As part of its 20th anniversary celebrations this July, FinanceAsia interviewed a series of leading figures that have helped shape Asian financial markets over the past two decades.
Following his arrival in the mid 1990's, he progressed up the ranks, becoming head of Asian equity capital markets then head of Asian investment banking and finally vice-chairman for Asia ex-Japan.
In a wide-ranging interview, Machin discusses how much Asia, Goldman and equity capital markets have changed over the past 20 years.
As a former banker and global institutional investor he is uniquely placed to comment on the controversy surrounding the heavy reliance on cornerstone investors to push initial public offerings through in Hong Kong.
You’ve lived through some huge changes in Asia both as a banker and as an investor. How was it in the beginning?
I came out to Hong Kong with Goldman in 1994. My first ECM job popped up out of the blue as the bank was only just setting up its capital market business in the region then.
I never thought I’d be here more than two years let alone two decades.
It wasn’t a particularly auspicious start either as 1994 turned out to be a particularly bad year in Goldman’s history. That year, the new partners had to write a big cheque because of losses. It was actually one of the catalysts for the firm eventually going public in 1999.
I remember attending a conference in New York and someone came up with a humorous list of cost saving measures. Closing the new Hong Kong office was top.
There were a lot of cutbacks and I spent my early years in Asia with pitch books explaining who Goldman Sachs was, what an investment bank does.
All the British banks thought we’d be fly-by-nights. China was the great hope then as it is now, but the real focus was Southeast Asia, particularly Thailand. It just shows how much can change and how quickly.
In retrospect pre-crisis Asia comes across as a pretty racy place to do business. Everyone interviewed for FinanceAsia’s anniversary issue has armfuls of stories.
Yes it was. One of the first big deals Goldman won was PT Telkom’s IPO in Indonesia. We thought it was going to be a $3 billion deal and even John Corzine, our then CEO, came down to pitch.
It promised to be massive by the standards of the mid 1990’s. But pretty much anything that could go wrong did go wrong.
One banker ended up with cysts in his bones because of salmonella poisoning. A lot of people were also nervous about flying in and out of Bandung because they could see bits of other planes strewn over the hillside on the approach. And in the end, after many, many twists and turns, the international deal got chopped down to virtually nothing.
So what was the first big deal you executed?
It was the IPO for China Telecom (now Mobile) in 1997. At that point, Goldman hadn’t done anything in China, but the bank had executed a deal for SingTel in 1993, our first Hong Kong IPO for AsiaSat and Deutsche Telekom’s first privatisation.
Goldman was also lucky in being able to take advantage of Morgan Stanley’s misfortune after they fell out with their rainmaker Fang Fenglei, who later became Goldman’s partner in China. Morgan Stanley had been way out in front in those days having established China’ first Sino-foreign investment bank – CICC.
However, in some ways quite reasonably, they didn’t have a high conviction that China really would privatise its telecom company at a time when many other countries, including even France, hadn’t. So Fang crossed the road to Morgan Stanley’s greatest rival.
It was a huge effort to get the deal across the line. We won the mandate in May and executed it in October. In the process, we had to use every single person in the office that could speak Chinese.
We chose to list the mobile business because it was the cleanest and picked two provinces, which had the best growth profile and sufficient scale. But market conditions were exceptionally challenging when we finally got to launch date.
The red-chip bubble burst in September 1997 and the Hang Seng Index dropped 24% in the space of a week one month later. So Hong Kong’s largest IPO began trading in the middle of all of that.
At the lunch, after the listing ceremony, Fang Fenglei got up and said real gold should not be afraid of fire. By the end of the first week, the stock was up 3% and we were all hugely relieved. Fang had been correct.
The late 1990s were the high water mark for telecom deals.
They were. That summer in 1997, I was also working on the IPO for Telstra, Chunghwa Telecom’s pre-privatisation study, as well as deals for India’s MTNL and the pitch for Korea Telecom.
There was one day in August when I arrived one morning and was still listening to voicemail the following morning. I sat there typing and listening for hour after hour. I had no sleep for three nights in a row.
At the time my former professor at Oxford University had published research, which suggested the body didn’t need sleep. Of course we all now realise how lack of sleep accelerates ageing. It explains my current state!
In those days Goldman was also famously a voicemail culture with very little email.
That was Hank Paulson’s preference. 1997 was actually the year Goldman started using email for the first time. I remember being very jealous that SG Warburg got it first in the mid 1990s.
What do you think now when you look back at the Asian Financial Crisis and the way it affected Hong Kong?
The handover, the bursting of the red-chip bubble and speculative currency attacks ushered in a period of existential angst for Hong Kong. Some venerable UK fund managers even went into their vaults and dusted off share certificates they’d held for 40 years and sold them off.
