Speaker 1: This is Wall Street Week. I'm David Weston bringing you
Speaker 1: stories of capitalism. This week, we go to the waters
Speaker 1: off of Mexico to see the role private equity is
Speaker 1: playing in getting you that high end blue fin tuna
Speaker 1: for your favorite sashimi. And we hear from Anna Botina
Speaker 1: Santander about prospects for growth in the US and Europe
Speaker 1: and how the crisis in Ukraine may serve as a
Speaker 1: wake up call for the EU to make the financial
Speaker 1: reforms it has needed for years. But we start with
Speaker 1: the big story for global Wall Street this week, the
Speaker 1: tale of Trump tariffs and what they may do to
Speaker 1: the US economy. For his views on tariffs and the economy,
Speaker 1: we welcome back our very special contributor, Larry Summers of Harvard.
Speaker 2: We will charge them approximately half of what they are
Speaker 2: and happened to, so the tariffs will be not a
Speaker 2: full reciprocal I could have done that, yes, but it
Speaker 2: would have been tough for a lot of countries who
Speaker 2: didn't want to do that.
Speaker 1: Will these increased costs be passed along the consumer? I
Speaker 1: know you've taken a position on that. The Secuar and
Speaker 1: Treasury current Secuary and Treasury Scott Besson has questioned exactly
Speaker 1: why they would be passed on.
Speaker 3: I'm not going to get in a back and forth
Speaker 3: with Professor Summers, And you know, maybe Professor Summers should
Speaker 3: let the world know who his client lift is and
Speaker 3: why he's talking about things like this, because he does
Speaker 3: have professional clients away from Harvard. But you know, I
Speaker 3: would also add that I have seven years of empirical
Speaker 3: data and which showed that the China terrifts were not
Speaker 3: passed on to the American people.
Speaker 1: What's your response.
Speaker 4: He's tried to call me out like I've got some
Speaker 4: kind of importer clients who's paying me.
Speaker 5: That's ridiculous.
Speaker 4: Maybe we ought to pay some attention to the various
Speaker 4: financial affiliations of all the people in the Trump administration
Speaker 4: involved with Crypto.
Speaker 5: On the marriage, we've got a clear test.
Speaker 4: They put a tariff on steel, and the price of
Speaker 4: stealing the United States is up thirty percent since inauguration day.
Speaker 4: We got many economists at the Peterson Institute. There's a
Speaker 4: different study in the American Economic Review that looked at
Speaker 4: the effects of President Trump's tariffs in his first administration.
Speaker 5: Those are much smaller.
Speaker 4: Tariffs than are being discussed and put in place today.
Speaker 4: But the evidence looks like it's pretty close to dollar
Speaker 4: for dollar in terms of increased prices that consumers face.
Speaker 4: And the economic logic is, if you put a dime
Speaker 4: tax on a hot drug, the guys selling the hot
Speaker 4: rug's going to sell it for ten cents more. If
Speaker 4: he could have squeezed to suppliers, he would have already
Speaker 4: squeezed his suppliers. Putting that ten cents on doesn't make
Speaker 4: it any easier. So I don't understand the argument, and
Speaker 4: I'm not alone among serious economists in not being able
Speaker 4: to understand the argument that this will be absorbed.
Speaker 1: There was a lot of anticipation built up to this
Speaker 1: so called Liberation Day this week, But by all accounts,
Speaker 1: this is not the end of the process. This is
Speaker 1: in the middle of the beginning of the precess, which
Speaker 1: will lead to a lot more negotiation, bilateral negotiation. What
Speaker 1: about the cost of uncertainty itself in this process of
Speaker 1: President Trump trying to use tariffs to extract things out
Speaker 1: of country.
Speaker 5: I see two things about that. First, the White House
Speaker 5: can't have it both ways.
Speaker 4: Either of these taxes are a crowbar, These taffs are
Speaker 4: a crowbar.
Speaker 5: Or they're a source of revenue, but you.
Speaker 4: Can't say they are a source of revenue, so we
Speaker 4: don't need to worry about the deficit and then say
Speaker 4: we're they're a crowbar because we're going to get rid
Speaker 4: of them when other countries.
Speaker 5: Reduce their tariffs. That's just contradicting yourself.
Speaker 4: Look, all of us making decisions don't want to make
Speaker 4: them when there are a whole bunch of cards that
Speaker 4: are going to be turned over before too long. Whether
Speaker 4: it's buying a washing machine, buying a car, buying a house,
Speaker 4: or a business buying a factory. You want the situation
Speaker 4: to settle down, and you want to have some sense of.
Speaker 5: Certainty before you act.
Speaker 4: How could anybody act with confidence when you don't know
Speaker 4: what the price of steal's going to be, when you
Speaker 4: don't know what the situation of your competitors is going
Speaker 4: to be. So the traditional approach of policymakers is to
Speaker 4: try to provide as predictable an environment as possible so
Speaker 4: as to increase business confidence. And this new approach of
Speaker 4: trying to maintain maximum flexibility probably is good for raising
Speaker 4: the ratings of a TV show because you never know
Speaker 4: what's going to happen next, but it's hard to believe
Speaker 4: that it inspires the confidence that will be a basis
Speaker 4: for investment.
Speaker 1: We talk about systemic risk when it comes to the
Speaker 1: banking system. What about systemic risk the overall global economic system?
Speaker 1: I mean, apart from the individual tariffs and what consequences
Speaker 1: immediate might happen, how big at risk is there to
Speaker 1: the system? And I will say, in the past, we've
Speaker 1: had some shakeups. I mean, Margaret thatcher Ronald Reagan shook
Speaker 1: up a lot of economics. Is this that sort of
Speaker 1: a transformation or could it be more profound?
Speaker 4: I think a lot of, not everything, but a lot
Speaker 4: of what Margaret thatcher Ron reign did was a necessary
Speaker 4: corrective to various kinds of accesses. You know, we had
Speaker 4: twenty percent interest rates in the United States. They had
Speaker 4: piles of garbage twelve feet high on every street in London.
