museum. You could come, you could look, you could examine, you could read about, you could be interested in, but you couldn't buy anything. So you were at the whim of the museum and often closing time meant you had to go home. But now this transition to a market means if you want it and they're not responding, you can buy it. That's a pound the table moment. When the capital that is piled up in private equity finally feels like they can actually make bids for companies get financing, get the support of the share transfer agents, there have been so many informal blockages to these bids, but tick by tick.”
2024-09-23 · Capital Allocators · Toby Rodes - Unlocking Value in Japan (EP.407) · IDENTIFIED FROM THE TRANSCRIPT · source
“So it's a challenge. The yen in 2023, I think I'm quoting this right, went from 107 yen to 161 yen to the dollar. How do you manage forecasts in a world where your currency is moving that aggressively? And what does that mean? It means Japanese companies have been very conservative on thinking about the positive impulse from the weekend. It used to be the weaker the yen, the better. When the yen went through 140, Japanese companies started saying, you know, this is not good for us anymore. So they've already been signaling that they don't want the yen to go to 160. So they're prepared for even our round tripping back to the 140s where we are today.”
2024-09-23 · Capital Allocators · Toby Rodes - Unlocking Value in Japan (EP.407) · IDENTIFIED FROM THE TRANSCRIPT · source
“Means that what was being offered for free, you're now going to have to pay for. And anytime you put a price tag on decision making, people start to act. So we think that rising interest rates in Japan is just the sign of the Japanese economy finally normalizing.”
2024-09-23 · Capital Allocators · Toby Rodes - Unlocking Value in Japan (EP.407) · IDENTIFIED FROM THE TRANSCRIPT · source
“The second risk is a stronger yen. The yen is obviously the first derivative of interest rate differentials. And perhaps we'll talk about the carry trade and some of the convulsions we've seen recently. Our portfolio is built for these events. What I mean by that is the Yen Carry trade and the Yen strengthening is something we're prepared for. We don't have a portfolio predicated solely upon weekend. We think that risk is primarily high valuation in almost any environment, whether it's strong yen, weak yen, slow economy, higher interest rates. We've incorporated all that history in our screen and our tenure lookback and all of our companies have survived all of these exogenous shocks. So our portfolio is built for even things like the normalization of Japanese interest rates. We think it's positive because what it does is it finally puts a price tag on the cost of debt and it”
2024-09-23 · Capital Allocators · Toby Rodes - Unlocking Value in Japan (EP.407) · IDENTIFIED FROM THE TRANSCRIPT · source
“And now it's got to run in with someone who's not just a financial operator, but an operator of convenience stores saying we can run them better. We see this as constructive and positive. We don't think that Japan is going to run and hide, but watch this. This is where the thesis is playing out and where the friction point is. I would suggest that where we're operating, though, still offers another path in that the average size of our companies are distinctly middle market, and nothing that we're bidding on or areas we're operating on is essential and would fall under the national champion need for protection. And just as imagine someone showing up and trying to bid for Boeing or someone trying to bid for another national champion in any other market, these things are complicated. Japan isn't going to offer everything up for sale. But the bad capital allocators, the companies that have defaulted on their cost of equity, were being”
2024-09-23 · Capital Allocators · Toby Rodes - Unlocking Value in Japan (EP.407) · IDENTIFIED FROM THE TRANSCRIPT · source
“So the big element here, and it's playing out, is that this market for control is too painful for Japan to bear. Let's be clear, there's a tit for tat going on. Nippon Steel is showing up and trying to buy US steel. The flip side is a Canadian peer of one of Japan's giants, seven and I. If you've been to Japan and you've been to a 7-Eleven in Japan, you know it's a fundamentally different company than a 7-Eleven in the US. It's a tremendous service offering. And the Canadian entity issued what is quote unquote a friendly bid for what is an almost sacred part of Japanese life. We're already starting to see seven and I turn to the government and say, aren't we national security? Shouldn't we be able to thwart a aggressive takeover bid? We're all watching this closely. And the answer is Seven and I has had run-ins with third point. It's had run ins with value act.”
