Wharton Journal

Issue date: 12/4/06 Section: News

For a talk on country with $1,500 in income per capita and capital markets that are not truly open to foreign nationals, why was a Wharton classroom filled to the brim with over 80 students at 4:30pm on a Thursday afternoon to talk about investment opportunities?

The answer is of course that the country in question is China and it is already an economic powerhouse, currently #4 in the world and projected to be the largest economy in the world in 2040. As our distinguished alumni speaker, Keith Abell astutely noted: the averages don't matter in a rapidly urbanizing environment.

Indeed, urbanization is the key trend in the country; everything else is a derivative of that according to Abell. 400 million people have moved from the countryside to cities in the last 30 years in China; another 400 million are expected to move in the next 15 years. Ten years ago, about three out of four people in the country lived in rural areas; by 2010 it will be 50:50 and by 2020, the balance will have shifted to 2 out of 3 people living in urban areas. Within two generations, China will have gone from pre-industrial society to manufacturing powerhouse to a post industrial middle class society. So far, the political leadership has blithely navigated through the paradox of political totalitarianism and open(ing) markets with minimal social upheaval.

Keith Abell has a unique perspective on this process. As a graduate of the first Lauder class in 1986, Abell began with an internship in 1985 with Xerox's China JV partner - Shanghai Number 2 Photocopy Factory - with nothing more than a plane ticket and a bicycle. After graduation, Abell cut his teeth at Goldman in Corporate Finance and M&A and soon became a VP. Nonetheless, Asia beckoned; in 1990, Abell moved to Tokyo with the Blackstone Group and later set up its private equity practice in Hong Kong. In 1994, Abell sewed the seeds of what would become today's GSC Group: the business began as a few hundred million in capital as an in-house investment arm of Travelers group and has flourished to the $18B asset management business it is today.

Abell has experienced the history of foreign investment in Chinese business under the so-called "Socialism with Chinese Characteristics" regime first hand. In the mid 80s, a company outside of China could not pick its JV partner or gain effective control of a business, so partnerships were akin to "shot gun marriages". And as in many marriages, objectives of both parties changed over time and these structures became hard to unravel.

Continued...

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