Speaker 4: So I don't think that's the right example for thinking
Speaker 4: about this at all. I think a better example is
Speaker 4: the smooth Hawley tariffs that we saw. Now, the lore exaggerates,
Speaker 4: but I think it's fair to say that the smooth
Speaker 4: Holy tariffs contributed to making the depression great.
Speaker 1: Even the issue of smooth Holly raises the larger issue
Speaker 1: where are we on the likelihood or probability of recession
Speaker 1: or stagflation. Obviously we don't know where we are yet,
Speaker 1: but where is that headed.
Speaker 4: I think the odds are on one side or the
Speaker 4: other of fifty percent that we'll have a recession within
Speaker 4: the next year. The indicators of sentiment, the psychological indicators,
Speaker 4: are mostly running really very negative. The hard indicators on
Speaker 4: what's actually happening are less negative, but they've had less
Speaker 4: time to adjust and are more backward looking and are
Speaker 4: less forward looking. So I think the odds of a
Speaker 4: recession are probably fifty to fifty. And part of the
Speaker 4: reason I think they're as limited as that is because
Speaker 4: I think there's some prospect that, particularly if things turned downwards,
Speaker 4: they'll be a reversal in course.
Speaker 1: What does this do for some of our economic rivals?
Speaker 1: I mean, during the first administration of Donald Trump, he
Speaker 1: really focused on China, not exclusively, but really predominantly. This time,
Speaker 1: maybe it's not quite so sure. But if you're sitting
Speaker 1: in Beijing right now, if your president g how do
Speaker 1: you react to these tariffs?
Speaker 5: What does it do to your situation? You know?
Speaker 4: I think it goes beyond the tariffs, David. In China,
Speaker 4: the signal event in the lives of people your age
Speaker 4: and my age in China was the cultural revolution, when
Speaker 4: the government turned against all the traditional leading institutions of society.
Speaker 4: And what I hear and see is that the Chinese
Speaker 4: see that we are having a kind of cultural revolution.
Speaker 4: They also see it as a huge opportunity because they
Speaker 4: know better than anyone else how much damage a cultural
Speaker 4: revolution can do to a society. And they see us
Speaker 4: alienating all our traditional friends, and they see us increasingly
Speaker 4: internally divided, and they see us focused on domestic vengeance
Speaker 4: rather than global challenges, and they have to see that
Speaker 4: as a very big opportunity and perhaps even as a
Speaker 4: strategic gift.
Speaker 1: Larry, you always admonish me and us not to overreact,
Speaker 1: not to over predict what's happening. So I wander careful
Speaker 1: not to do that. But what you're talking about really
Speaker 1: goes to the rule of law, which sounds like it's
Speaker 1: a really nice concept, but maybe we don't always remember
Speaker 1: how that undercurds are capital markets the entire economy. Now,
Speaker 1: as you say, we're not at the cultural revolution, but
Speaker 1: even shaking it a bit in that direction. When do
Speaker 1: we start to see that in barring costs the cost
Speaker 1: of capital.
Speaker 4: One of the things people have talked about is American exceptionalism,
Speaker 4: and one aspect of American exceptionalism is that multiples the
Speaker 4: ratio of prices to earnings are higher here.
Speaker 5: And that's for many reasons.
Speaker 4: But one of those reasons is that if you have
Speaker 4: earnings today here, it's more secure than you're going to
Speaker 4: have earnings tomorrow because you can count on your property rights,
Speaker 4: you can count on being able to enforce contracts. And
Speaker 4: if we start attenuating the rule of law, that starts
Speaker 4: to go away, and that can take a turn two turns,
Speaker 4: three turns off of price earnings ratios, and that's a
Speaker 4: loss of trillions of dollars of investment. And so we
Speaker 4: take for granted that we make investments with partners, and
Speaker 4: we have lawyers who write contracts, and then we know
Speaker 4: that contracts.
Speaker 5: Will be enforced.
Speaker 4: You know, one of the things I used to not understand,
Speaker 4: and I think I understand better today is why it
Speaker 4: is that in so many parts of the world you
Speaker 4: have these family clan businesses that are in twenty different industries,
Speaker 4: and we have so little of that in the United States,
Speaker 4: And the answer is that if you don't have contracts,
Speaker 4: then what you have is blood, and so you get
Speaker 4: these clan businesses because you can't trust people outside of
Speaker 4: your clan, and so you choose your cousin rather than
Speaker 4: the best person. That's a price those societies pay economically,
Speaker 4: and because we've been so good at the rule of law,
Speaker 4: it's not a price that we've paid in the last century.
Speaker 5: But we may be moving back a bit in that direction.
Speaker 1: Coming up, as the US comes to terms with Trump tariffs,
Speaker 1: Europe does an about face on defense spending. We talk
Speaker 1: with Anna Botine of Santander about what it could mean
Speaker 1: for her bank and potential reform of capital markets. This
Speaker 1: is a story about two economies in transition. In the
Speaker 1: United States, as President Trump shakes the foundations through tariffs.
Speaker 2: Foreign nations will finally be asked to pay for the
Speaker 2: privilege of access to our market, the biggest market in
Speaker 2: the world, where right now the biggest market in the world.
Speaker 2: We had a great country four years ago in terms
Speaker 2: of the economics. We were doubling up when China we
Speaker 2: were doing so well, nobody was going to catch us.
Speaker 1: And in Europe suddenly facing the need for massive defense
Speaker 1: spending it never really expected.
Speaker 6: The era of the peace dividend is long gone.
Speaker 7: The security architecture that we relied on.
Speaker 6: Can no longer be taken for granted.
Speaker 3: The age of spheres of influence.
Speaker 8: And power.
Speaker 6: Competition is well and truly back.
Speaker 1: While the new administration in the US slashes regulations and
Speaker 1: the size of the government to keep the country competitive,
Speaker 1: the EU is dealing with a stalling economy that is
Speaker 1: falling behind its western piers.