2024-09-23 · Capital Allocators · Toby Rodes - Unlocking Value in Japan (EP.407) · IDENTIFIED FROM THE TRANSCRIPT · source
“So our bi discipline is hard coded. If it doesn't pass our screen, we're not looking at it. But our cell discipline is much more deep diligence-based. What do we really think this company is worth? And then we add a layer to that and we say, what do we think private equity is willing to pay for it? We're trying to put a premium for control in our valuation. So our valuations and holding periods tend to be both longer and reasonably aggressive. We are the first stage of unlocking that value in giving management confidence to understand that better ownership equals better outcomes for employees, for all stakeholders, and that what used to be considered hostility is now maybe a better way of delivering on the function of a company.”
2024-09-23 · Capital Allocators · Toby Rodes - Unlocking Value in Japan (EP.407) · IDENTIFIED FROM THE TRANSCRIPT · source
“Engagements take time, the conviction that we enjoy today that 50% in five names is the product of three, four years of very hard work. Conviction is a three or four year process. So holding periods are anywhere from five to seven years. And I'm going to throw a bit of a curveball in that one of our main really headlines for why this time is different in Japan is there is a market for control. And we feel in certain of our lead engagements, there are sufficient trust elements to our relationship where bringing capital to privatize the company is not out of the question. We're starting to see this, that the public market investor, through the duration of that investment and through doing the hard work of partnering with management has developed the credibility to make the case for privatizing the company. And that's something that we would like to explore.”
2024-09-23 · Capital Allocators · Toby Rodes - Unlocking Value in Japan (EP.407) · IDENTIFIED FROM THE TRANSCRIPT · source
“So I told you five of our top names are 50% of our portfolio. We're still with 50% of our weight sub four times EBITDA, about three and a half times EBITDA, nine times earnings, three percent dividend yield. Market multiples in Japan are seven, eight maybe depending on where you look and maybe market cap adjusts, 12 times EBITDA. So we're anywhere from a half to a third of market multiples. Our free cash flow yield is 40-50% higher than the market. Our ROEs are 30, 40 percent higher. So we are twice as nice, if not more, at half the price.”
2024-09-23 · Capital Allocators · Toby Rodes - Unlocking Value in Japan (EP.407) · IDENTIFIED FROM THE TRANSCRIPT · source
“and thankfully I was able to bring this highly talented Timon from Japan. A key addition was now Makino. I found him at Columbia Business School, young, hard charging, veteran of markets at a young age of thirty three,”
2024-09-23 · Capital Allocators · Toby Rodes - Unlocking Value in Japan (EP.407) · IDENTIFIED FROM THE TRANSCRIPT · source
“That's been an evolutionary step in one confession is in our five year existence. We started as an equally weighted value portfolio and thought that the factor would drive the return and in our mind where quality meets value. Japan has shown that it compounds at about 12%. In the first year or two, the best companies in our portfolio with open shareholder roles got bought. We enjoyed the market for control expressing itself in our portfolio and five companies got bids and we thought, hurrah, we've bottled lightning. What we didn't realize is that the remainder of our portfolio were the tough walnuts. The easy nuts had been cracked. So through that, we had to parse and let go of the nuts that we could never crack and then find the ones that we could. And then we had to refresh using our output to find higher and better uses of capital. That was a lesson learned in 2021, 2022 through COVID.”
