Creating value in Asian private equity transactions in 2013

At the risk of generalising, whilst buyout deals do exist (but are rare), most Private Equity Funds in Asia typically take minority stakes in companies (about 20%) and work with the founders to grow these companies for IPO or for trade sales. This means that in Asia, the PE Firm cannot replace the management of such companies easily and thus in Asia it usually takes more than mere capital to grow a company and prepare the target company for an exit.

In the current environment in 2013 where global uncertainty abounds and LPs and fund of funds are uncertain which segments/sectors to allocate their funds to (for the purpose of portfolio allocation), PE Firms need to show that in addition to finding good deals to invest in, the PE Firm can create value for its investee companies to achieve the superior returns that is promised in their investment policy statements.

This article will highlight three ways (amongst the many ways) that PE Firms in Asia create value for their investee companies and such “Value Creation” is often also communicated to such investee companies at the point of pitching for deals.

Operating Partners

In pitching for deals and securing mandates from both target companies and LPs, PE Firms often need to show track record in helping other companies grow and succeed. One key way in Asia is in the PE Firm having good operating partners in the team. In Singapore, an example of this would be Koh Boon Hwee and his team at Credence Pte Ltd. Credence was founded by Koh Boon Hwee, Tan Chow Boon and Seow Kiat Wang when the company (Omni Industries a electronics manufacturing company) they founded was acquired by Celestica for USD890 million. Credence has leveraged on this expertise and today is doing well in aiding the growth of companies in the manufacturing and electronics sector. Thus we see that having good operating partners in your team in a PE Firm is important to show the target companies that more than just being a provider of funds, a PE Firm can help grow revenues and improve operational efficiency of target companies.

Strategic Reach and Distribution

A rising trend in Asia is for conglomerates and large corporate to either set up their own PE divisions or invest in PE to grow their capital base. PE Firms affiliated to large conglomerates can give target companies access to the huge network and expertise of such conglomerates which helps the target company benefit from superior connections without being bought up completely by the main conglomerate.

It was widely reported in the Singapore newspapers that Charles and Keith had been looking for a strategic investor to help them grow their business and was not just looking for money and finally L Capital Asia with its links to the fashion conglomerate LVMH was able to snag the deal. This was in part due to its ability to provide strategic expansion advice and capitalise on its large network from its parent to help Charles and Keith to expand in China.

Two other examples from the Venture Capital Space in Singapore include Innov8’s relationship with Singtel which allows new mobile applications to plug into the Singtel network and SPH’s investment in Chope which allows Chope to ride on SPH’s publicity to increase its installed user base.
Conversely, this also means that PE Firm’s without such backing can also consider strategic alliances/arrangements with their conglomerate LPs to help target companies expand so as to help the fund achieve superior returns through alignment of interests.

Political Connections

In Asia, due to the heavy state involvement in the economy, political connections to PE Firms are key to providing deal flow and getting necessary approvals. In this regard, in China for example, some PE Firms hire people with strong political connections and this has provided some PE Firms with access to the state owned enterprise segment of the Chinese economy which has traditionally been closed to outside investors. In South East Asia, for natural resource deals such as mining or plantation deals, PE Firms typically would have to partner with politically connected families in Malaysia or Indonesia to ensure the success of the deal.

Separately PE Firms, could also consider hiring former government ministers to join their board of advisers to help them navigate the local laws, politics and also provide access to deal flow which may otherwise been unreachable.

In conclusion, the haydays of Private Equity in Asia whereby PE Firms invested in Chinese companies and then quickly such companies going for IPO or M&A are over. Today’s market requires more strategic teambuilding and alliance forming to allow a PE Firm to retain or gain a competitive advantage over other firms which may be chasing the same good deal in the market.