Speaker 7: So the US has something really important, which is what
Speaker 7: I call a growth mindset. So whatever government is in place,
Speaker 7: it has always been more pro growth.
Speaker 1: Anne Boutine is the executive chair of Santander Group, the
Speaker 1: fourteenth largest banking institution in the world, with operations in
Speaker 1: Europe and the Americas North and South. Thirty eight percent
Speaker 1: of its net revenue comes from Europe and South America
Speaker 1: comes in second, contributing thirty two percent.
Speaker 7: You can see that in the growth of the last
Speaker 7: decade than Europe. So it's early, but I believe that
Speaker 7: that is a very positive sign. And as I like
Speaker 7: to say, Europe is awakening and the alarm clock has
Speaker 7: been President Trump because what I have never seen is
Speaker 7: the President of the Commission saying that we're in extraordinary
Speaker 7: times and we need to take extortly measures. So it's
Speaker 7: not just good for the US, it's good for Europe.
Speaker 7: What's happening is good for growth. It's good for citizens
Speaker 7: and society, because I believe that is. I mean, there
Speaker 7: are the factors that are not as positive, but this
Speaker 7: is a very positive signal that businesses will be able
Speaker 7: to do more, invest more and create more growth.
Speaker 1: Are we seeing action yet and how much of it
Speaker 1: is being triggered frankly by what's going in Ukraine and
Speaker 1: European countries deciding they really have to step up and
Speaker 1: spend more on defense.
Speaker 7: It's a combination, I think geopolitics and what's going on
Speaker 7: in Ukraine, but also the economic, let's say, policies of
Speaker 7: the US administration. So I think both of those drivers
Speaker 7: for what I see, as you know, the German awakening,
Speaker 7: the lifting of the breaks on debt, Germany lifting the
Speaker 7: brakes on debt. It's harder except when Europe isn't a crisis.
Speaker 7: Feeling now in Europe is we are in a crisis
Speaker 7: or we could get into a crisis, and unless we
Speaker 7: do something fast, and so there is a sense of
Speaker 7: urgency I have not seen before and this is good
Speaker 7: also for companies and banks. I mean, we do business
Speaker 7: in Europe. You know, one of our biggest markets is Spain.
Speaker 7: Spain is going to grow at those two and a
Speaker 7: half even three percent depends on who you ask. So yes,
Speaker 7: I think what's going on is both structural but also
Speaker 7: due to the pressure that we're feeling on both the
Speaker 7: war and the economy.
Speaker 1: It wasn't always a positive picture for Spain. During the
Speaker 1: European debt crisis of the late two thousands, Spain was
Speaker 1: among the five EU member states that were struggling to
Speaker 1: repay their debt. Now it's economic growth outpaces Germany, France
Speaker 1: and the United Kingdom. Part of the problem is a
Speaker 1: European wide monetary policy coupled with fiscal policy run by
Speaker 1: the member states, often in different directions. What about capital
Speaker 1: markets in Europe, because it's been thought that part of
Speaker 1: the driver of growth in the United States has been
Speaker 1: the robust capital markets. So people want to raise capital
Speaker 1: to invest in, for example, startups and tech companies. Can
Speaker 1: you move in that direction to have more robust capital markets?
Speaker 7: This is one of the big goals we've had for years. Again,
Speaker 7: what's happened. The awakening that I can see in Europe,
Speaker 7: led by Germany and possibly France, means that Germany will
Speaker 7: invest one trillion euros one trillion dollars over the next
Speaker 7: decade in defense and the way they're going to finance
Speaker 7: that is through a common eurobond. So that effectively is
Speaker 7: one of the potential drivers for this Common Capital Markets Union,
Speaker 7: which we call it in Europe, which again is good
Speaker 7: for banks.
Speaker 1: What is the role of regulation in all of this?
Speaker 1: I mean, when it comes to the United States. You
Speaker 1: famously asked President Trump about deregulation at Davos earlier this year.
Speaker 1: What are the regulations that can help or hinder what
Speaker 1: you want to do? At Santadre.
Speaker 7: So, regulations matter, That's why I asked the question. I've
Speaker 7: been very vocal about this. It's about regulation, but it's
Speaker 7: also about supervision, how the agencies interpret the regulation, and
Speaker 7: this is one of the quick wins. That's why I
Speaker 7: asked the question. So I see governments as enablers for business.
Speaker 7: Businesses create wealth, you know, create companies and jobs. That's
Speaker 7: where you know, we pay taxes. Government can deliver other services.
Speaker 7: So just by getting the balance right on regulation. And
Speaker 7: at the end, regulation is there to protect consumers, but
Speaker 7: if you overprotect them, you don't grow.
Speaker 1: The European Commission turned to former ECB President Mario Draghi
Speaker 1: to study the effects of the single market and competitiveness
Speaker 1: in the EU. In the report, published in September twenty
Speaker 1: twenty four, Dragi says regulation should be designed to facilitate
Speaker 1: market entry, not become a bear to Europe's goals.
Speaker 9: A little over a decade ago, the US and European
Speaker 9: GDPs were They weren't exactly on top of each other,
Speaker 9: but they were pretty close sixteen versus fifteen roughly. And
Speaker 9: now the European GDP is fifteen or sixteen trillion, I think,
Speaker 9: and the US GDP is about thirty trillion over the
Speaker 9: course of a little more than a decade. And that
Speaker 9: is a function. Again, that's a function of a lot
Speaker 9: of things, but it's a function of a lack of
Speaker 9: investment in productivity and an over regulation of the European economy.
Speaker 9: And just as I think that we could have a
Speaker 9: significant effect on American growth by streamlining our regulation, I
Speaker 9: think you could have an even more dramatic effect on
Speaker 9: European growth if they were willing to undertake that deregulatory project,
Speaker 9: some of which has been suggested recently by Mario Draghi.