2024-09-23 · Capital Allocators · Toby Rodes - Unlocking Value in Japan (EP.407) · IDENTIFIED FROM THE TRANSCRIPT · source
“Room reading Japanese documents for two years. I love reading Japanese documents. The great thing about Japanese documents is they're very comprehensive. People accuse Japanese companies of having awful disclosure. And it's true. It's awful disclosure in English. It's great disclosure if you read Japanese. And we find all of our fact patterns and points of engagement in public information”
2024-09-23 · Capital Allocators · Toby Rodes - Unlocking Value in Japan (EP.407) · IDENTIFIED FROM THE TRANSCRIPT · source
“First and foremost, we're a value fund. That's the discipline that I was taught at GMO, and we continue it to this day. By adding those quality elements to our screen, we think we've given ourselves a huge head start by avoiding those value traps. These companies are not value traps from an operational product standpoint, but for various quirks, they might be trapping value. So the first step is we always try and figure out the degrees of freedom of management. If we're going to ask for something, can these guys actually deliver it? Is there some hidden constraint that we don't know about? Have we done enough research to really understand what's holding these guys back? This is the cultural element again, because Japan is a proof of work culture. They won't tell you, hi, here's the pressure point. This is why I can't do it. You got to find it. This might hearken back to my time working as the back office of the U.S. Trade Representative, but I was locked in a window.”
2024-09-23 · Capital Allocators · Toby Rodes - Unlocking Value in Japan (EP.407) · IDENTIFIED FROM THE TRANSCRIPT · source
“That helps us with our story and credibility with companies that realize that we can partner with them to drive change, that no matter what, we're looking for the best outcome for the company.”
2024-09-23 · Capital Allocators · Toby Rodes - Unlocking Value in Japan (EP.407) · IDENTIFIED FROM THE TRANSCRIPT · source
“To the market. They finally realized the power of the equity market. So that's the positive. The negative is the same negative controlling shareholder role, but we find a fact pattern of self-dealing or bad behavior of insiders, a complete failure of the board, and I want to be clear, we do go in hard on some of these companies. We exercise all of our rights as shareholders. We bring shareholder proposals. We bring derivative lawsuits against the board in cases of obvious self-dealing. And what we find is that these two strands of our strategy are complementary, that in both instances we're principle based, that we're looking for properly functioning boards to deliver companies composed of the highest return assets with the lowest cost of capital. And when we're in the public, driving good companies to be better because they've got insiders that are trapping value,”
2024-09-23 · Capital Allocators · Toby Rodes - Unlocking Value in Japan (EP.407) · IDENTIFIED FROM THE TRANSCRIPT · source
“Market share. Now is the time for aggression. It might sound strange to you, but we're not here to ask you for a big buyback and a large dividend. We want you to go all in on investing in next generation fuels in your Himiji plant. We want you to capture market share in ammonia, methanol, hydrogen, next generation fuels in the shipping industry. Huh, we've never thought about that, says the company. We wait until our customers tell us they're ready for what we're ready to ship. We've got all the technology, but we're a supplier. I said, this is the moment where you drive the change. This has taken two or three years, but this type of partnership has allowed us to put people on the board of this company. This company flies and spends seven hours with us in Boston. And whiteboards around what new service offerings, how to reposition themselves, how to rearticulate their equity stores.”
2024-09-23 · Capital Allocators · Toby Rodes - Unlocking Value in Japan (EP.407) · IDENTIFIED FROM THE TRANSCRIPT · source
“It's hard work. And even Japanese people miss it at times. It's not an overstatement to say that sometimes not even Japanese people know what Japanese people are saying. And sometimes my job is to pretend I don't understand what they're saying. This is the dynamic, and I'll walk you through a few examples. We hear a company that understands that they've got a good business. It's not a run and hide, try and dodge taxes type of business, but maybe they're a slow-moving company in a slow-moving industry, and they've just never really thought about shareholder return. They've got a big anchor shareholder that owns 35%, a negative control element, and they know that basically they don't have to listen to shareholders. So they've gotten in the bad habit of not doing it. This type of company has, in the process of ignoring shareholders, has also ignored animal spirits and aggression. And when we show up, we say, do you realize that there's a shift happening in your industry, you've got 25% global.”
2024-09-23 · Capital Allocators · Toby Rodes - Unlocking Value in Japan (EP.407) · IDENTIFIED FROM THE TRANSCRIPT · source
“When you're assessing that management's willingness to improve the stock price through those meetings and you've got these two extreme buckets of, yes, please help us and go away. How much does the understanding of the local culture help you interpret what that message is?”