But the government’s intervention in the stock market generated one of the most interesting deals I ever worked on: the Tracker Fund IPO of 1999. It was a really creative transaction and we saved the government about $220 million in fees by establishing a tap mechanism to sell down the massive portfolio it had amassed in the years following the IPO.
No government had ever done anything like it before and no one really knew what an exchange traded fund was in those days either.
I was also really proud of the advertising campaign, which was similar to the famous British privatisation adverts of the 1980s. We wanted to make people feel proud to be Hongkongers and want to “own a part of Hong Kong.”
That’s how we described the opportunity to buy the units of the Tracker Fund, which represented all the stocks in the Hang Seng Index. There were a lot of images portraying Hong Kong and its people; what makes the place and community special.
It’s very easy to get jaded as you get older and look back at your younger days through rose-tinted spectacles. But these and many others really were iconic moments for me.
What role do you think retail investors should play in the Hong Kong stock market? They’re famous for flipping out of deals as soon as they begin trading.
Retail investors are very important in Hong Kong. That’s the regulatory mindset and philosophy here.
The regulators want to give Mrs Chan a fair chance to participate. And I think that’s a good thing. The Tracker Fund, MTR Corp and the Link REIT privatisations all were widely marketed and supported by Hong Kong retail investors.
But balance is important. I think the regulator made the right call to stop retail participation in the Rusal IPO in January 2010. There were risks and it was one for institutional investors.
China’s domestic capital markets are still under-institutionalized, but the regulators are aware of it and have been working to improve the institutional environment, both domestic and international, for a number of years.
What’s your view on cornerstones?
When it started it off in 1997 it was a good idea. Now it’s questionable whether you can call some of these deals IPOs anymore. Some are effectively placements to connected people.
Does this create a false market? Well it certainly makes it difficult for institutional investors to do proper valuation work.
I can see how appealing it is for issuers to lock up as much paper as possible up front. But I do think there has to be some balance where proper free market valuations and trading are established through the IPO process.
How does it affect your strategy at CPPIB?
We’re super long term so we’re not worried about IPOs as such. As a big investor we want to have scale. So in Asia we focus on markets like Australia, Japan, China, India, Korea and Hong Kong and Singapore.
What kind of sectors?
Anything that’s consumer facing, or taps into the region’s rising middle class: financial services, healthcare, education, the new economy.
How do you ensure you’re getting in at a good level, since these are sectors everyone wants to buy?
Yes that’s the problem. Some fintech related companies have incredibly high valuations and the old style banks are arguably a lot cheaper right now.
So you’ve got to be careful about when you get in and be prepared to be patient. You also need to have a very thorough understanding of the risks.
That’s why it’s good to have a few old grey haired people around like me. There really is no substitute for conducting proper due diligence, but also understanding who or what you’re dealing with.
Particularly in China where we hear a lot about key man risk?
It can happen anywhere. Goldman Sachs Asia endured its biggest loss from a fraud as a result of principal investing in New Zealand, not in an emerging market.
Xi Jinping’s anti-corruption drive was absolutely necessary otherwise China would have eventually blown up.
Do you think China’s rising power on the world stage will continue to be accepted?
I’ve actually been amazed how the world has coped with China’s rise so far. But the West can also still compete by improving education and capital availability.
I really hope countries don’t go down the other road and shut their minds and borders.
Do you think the Fed will ever be able to raise interest rates over the next two decades?
We do seem to be stuck in a low interest rate environment where QE is no longer as effective and negative interests have limited positive impact.
Our generation has done a great job of spending the money that should have gone to the next generation. There’s $200 trillion of debt in the world and no clear way to pay it all back.
At some point governments and supranational institutions will have to take some fairly radical steps.
Such as debt forgiveness?
There could well have to be some debt forgiveness at some point. Central banks keep hoping we’ll be able inflate our way out of it, but I don’t think that’s going to happen given the level of overcapacity in the world.
As part of FinanceAsia’s 20th anniversary we’re also looking 20 years into the future. What are the big risks investors need to be aware of?
There are macro risks everywhere – war between India and Pakistan, between China and Japan, North Korea. Australia hasn’t had a recession for the last 30 years and Japan’s demographics are undeniable.
If you look at the cycle of history, humans have a natural tendency to swing between hope and fear. Brexit, Putin and Trump all appear to be part of this cycle.
But I believe in increasing communality, the free movement of people and ideas. We’re all homo sapiens: fundamentally the same people.
It’s just the circumstances, which are different for some of us. By sharing we can share the benefits with more and more people and benefit us all.