Speaker 9: In his report delivered to the European Commission.
Speaker 1: During his tenure as Vice Chair of the Federal Reserve,
Speaker 1: Randy Korrels dealt with policy recommendations for regulating financial institutions.
Speaker 1: He agrees with drog these concerns that regulations have played
Speaker 1: a part in holding Europe back.
Speaker 9: They really haven't created a European wide financial regulatory system,
Speaker 9: and that fragmentation contributes to a great deal of cost.
Speaker 9: Where there are not conceptually dramatic, but material and important
Speaker 9: differences from one jurisdiction to another within Europe with respect
Speaker 9: to financial regulation that continue to increase cost. And so
Speaker 9: from my point of view, the most important thing that
Speaker 9: Europe could do would be to accelerate in advance its
Speaker 9: europe wide framework for financial regulation, even more than some
Speaker 9: of the important particular changes that they could make. If
Speaker 9: Europe could refine its relation of capital provision. The venture
Speaker 9: capital ecosystem in Europe, for example, is very underdeveloped, and
Speaker 9: the provision of financing really of any sort to startup
Speaker 9: companies is not terribly robust, certainly compared to America. The
Speaker 9: reason that we have such an advanced tech sector is
Speaker 9: that for decades we have had nurtured, tried to develop
Speaker 9: a capital financing system that supports the provision of capital
Speaker 9: to these risky startup enterprises. And Europe has not done that.
Speaker 9: Were they to make changes to the governance of capital
Speaker 9: provision that supported particularly that sort of financing, I think
Speaker 9: you could, in a relatively short period of time, call
Speaker 9: it a decade, make a big dent in that when
Speaker 9: you consider how much the technological landscape has changed in
Speaker 9: the United States, how different the technologies that are being
Speaker 9: deployed now in the US are from what they were
Speaker 9: ten or fifteen years ago, all of which supported by
Speaker 9: our financing system. If Europe had had a financing system
Speaker 9: that was as well geared as ours to supporting that
Speaker 9: kind of innovation, they would have participated in that to
Speaker 9: a much greater degree than they have.
Speaker 1: Unifying capital markets is not a new concept to Europe,
Speaker 1: but the idea has never really gotten off the ground,
Speaker 1: and Quarrels thinks that the Trump effect might be what
Speaker 1: Europe needs to start moving towards making the changes it needs.
Speaker 9: I think it's true, nonetheless, that Europe has had a
Speaker 9: wake up call and it's been very unpleasant. But I
Speaker 9: have talked to a number of European policy makers over
Speaker 9: the course of the last month that really hasn't been
Speaker 9: much more than a month. That seems like it's been
Speaker 9: much longer than that. Certainly seems like that to the Europeans,
Speaker 9: and there is a intensity and practicality to what they
Speaker 9: are now saying they would be prepared to do in
Speaker 9: the way of accelerating regulatory change, accelerating investment in defense
Speaker 9: that really never was there before. And again, well, it
Speaker 9: has been unpleasant medicine, I think it could have a
Speaker 9: very good result for Europe.
Speaker 1: In a global economy, the race to grow is not
Speaker 1: a solo sport.
Speaker 9: Economics and economic growth is not a zero sum game.
Speaker 9: When you have a vibrant Europe, that is you know,
Speaker 9: that's better for us. There are many many win win
Speaker 9: opportunities when you have two dynamic economies that are interacting, competing,
Speaker 9: partnering with each other, and you know, we would be
Speaker 9: much better off if Europe were economically healthier than it
Speaker 9: is currently.
Speaker 1: And Anna Boutein believes that opportunity for growth and scale
Speaker 1: and diversification is the path forward for Santander as well.
Speaker 7: Going back to the key competitive advantages of Santander Global
Speaker 7: and in market scale one hundred and seventy three million customers,
Speaker 7: one of the largest consumer basis in the world. The
Speaker 7: second key strength is diversification. We do better when things
Speaker 7: get difficult because we have geographies and businesses that tend
Speaker 7: to compensate each other. Now, having said that, we obviously
Speaker 7: factor geopolitical risk into our risk analysis, and this is
Speaker 7: where being a bank that has been around for one
Speaker 7: hundred and sixty eight years helps, right, So we've gone
Speaker 7: through many crises, We've gone through Industrial revolution. You know,
Speaker 7: we're going through another change in an era right now
Speaker 7: with AI, and so we factor that into our processes
Speaker 7: and that's one of the things that we do, I
Speaker 7: believe better than others.
Speaker 1: Coming up the story of how all that delicious tuna
Speaker 1: you enjoy at high end restaurants makes it from the
Speaker 1: sea to the table with a little help from private equity.
Speaker 1: That's next on Wall Street Week. This is a story
Speaker 1: about investing in fish. Those giant bluefin tuna favored by
Speaker 1: the best sushi restaurants in New York and all around
Speaker 1: the world. Our colleague Danny Berger went to the waters
Speaker 1: off of Mexico to see where it comes from and
Speaker 1: how private equity is helping to make sure we can
Speaker 1: all enjoy it even as demand grows.
Speaker 10: You can thank private equity for this tuna farm. In
Speaker 10: November twenty twenty three, a group of investors purchased a
Speaker 10: majority steak in Baja Aqua Farms, a producer of high
Speaker 10: quality sashimi grave bluefin tuna in the Pacific Ocean off
Speaker 10: of Baja California, Mexico.
Speaker 8: This is the only farm in the world that is
Speaker 8: being fed by a centralized figure. So there is no
Speaker 8: other feeding vessel like this one in the world. So
Speaker 8: this was designed by us in integration with Mexicanca Company
Speaker 8: and a Chillian company that was working on the engineering
Speaker 8: behind this. It's always looking for efficiencies. This vessel what
Speaker 8: basically does It receives the sardines from the fishing vessel
Speaker 8: that is pumps on the fishholds. Then we grabbed that sardines,
Speaker 8: we put it in a big fishhold that we have
Speaker 8: here on the main deck, and then with those the
Speaker 8: sardines two different cages.