2024-09-23 · Capital Allocators · Toby Rodes - Unlocking Value in Japan (EP.407) · IDENTIFIED FROM THE TRANSCRIPT · source
“That's where the quant turns into fundamental work. The middle step is we take those 300 names and rank order them by a pretty naive but punitive DCF. So with that, we organize our research and on any...”
2024-09-23 · Capital Allocators · Toby Rodes - Unlocking Value in Japan (EP.407) · IDENTIFIED FROM THE TRANSCRIPT · source
“And by and large, they've got certainly better than average management. Then we just ask that we're able to get those stocks in less than five and a half times EBITDA, and lo and behold, there are still 300 of these companies in Japan.”
2024-09-23 · Capital Allocators · Toby Rodes - Unlocking Value in Japan (EP.407) · IDENTIFIED FROM THE TRANSCRIPT · source
“What we're doing is we're adjusting the asset side of the balance sheet, and we're only looking at assets used to produce a sale. You're looking at the muscle of the balance sheet, and you're forgiving the fat. Let's face it, Japanese balance sheets still carry a lot of fat. But because of that fat, the muscle can get ignored, and we focus on the muscle and we turn it into an adjusted ROA by taking operating profits after tax, and then we hold it to a 10, 15-year lookback of generating consistent 10% adjusted ROA. You don't do that by accident. You have to have very productive assets to be able to do that. The last thing we do is look at incremental returns on CapEx. Here we're using a longitudinal study that shows not only good management, but operating in a good industry. So once we've meshed these three attributes of quality, we know that this company has tremendous product focus, and they operate in a good industry.”
2024-09-23 · Capital Allocators · Toby Rodes - Unlocking Value in Japan (EP.407) · IDENTIFIED FROM THE TRANSCRIPT · source
“It's the biggest risk in Japan. There's no shortage of cheapness. By most counts, still half of listed Japan trades at less than one time priced a book. It's hard to argue with what that means. Our analysis of a market where half trade's less than one-time price to book means half of the listed market is still defaulting on their cost of equity. So how do you find the diamonds in that rock pile? We do it with a quant screen because by our analysis still roughly 60, 70 percent of listed Japan, roughly three thousand companies, remain totally uncovered by the street. We want companies that can keep margins high through now a 15-year lookback. The second is probably the most important, and we call it management rate of return.”
2024-09-23 · Capital Allocators · Toby Rodes - Unlocking Value in Japan (EP.407) · IDENTIFIED FROM THE TRANSCRIPT · source
“236 yen. A new manager came in and sat in front of me Nakanisan, and he said, I've read through the notes, you've kindly met with Hitachi for five years, and every year you've given us a laundry list of things we need to do. I've read it. I'm here to tell you that we have failed. Our share price is back to nineteen seventy three levels. I'm going to do what you've told us to do. The meeting lasted thirty minutes. And in that 30 minutes, I realized that this company was serious about change. We backstopped a follow-on offering, and the stock has been on a tear for the last twelve, thirteen years. Japanese people laughed at me. They were horrified. So it's very easy to find huge long-run secular stories that Japanese people are very late to understanding.”
2024-09-23 · Capital Allocators · Toby Rodes - Unlocking Value in Japan (EP.407) · IDENTIFIED FROM THE TRANSCRIPT · source
“Value works, but you have to be very careful. Value works for two reasons. One, in Japan, this has been a growth-starved economy for a long time. When there is a growth company, it tends to get overvalued. Traditionally, the boundaries of growth are hit and the company disappoints. So value works because you start with low expectations and any positive surprise is asymmetric return. The other thing about Japan is it's easier for me to love what the herd hates. That I find it easy to embrace and understand why the collective wisdom of the market in Japan is often wrong because they do not understand when leadership is embarking upon a journey of change. When I first started investing in Hitachi, one of Japan's large cap darlings, it was two thousand eight, the share price was.”
