The Dutch pension asset manager's Asia Pacific head of real estate says his team has just had one of its busiest years ever and that 2021 is looking similarly promising.
We are targeting assets under management of $500 million by the end of 2007. We currently manage about $200 million and are raising our third fund with about $300 million û we already closed $100 million in January and are in the process of raising the balance $200 million.
In the past we raised money from a friends and family network. We are now targeting more institutional investors, as we have a track record of performance to show them. Geographically 90% of earlier investors in the fund are split equally between the Middle East, Europe and the US, while Asia is 10%. The tenure of the fund is seven years, five years in investment mode and two years in divestment mode.
What kind of companies do you invest in?
We invest between $5 million and $20 million in mid-sized companies, to give us about a 30% stake. For us management is key. Many of these companies are founded by first generation entrepreneurs who are keen to grow the platform they have created.
Our investee companies in general have had at least $10 million profit. For these companies, we provide growth capital which goes right into expansion and translates directly to bottom line. Our focus is on privately owned companies though we do look at state-owned enterprises (SOEs). In one instance we did take a SOE private.
Our target sectors are aligned with the government preference so for example we have invested in health care, agriculture, consumerism. This is because we feel being aligned with the government thinking provides stability and continuity. But we are not confined to those sectors and on an opportunistic basis have also looked at auto parts, galvanised steel and mining.
What about the exit?
Our holding horizon is two to three years. Typically, by then the company is ready for an exit as we seek good, profit-making companies with established businesses. For these companies we act as CFO, headhunter as well as investor!
We exit through either an IPO or a trade sale. We had initially anticipated most of our exits will be through IPOs but in the current market environment, sales to strategic investors have been commanding good premiums.
How do you enhance the value of your investments?
We add a lot of value to these companies although our aim is not to change management. We identify profitable companies with sound management then institutionalise them in terms of reporting, corporate governance, expand their customers or distribution internationally.
We may have only 30% but we are very close to management and exert influence on direction and strategy
How do you find the right people for the companies you invest in?
We try to bring in people who add value. This is critical to our model and is getting harder and harder. We seek local Chinese speakers with a certain skill set who are willing to work in China. We recruit a lot of people from Singapore û the willingness of people from Singapore to move to China is sometimes higher then in Hong Kong. We use headhunters selectively.
Is competition impacting the economics of doing deals?
We enter our investee companies at a low valuation. That is a key strategy û we have entered at one to five times earnings. It is not easy and takes a lot of negotiation.
There are lots of people currently walking around with a lot of cash looking for deals. But we focus on building relationships for example with local government, especially in second tier cities. We get good endorsements from provincial governments. Remember, these are good companies but they are also sceptical about the value the investor can add?
What kind of returns have you achieved?
We have achieved 40% per annum compounded annually. This is very attractive though it is obviously not easy to find such investments.
We believe we are kind of like a surfer on the top of the China wave. I think very few countries in the world offer this type of return.
Is increasing competition in the industry affecting your ability to close deals?
We seek the smaller companies. We are dynamic û but lower profile about the companies we invest in and the returns we earn. We have a truly local team. Our Shanghai office, where sourcing and execution takes place, is the centre of activity.
Large players look for big deals: M&A and buyouts and maybe China is not quite ready yet. It will be but maybe it is not there yet.
There is still a lot out there. We have been lucky to see a period of low hanging fruit when the returns are quickly and easily visible. Now it takes more work to find good companies which will deliver returns but they can still be found.
What is your comment on corporate governance in China?
There used to be a lack of transparency in the China market which concerned investors but this is changing. Someone like us goes in and really improves quality standards. In some cases companies just donÆt have the time to focus on the things which go into being well-governed. There is a trend towards better corporate governance in China and it is being aided by efforts like the World Bank conference last year, funds such as ours and other external factors.
How do you control your failure rate?
We had only one failure thus far and that was a case of fraud. That is why management and integrity of the entrepreneurs we back is critical. We are not changing the business model or the management so it is important that the existing model is poised for success.
We do a lot of independent verification, ourselves and using external agencies. Other than that we spend a lot of time with these companies before we actually make an investment û on the average 5-6 months. This time is spent on character assessment primarily.
Our nine successes to date include four we have exited on the Singapore Exchange and the rest are all on track to deliver the return we discussed.
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