Speaker 10: Baja story began in nineteen ninety nine with just a
Speaker 10: few pens and when growing consumer demand was pushing the
Speaker 10: industry to the brink.
Speaker 11: If you look at this story of all these familiar
Speaker 11: business which baff was not really a family business, but
Speaker 11: it was really shape as a family business.
Speaker 10: Manuel Vanscez, a veteran of Nastli and other food companies
Speaker 10: around the globe, arrived at Baja Aqua Farms in March
Speaker 10: of twenty twenty three as the company CEO this fishery.
Speaker 11: For a long time, it was seen with very bad eyes.
Speaker 11: I'm going back to twenty ten, okay, and at that
Speaker 11: time the fishery was over fish. There were some indicators
Speaker 11: that were saying that in general, all the countries that
Speaker 11: are fishing these which is all the way from Japan
Speaker 11: to America and Mexico, they were abusing a little bit
Speaker 11: on the way that they were taking fish out of
Speaker 11: the water. Hence it wasn't danger. We are not fishing
Speaker 11: small fish, so we are giving the time for the
Speaker 11: fish to reproduce several times before it gets caught. Right
Speaker 11: and by definition, if you have an eighty five kilog fish,
Speaker 11: you're talking about fish that is more than ten years old,
Speaker 11: that has passed that process several times, and then you
Speaker 11: can be one hundred percent sure that going forward then
Speaker 11: there will be more. And this is really a cycle
Speaker 11: that is virtuous and is reproducing, going on and on
Speaker 11: and on.
Speaker 10: According to Noah, US, commercial fishers harvested three hundred and
Speaker 10: sixty eight metric tons of Pacific blue in tuna in
Speaker 10: twenty twenty two, grossing more than two zero point two
Speaker 10: million dollars on the dock revenue, which accounts for ten
Speaker 10: percent of total Pacific bluefin tuna landings that year. Baja
Speaker 10: is in the right place for the business. Japanese and
Speaker 10: Mexican vessels harvest the majority of the annual catch. It
Speaker 10: starts with the actual fishing. There are two commonly used
Speaker 10: methods in the Pacific commercial and recreational fissures either use
Speaker 10: hook and line or persains. Baja ops to use per sins,
Speaker 10: which are massive nets used to capture the fish but
Speaker 10: not lift them out of the water.
Speaker 8: We are now working with the fine tunings, so we
Speaker 8: have to improve this vessel. We have to bring another
Speaker 8: vessel to the rest of the cages because we are
Speaker 8: capable to fit twenty four here, but we have forty.
Speaker 8: We're going to have fifty in the next July. So
Speaker 8: we got to move fast because if we want to
Speaker 8: keep all the benefits that we've been gaining with this
Speaker 8: investment in the other cages, then we got to replicate this.
Speaker 8: So the next thing is to come with another grid,
Speaker 8: and then we have to bring another feeding vessel like
Speaker 8: this one, and that requires money.
Speaker 10: How much could you theoretically grow by double the size
Speaker 10: of what you have here?
Speaker 8: Yes, yes, we can go with double ba.
Speaker 10: Aqua Farms hunts by air for schools of wild bluefin
Speaker 10: tuna in the Pacific corrolse them and towes them to
Speaker 10: their farm pens off the coast of Ensenada, Mexico. There
Speaker 10: they feed and tend to the fish's environment until they
Speaker 10: reach the ideal size for market, harvest them and bring
Speaker 10: them to their processing facility on land. The fish are
Speaker 10: graded for quality and either cut or packed hole for
Speaker 10: shipment to customers enter private equity.
Speaker 12: These are one hundred and seventy five to two hundred
Speaker 12: pounds a piece, and most restaurants in the country didn't
Speaker 12: actually need that much tune at one time. So what
Speaker 12: restricted actually who the company could sell to.
Speaker 10: Equity Group is the private equity investment arm of the
Speaker 10: Zell family, founded by billionaire investor Sam Zell, who passed
Speaker 10: away in twenty twenty three. It still invests cell family
Speaker 10: assets target and not specific industries, but certain features.
Speaker 12: Run companies, and I used to work at Coca Cola,
Speaker 12: and I ran budget, ran a car, and I ran
Speaker 12: a software company, which I think is a little a
Speaker 12: typical for somebody as a president of an investment firm.
Speaker 12: I think it's relevant because what's going on in private
Speaker 12: equity right now. You know, there's lots of capital, and
Speaker 12: there's lots of firms and a lot of competition. We
Speaker 12: cut across a lot of industries. So we're in healthcare,
Speaker 12: we're in agriculture, oil and gas, real estate. We have
Speaker 12: a company that sells software to the NSA, so you
Speaker 12: name it. We cut across a lot of industries. We're
Speaker 12: usually looking for something about the industry and something about
Speaker 12: the company where there's a barrier or some type of
Speaker 12: structural advantage. So what that makes us do is actually
Speaker 12: look across different sizes and in particular different industries.
Speaker 10: In early twenty twenty three, rather unusually, a number of
Speaker 10: investors heard about the promise of tune A Fie fishing
Speaker 10: and Baja Aqua farms at the same time.
Speaker 12: There's a lot of strong growth in the bluefin tuna market,
Speaker 12: so inherently it's been growing for decades. And then on
Speaker 12: the supply side in the industry, it's a regulated global market,
Speaker 12: so there are quotas internationally. You can't just go out
Speaker 12: and fish as much as you want. In each country.
Speaker 12: There are concessions, so you have to have the right
Speaker 12: and a concession to actually grow the tuna. And then
Speaker 12: there's actually licenses that you need for the fishing boats
Speaker 12: and the captains. So the demand's growing and the supplies
Speaker 12: got some controls around it. So that's what we liked
Speaker 12: about the industry. The company has got a few structural
Speaker 12: advantages that we really appreciated, and they revolve around its proximity.