2024-09-23 · Capital Allocators · Toby Rodes - Unlocking Value in Japan (EP.407) · IDENTIFIED FROM THE TRANSCRIPT · source
“So Kaname is the linchpin. It's the linchpin in a fan. So a fan in Japan is the symbol of prosperity. And the more the fan is opened, the more prosperity is being shared. And this is a well understood symbol in Japan. And by being the kaname, the pin, the whale bone that literally holds this fan together, our role is to protect the cost of equity. We think the cost of equity is the kaname of the economy. With the proper protection of the cost of equity central to every balance sheet, you get capital to start flowing again. So this message is the reason we think in our dialogue and our engagement with companies comes with a high degree of spreading prosperity, joint value creation.”
2024-09-23 · Capital Allocators · Toby Rodes - Unlocking Value in Japan (EP.407) · IDENTIFIED FROM THE TRANSCRIPT · source
“Japan is different. They make domestic investors disclose how they're voting. They embarrass them. It takes Miti to embarrass the managers of these companies. They have to threaten unsolicited takeover bids. It takes the TSE to literally publish a list of companies that are not publishing a cost of capital and proof that the management team is managing the business with a cost of capital mindset. So there is no immediate one center to this. It is a collaboration between various parts, and you'd think that it would be the investors that grab this bull and take it by the horns, but they wait until all the other institutional stakeholders and participants and regulators give them the green light before they take action.”
2024-09-23 · Capital Allocators · Toby Rodes - Unlocking Value in Japan (EP.407) · IDENTIFIED FROM THE TRANSCRIPT · source
“It was really the emergence of the foreign manager with strong research capabilities, largely backed by US university endowments that led the ultimate upgrade and the transmission of the stewardship code into reality. And what we found is”
2024-09-23 · Capital Allocators · Toby Rodes - Unlocking Value in Japan (EP.407) · IDENTIFIED FROM THE TRANSCRIPT · source
“What's really interesting is Japan has tried to educate their own domestic investor complex to be better custodians of capital. And they look to the UK a kinder and gentler market than the US. And they saw the UK stewardship code. They latched upon this shortly following the rise of Prime Minister Abe, who said, we need to have at least one independent director in all Japanese companies. That was a revolution in twenty thirteen. And out came the stewardship code from the FSA, and this code was trying to teach the language to domestic investors that it's not a taboo to ask for higher return, higher dividends, better balance sheets. It took ten years for this conversation to take form. I've got a lot of theories around that, but my strongest assertion here is that no one was rewarded for taking that risk.”
2024-09-23 · Capital Allocators · Toby Rodes - Unlocking Value in Japan (EP.407) · IDENTIFIED FROM THE TRANSCRIPT · source
“To somebody who could manage them better. In Japan, we have the same 4,000 listed companies, but we got there from 2,000. That over the last same 20 years, we've added a lot of people during a period of a negative equity risk premium that were told that they could be a listed company with no strings attached. This is the case for Japan. You've got tremendous product focus, and we're on year three of a cost of equity seeping into all parts of this equity market. And I would say over the next ten years, a thousand of the four thousand listed companies are likely to be exited in one way or another. This is pure value creation.”
2024-09-23 · Capital Allocators · Toby Rodes - Unlocking Value in Japan (EP.407) · IDENTIFIED FROM THE TRANSCRIPT · source
“Importance of takeover bids in a properly functioning equity market. That's when I literally saw the light bulb go off, when the participants from Japan said, you mean there's no such thing as a friendly takeover? And the team from Harvard said very convincingly, of course not. That's when new language came out of the meaty guidelines for a word that hadn't existed before in Japan. Unsolicited takeover bid. Up until then, everything was a hostile bid. But they recognized that there was social utility in a market for control. This is what's playing out. And I'll put some data to this. Today there are 4,000 listed companies in the US. The U.S. got to 4,000 listed companies from 8,000. The brutal aspects of American capitalism meant that there were a fair amount of management teams that either sold, lost and take over bids, handed off their assets.”
2024-09-23 · Capital Allocators · Toby Rodes - Unlocking Value in Japan (EP.407) · IDENTIFIED FROM THE TRANSCRIPT · source
“High cost equity with cheaper debt. So that was a failure. So fast forward to 2019-2020 where thankfully Konami Capital has been invited into the study groups at MITI, into the study groups at the FSA, and they say, how can we finally get the voice of minority interest shareholders to change the capital makeup of the balance sheet? And we said it's a market for control. Without a market for control, everything is fine words without fine deeds until a management team suffers an unsolicited bid from someone who will run the assets better, you won't get the type of change you're looking for. Japan is always looking for the bloodless, painless revolution. It doesn't exist. If you want the rain that waters your crops, you gotta have thunder and lightning too. I took mete officials to Harvard Law School, and they met with the leaders of activism and the employer.”
2024-09-23 · Capital Allocators · Toby Rodes - Unlocking Value in Japan (EP.407) · IDENTIFIED FROM THE TRANSCRIPT · source
“So there's another false start that happened in 2012, 2013, the Abbeanomics push, I'd be remiss to skip over that. It was another false dawn. That was the BOJ doing a hostile takeover of the Japanese bond market. They drove the final push on the JGB yield curve, dragging it through zero. When I was at Brookings, we debated whether Japan could go through zero, and boy, did it go through zero. What that meant is GPIF was flushed out of the JGB market and was pushed into the equity market. It was thought that just by making debt super cheap for Japanese managers, they would access the semi-permanent capital bonds. And the story would write itself. Animal spirits would be unleashed. It didn't happen. It didn't happen because the voices of shareholders were still too muted to drive that balance sheet reflation of replacement.”
2024-09-23 · Capital Allocators · Toby Rodes - Unlocking Value in Japan (EP.407) · IDENTIFIED FROM THE TRANSCRIPT · source
“When GPIF knocked on my door and said, we don't do this for many people. I'm speaking with again great humility. They said, usually it takes a year for people to get a permit to operate and run funds in Japan. We think we can accelerate that for you. That was one of a few catalysts for spinning out of GMO. But that's when I realized just how serious people were about bringing a different type of viewpoint. And as I'd done in the past, bringing an accountability and a governance framework that Japan didn't really speak. It was a language they didn't really understand. But they realized that there were several people that could help transplant some of those concepts. And I feel very fortunate to have been chosen as one of those people to foment for change in Japan.”
2024-09-23 · Capital Allocators · Toby Rodes - Unlocking Value in Japan (EP.407) · IDENTIFIED FROM THE TRANSCRIPT · source
“Doing it in a way that's constructive. I didn't realize that I was building a track record, and a following in Japan. With great humility, what happened is a lot of these stewards of the companies, primarily from Sumitomomitsi Trust Bank, ended up becoming the insiders in the GPIF, the government pension investment fund in Japan. These guys were the drivers of the governance upgrade in Japan. I told you that the cost of equity and the equity risk premium is a big ultimate mover of the Japanese equity market. Its GPIF that needs equities to perform to deliver on their pension obligations. So they realize that all of these complex relationships and conflicts in the Japanese financial services market meant that only outsiders could come and constructively cut some of these threads and free up the flow of capital in Japan. I got the signal.”
2024-09-23 · Capital Allocators · Toby Rodes - Unlocking Value in Japan (EP.407) · IDENTIFIED FROM THE TRANSCRIPT · source
“You get invited into the control room. And I didn't know it at the time, but at GMO, I did probably 450 meetings in Boston a year in Japanese. And the reason the carpet was worn out to our meeting room was GMO had both my fundamental portfolio and then a quantine that owned anywhere from 125 names. So every Japanese company that saw GMO show up in their shareholder role thought I was their shareholder. I made it a policy. If someone wants to come and talk to me for an hour about their business, I would say yes. And out of this came a relationship with the C-suite of the top 700 companies in Japan. What I didn't know at the top is the quiet person that Shepherds the C-suite into my meeting room are from the trust bank. And the trust banks are quietly taking notes on who is engaging with Japanese companies and always asking them to make a better peanut butter and jelly sandwich.”