Speaker 12: It's based in Mexico, and this industry, you can imagine
Speaker 12: a tuna is heavy, right, two hundred pounds, and so
Speaker 12: shipping a tuna, especially air freight, is very very expensive,
Speaker 12: so are competitions in Japan and the Mediterranean. Mexico, so
Speaker 12: the proximity to the US is a huge advantage for
Speaker 12: this company to ship fish from Mexico into the US,
Speaker 12: so that's one. The second one is the labor cost
Speaker 12: in Mexico is cheaper, so there's an advantage there. And
Speaker 12: then the third component is just the cost of feeding
Speaker 12: the tuna. So you feed them anchovies, you feed them sardines,
Speaker 12: and structurally it's been really a positive that where we
Speaker 12: fish for the tuna off the coast of Mexico is
Speaker 12: very close to where we fish for the sardines, so
Speaker 12: that lowers the feed cost.
Speaker 10: Conti, Cultiba Equity Group and Cassel Harlan purchased a majority stake,
Speaker 10: leaving dry Powder in their arsenal for ongoing support. They've
Speaker 10: also each sent an executive to Bajas board. The goal
Speaker 10: is essentially the same as any other private equity investment,
Speaker 10: grow the customer base, expand to new markets, and invest
Speaker 10: in new technology, equipment and staff.
Speaker 6: We have the best brothers them as we tried who
Speaker 6: Growwindo Martin and as we have more supply now.
Speaker 1: Because the colt that has increased. Now the real challenge
Speaker 1: is to build those markets.
Speaker 13: We are waiting the fish older, so after we grade it,
Speaker 13: then they're cutting the tail and those guys over there,
Speaker 13: they are going to win the fish.
Speaker 6: So they are going to put again this camp with
Speaker 6: the exact wave of the product before putting it into
Speaker 6: the bus. So if it is going to Japan, and
Speaker 6: we'll go to one side, Brazil, Colombia, Lubai, the state's
Speaker 6: interial east coast, west coast and.
Speaker 10: Make this incredibly huge logistics operation. It is it is fresh, Well, yeah,
Speaker 10: it's fresh. It's so many different sizes. You're shipping it
Speaker 10: literally all over the world and you have to, I
Speaker 10: guess calibrate as each one comes in which client it's going.
Speaker 11: To, Yes, indeed, and then we are tracking over there
Speaker 11: and obviously the distance from one point to the end point,
Speaker 11: so there's airports connections. Even the barcoo that you.
Speaker 2: See over there in the mouth of the y it's
Speaker 2: also ours.
Speaker 13: It's just just a software that illustrated inside. There is
Speaker 13: also a thermometer that is coming into the fish and
Speaker 13: is tracking the temperature of the fish from that boy
Speaker 13: until you up in the bus.
Speaker 11: We will need to expand and that's a challenge too,
Speaker 11: So it's a bit of testinal the promises. As you
Speaker 11: can see, there's no machine but.
Speaker 6: That can actually replace these labor because of these specifications
Speaker 6: that we have in the product and what you have
Speaker 6: on the value proposition through our consumer. But at the
Speaker 6: end of the day, yeah, we will need to expand
Speaker 6: and get more people and more production lines in order
Speaker 6: to bring all this volume.
Speaker 10: Into the company.
Speaker 1: And that's where we turn next to how a private
Speaker 1: equity firm founded by Sam Zell stepped up to provide
Speaker 1: the capital and the expertise Baha needed to grow its business.
Speaker 1: EGI joined with others to provide the capital Baja Aqua
Speaker 1: Farms needed. How is that capital being deployed and how
Speaker 1: is it changing the way Baja does its business. Dannie
Speaker 1: Burger continues the story.
Speaker 10: After nearly a year and a half with private equity
Speaker 10: on board, Baja is putting its new capital to work.
Speaker 8: We got an investment plan of around five millions per
Speaker 8: year which is going entirely to fishing assets, to farming assets. Yeah,
Speaker 8: so you keep things running right, so you have maintenance
Speaker 8: kpex and then growing kepex. We have a plan for
Speaker 8: eight millions this year which is a new vessel that's
Speaker 8: going to be incorporated to the fishing fleet, and then
Speaker 8: we have some growth kapex that's going to be here
Speaker 8: at the farm. You see around mooring grates right, So
Speaker 8: there's a big bound of cages there, thank cages there,
Speaker 8: tank cages there all together in a solitary mooring system.
Speaker 8: And also we have some solitary systems which is holding
Speaker 8: one cage. So this year we're investing another million in
Speaker 8: putting another grid. So we're putting gauges together like this
Speaker 8: one to facilitate the feeding.
Speaker 10: Equity group, along with the rest of the investor consortium,
Speaker 10: owns a majority stake in Baja. The goals of private
Speaker 10: equity in any investment are the same, grow the company
Speaker 10: and get a return on the investment. But egi's timelines
Speaker 10: are different from what you would expect when you think
Speaker 10: of private equity. So you mentioned it takes some time
Speaker 10: you have to capital into this business to get the
Speaker 10: returns you want. What does an exit look like for
Speaker 10: something like Baja Aqua Farms.
Speaker 12: We don't put a time horizon on our investments. It's
Speaker 12: actually something that's a little different, I think from most
Speaker 12: pe firms. Most of them comes from Sam Zell and
Speaker 12: his family, so we're a principal investor and we sell
Speaker 12: when we've extracted as much value as we think we can.
Speaker 12: We really haven't even begun to penetrate the United States.
Speaker 12: There's new products that we can develop, and we're even
Speaker 12: going to explore maybe potentially other geographies to ficient. So
Speaker 12: there's a lot of growth potential here. We've held companies
Speaker 12: for five years, we've held companies for fifteen. It's all
Speaker 12: just a function of how much more growth we think
Speaker 12: is out there.
Speaker 10: Recently, private equity exits have taken longer and longer to execute.
Speaker 10: According to a twenty twenty five Mackenzie outlook for global
Speaker 10: private markets, average buyout whole times remain above the long
Speaker 10: term average at six point seven years. That compares to
Speaker 10: the average of five point seven years over the past
Speaker 10: twenty years. Is there a way to get returns out
Speaker 10: of the company? Do you look for ways to get
Speaker 10: dividends of sorts and the lead up to the exit.
Speaker 12: Yeah, no, for sure. That is actually a really core
Speaker 12: part of what we do. Part of it is MEYBI
Speaker 12: in an operation is very focused on that. We do
Speaker 12: expect our companies to generate cash and it's just kind
Speaker 12: of mandatory for us. Some of that is the investment
Speaker 12: thesis understanding the type of business that we invest in.
Speaker 12: But absolutely we're not going to hold something for ten
Speaker 12: years and not take money out of the company. You know,
Speaker 12: maybe the first year or two the company net isn't
Speaker 12: generating cash because we're investing. We're putting in new technology,
Speaker 12: new people, all the things I've talked about. But absolutely
Speaker 12: there's an expectation that we're diving ending money out and
Speaker 12: as the EBADAG grows, as the profits grow, will also
Speaker 12: every few years recap the business and take money out.
Speaker 12: That way, you know, our expectation is four or five
Speaker 12: years in if things are tracking, we've got all our
Speaker 12: money out of the investment that we've put in.
Speaker 10: Equity Group's patient capital and holding times may be different
Speaker 10: from their pepers, but one thing is the same. Private
Speaker 10: equity ownership means big changes for the companies that they own.
Speaker 12: The company was selling in the US, but they were
Speaker 12: using one distributor, mostly in southern California. So we've helped
Speaker 12: them roll out that we have now I think eight
Speaker 12: distributors across the entire US. We're also not just using distributors,
Speaker 12: we're actually building a salesforce going into the markets and
Speaker 12: selling the restaurants directly. So there's things like that that
Speaker 12: we help the company put in place, and that's going
Speaker 12: to create growth in and of itself. Just at one point,
Speaker 12: we've gone from three countries when we bought the company.
Speaker 12: We're up to nine right now, and so we're expanding
Speaker 12: in these other geographies. They've got their own consumer demand,
Speaker 12: they've got their own regulatory environments, so there's a lot
Speaker 12: of different issues you have to work through as you
Speaker 12: roll into new countries. Another aspect, which is enormous is
Speaker 12: when we bought the company and they sold tuna, they
Speaker 12: would actually sell the entire tuna. So if you're a
Speaker 12: restaurant and you wanted fresh bluefin tuna, you would have
Speaker 12: to buy the entire fish. These are one hundred and
Speaker 12: seventy five to two hundred pounds a piece, and most
Speaker 12: restaurants in the country didn't actually need that much tuna
Speaker 12: at one time, so it restricted actually who the company
Speaker 12: could sell to. So we're working on a project right
Speaker 12: now where we're going to sell loines, which is just
Speaker 12: basically selling part of the tuna, and that's going to
Speaker 12: open up probably tenfold as many restaurants as we're selling
Speaker 12: to right now.
Speaker 10: Jeffs Franklin Becker and Robbie Cook of coral Omakasse in
Speaker 10: Point Seven in New York source tuna from Japan and
Speaker 10: the East Coast of the US. Their merchants used similar
Speaker 10: practices to Baja, no catching tuna and nuts, no antibiotics,
Speaker 10: no hormones, native and national feed traceability and ECOGIMA. You're
Speaker 10: a veteran in this industry. You've worked with lots of
Speaker 10: different kinds of meat, different types of fish. Can you
Speaker 10: just talk about working with bluefin tuna? About how special
Speaker 10: and different that is?
Speaker 14: Bluefin tuna. It's so unique because because it's just got
Speaker 14: the right amount of fat and the right amount of
Speaker 14: marbling throughout the structure the fish is is it's just
Speaker 14: a beautiful fish at the end of the day, robust
Speaker 14: in flavor, beautiful color. When you get down into the
Speaker 14: chewturo and the o touro, which is the medium fatty tuna,
Speaker 14: and the fatty tuna just melts in your mouth.
Speaker 10: What do you make about this, this current moment of
Speaker 10: the popularity of the fish itself.
Speaker 14: You know, for a while it was overfished, and for
Speaker 14: a while people were kind of avoiding it, including myself,
Speaker 14: and thankfully the populations come back in a big way.
Speaker 14: They also do a process called ikagema, which is basically
Speaker 14: they stick a rod into its head, into its spinal
Speaker 14: cord and they bleed it out that way, and that
Speaker 14: prevents all the fish from basically atrophying the wrong way
Speaker 14: and the meat becoming tough, so that kind of keeps
Speaker 14: it really nice.
Speaker 10: Point seven and coral omacasse are also examples of demands
Speaker 10: for cuts of fish, not the entire bluefin.
Speaker 14: If you're buying the whole fish, you're buying it because
Speaker 14: a you have the storage space to handle it, which
Speaker 14: is a huge commitment all on its own, you're going
Speaker 14: to be able to turn it over. You have multiple
Speaker 14: restaurants in my case, with a twelve seat o macasse,
Speaker 14: it does not make sense.
Speaker 10: Beyond the quality of fish. Fuel and growth at Baja
Speaker 10: Aqua Farms meant new boats, more sophisticated and scalable IT systems,
Speaker 10: net cleaning and other maintenance systems, a larger sales staff,
Speaker 10: and crucially a new CEO.
Speaker 12: We start with trust and transparency. I mean, if we
Speaker 12: can't work together, that's going to be just a non starter.
Speaker 12: We look for alignment. It doesn't mean we always agree,
Speaker 12: But can we all see true north?
Speaker 4: Can we all.
Speaker 12: Agree that the direction we're going in makes sense? So
Speaker 12: that's got to be there. And then look, you know,
Speaker 12: leaders have to inspire. They have to hire good management themselves.