2024-09-23 · Capital Allocators · Toby Rodes - Unlocking Value in Japan (EP.407) · IDENTIFIED FROM THE TRANSCRIPT · source
“It doesn't work. Japan finally understands that this system and its three lost decades is proof that capital doesn't flow from low return ideas to high return ideas in Japan, that this system was engineered to keep foreign capital out, to keep foreign competition out. It worked to the extent that you were a catch-up economy. But once you'd caught up, there was nowhere for the system to go except hold Japan back.”
2024-09-23 · Capital Allocators · Toby Rodes - Unlocking Value in Japan (EP.407) · IDENTIFIED FROM THE TRANSCRIPT · source
“So, that initial wave that didn't really work out also sounds very consistent with how you described the culture of Japan, the ownership of companies, and capitalism for the insiders. Why has that shifted since then to make this a more attractive period of time?”
2024-09-23 · Capital Allocators · Toby Rodes - Unlocking Value in Japan (EP.407) · IDENTIFIED FROM THE TRANSCRIPT · source
“To the government. It was a huge air pocket, a downdraft. So while people were talking about governance at the same time, this is when the first wave of activists showed up and realized just how cheap was, but Japan was on its knees and it was undergoing an asset shift. The wrong people were showing up and saying, please, I have a flight to catch to New York. My suitcase is empty. Fill it with the gold, I need to catch the next flight. And I mean no disrespect to the first wave of activists. They saw the value, but they created a reaction in Japan which said, we hear what you're saying, activists, but the time is not right. We're on our knees for the wrong reasons right now. So out of this came a spade of poison pills, and Japan circled the wagons and shut down governance reform to basically prevent the looting and the asset stripping of a Japan that was finding itself under value.”
2024-09-23 · Capital Allocators · Toby Rodes - Unlocking Value in Japan (EP.407) · IDENTIFIED FROM THE TRANSCRIPT · source
“Japanese banking system between 1997 and 2003, and they did that without a revolution. You could only do that in Japan. So the first governance phase happened in 2005 when the equity risk premium exerted itself, but another thing was happening at the same time, and that is that the Nikkei and Topics was on 7,000. Today, we've gone back to just under $40,000. The Nikkei and topics was on its knees. The reason for that was that the Japanese pension complex was undergoing a change. What happened is corporate entities that were seeded the overall pension obligation were putting these obligations back to the government, and they had to do it through the market. So you had this huge foreselling as a mark to market needed to be established as a big pool of assets was handed back.”
2024-09-23 · Capital Allocators · Toby Rodes - Unlocking Value in Japan (EP.407) · IDENTIFIED FROM THE TRANSCRIPT · source
“I like to preface the governance conversation as a proximate cause, but the ultimate cause in Japan is the cost of equity and the equity risk premium. Up until 2005, to buy Japanese equities was really a fool's errand. Multiples were high, the bubble was still deflating. Ultimately, it wasn't until the final banking crisis and the cleanup in 2003 and 2005 that the overall market derated. And that's the first time you heard talk of governance. It was because for the first time management teams were under pressure to deliver on the cost of equity. So the first time happened in 2005 as Japan was finally emerging from a two decade-long period of overvaluation and a workout of the Japanese banking system. 20% of Japan's GDP was run through the Japanese.”
2024-09-23 · Capital Allocators · Toby Rodes - Unlocking Value in Japan (EP.407) · IDENTIFIED FROM THE TRANSCRIPT · source
“So, the corporate governance reform story has come in and out of favor in Japan, at least for the last twenty years. And I'd love you to take me through what didn't work in the past and why might that work this time around?”
2024-09-23 · Capital Allocators · Toby Rodes - Unlocking Value in Japan (EP.407) · IDENTIFIED FROM THE TRANSCRIPT · source