Speaker 12: Have they built a good organization? Have they built a
Speaker 12: good structure? Have they hired talented people to people like
Speaker 12: working there?
Speaker 10: New management comes with the territory. When private equity comes
Speaker 10: to the scene with a one of a kind feeding system, efficiencies,
Speaker 10: new products and markets. It's up to the CEO to
Speaker 10: manage and execute growth. His goal is to add one
Speaker 10: thousand more metric tons of tuna sales every year from
Speaker 10: four and twenty twenty four to five thousand this year
Speaker 10: and six the next. What do you think are some
Speaker 10: of the biggest changes that have been put in place
Speaker 10: since you and the investors have come in.
Speaker 11: In order to have the same product with the same quality,
Speaker 11: always right, with the same timeline, with the same freshness,
Speaker 11: with the same everything, you need to have a process.
Speaker 11: And in order to scale a business, you need to
Speaker 11: have those processes all around the company, even from the
Speaker 11: way that we fish, the way that we grow the fish,
Speaker 11: to the way that we go and do the logistics
Speaker 11: to the final restaurant that we have grow, grow, Grow growth.
Speaker 11: Last year there was a significant change also because of
Speaker 11: all these things that I'm telling you and the way
Speaker 11: that we're fishing. So they increase fifty percent the quota.
Speaker 11: That means that this year, for the first time.
Speaker 3: On the last.
Speaker 11: I would say, fifteen years, we are allowed to go
Speaker 11: and finish more fifty percent more of what this stack
Speaker 11: or this gap was allowing ones to get. As a
Speaker 11: result of that, if you are bringing that supply into
Speaker 11: the market, you need to grow the market very responsibly.
Speaker 11: And for that we created three different segments now which
Speaker 11: is ready to God, ready to serve, ready to eat,
Speaker 11: to have an investor group that believes in that vision
Speaker 11: and that is not only endorsing it, but it's facilitating
Speaker 11: the way to go there much more fast.
Speaker 10: What has been the biggest difference or surprise or change
Speaker 10: for you to work with a company that's private equity.
Speaker 11: Backed that is always the smarter people in the room
Speaker 11: than me. Yeah, it's always challenging. Yes, And when I
Speaker 11: am with this diverse group of people and I hear
Speaker 11: all these ideas, there will always be things that I
Speaker 11: have not seen or comments that I have not heard
Speaker 11: or even ideas that I never thought of. But that
Speaker 11: is actually very exciting. On the downside, I told you
Speaker 11: what it was. On the good part of it is
Speaker 11: that it's always keeping me at the edge and with
Speaker 11: all this adrenaline and trying obviously to improve as a
Speaker 11: person and also to try to grave all these knowledge
Speaker 11: that is there out. We don't take a fish out
Speaker 11: of the water unless it's already solved, which is very
Speaker 11: very important for us.
Speaker 10: What markets do you want to expand into?
Speaker 11: South America? Very interesting and we are moving forward very
Speaker 11: rapidly there. Middle East looks very interesting and we want
Speaker 11: to also check that market, and specifically the East coast
Speaker 11: of the United States is also very important to us.
Speaker 11: We are very strong on the West, but if you
Speaker 11: move east, then we start seeing some white spots. So
Speaker 11: now we change that strategy. We actually got the country
Speaker 11: in five different regions.
Speaker 10: Almost exactly a year after the Investor Group acquired at Stake,
Speaker 10: a new presidential administration won the White House promising tariffs
Speaker 10: specifically aimed at products from Mexico. How do you think
Speaker 10: about those costs and who they go towards? Do you
Speaker 10: push that forward to the consumer? Do you push it
Speaker 10: forward to someone else.
Speaker 12: We're in a lot of industries that we hold companies
Speaker 12: for a while and we see the environment change, sometimes positively,
Speaker 12: sometimes negatively. So it could be the consumer. Could we
Speaker 12: own a hospital chain and we owned it and managed
Speaker 12: it through COVID, so we dealt with that, that's a disruption.
Speaker 12: We own a warehouse company on the East coast ports
Speaker 12: and we dealt with the Baltimore Bridge collapse. So you know,
Speaker 12: and we're in cyclical industries. We're in oil and gas,
Speaker 12: we're in real estate, we're in agriculture, so we see
Speaker 12: most of our companies actually have a lot of ups
Speaker 12: and downs. Tariffs are just, in my mind, another type
Speaker 12: of headwind that a company potentially is going to face
Speaker 12: for some period of time in terms of if there
Speaker 12: are tariffs and how we'll manage it. Look, I think
Speaker 12: the answer is going to be it's the cost is
Speaker 12: going to get spread. We'll probably end up absorbing some,
Speaker 12: some will get passed along to the consumer. If you
Speaker 12: remember the value chain here, there's the consumer, there's the restaurant,
Speaker 12: there's the distributor, there's ourselves. So there's a series of
Speaker 12: different ownership groups all along the value chain. And I
Speaker 12: guess is every part of the value chain absorbs or
Speaker 12: part of that.
Speaker 10: Cost tariffs aside, everyone along the food chain recognizes what
Speaker 10: matters to consumers in the marketplace.
Speaker 14: You can have a bad fish coming out of Japan
Speaker 14: the same way you can have a bad fish coming
Speaker 14: out of California or Spain or North Carolina. It all
Speaker 14: comes back to the beginning. How is that fish caught,
Speaker 14: how is it killed, how is it preserved? What did
Speaker 14: they do? How long was it on the boat? All
Speaker 14: of these things matter. It comes down to authenticity. It
Speaker 14: also comes down to the fat content, and it just
Speaker 14: melts in your mouth and it becomes this experience that's
Speaker 14: almost religious.
Speaker 11: I mean, that's it.
Speaker 1: That does it for us here at Wall Street Week.
Speaker 1: I'm David Weston. This is Bloomberg. See you next week
Speaker 1: for more stories of capitalism.