The private equity industry has been receiving a lot of bad press in the past year or so, about issues such as overcharging and lack of transparency when it comes to fees.
One encouraging trend, however, has been a growing focus among PE firms in Asia on making operational improvements to portfolio companies, rather than simply relying on market appreciation to push up the value of their investments.
A new generation of general partners has emerged, many of which are putting operational expertise at the core of their strategy. As competition for investee companies and investor money gets fiercer, PE firms are under growing pressure to bring in people who can add real value to portfolio companies’ management teams and prove their alpha-generation capabilities to limited partners (that is, investors).
AsianInvestor has identified eight such GPs, which are taking the lead in operations, localisation and specialisation, or re-engineering traditional strategies for a more demanding LP base.
Demonstration of operational value-add is particularly important for new GPs, as LPs emerged from the 2008 global financial crisis more risk-averse than ever, preferring to place bets on proven incumbents.
Localisation is happening, but not to an extreme: teams typically base themselves in a central hub and cover a geographically wide area, often targeting companies with the potential to expand into the area of coverage.
Similarly, both specialists and generalists continue to carve out their own piece of the LP pie. From ultra-specialists such as Limetree and single-industry specialists like Quadria, to generalists such as Creador and Dymon PE, the market continues to accommodate a variety of strategies.
Freed from the burdens of pre-existing strategies and outsized funds, this new breed of GP is experimenting with new investment hypotheses with the aim of earning superior returns to trump the incumbents.
When selecting its list of firms, AsianInvestor started with a screen of first-time funds that were in the market in the last five years, narrowed them down by size and market (more than $100 million raised, targeting Asia ex-China/Japan/India), and finally refined the list through a mix of online and offline research.
We also reached out to market players to uncover niche funds that have deliberately stayed under the radar. Our selection is presented alphabetically.
Even though none of the funds profiled pursue pre-IPO or private investment in public equity (Pipe) strategies popular in China, they are heavily weighted towards growth capital, rather than traditional control buyouts.
While growth equity is a sensible strategy for markets growing as fast as some in Asia, it provides limited opportunities for PE players to show off fully their expertise in turning around and reviving struggling companies.
It will be interesting to see whether more buyout specialists emerge in the next few years; perhaps some funds profiled here will step into those shoes as the markets mature. In the meantime, their peers using Pipe strategies in China will be sitting tight.
The full, extended article with more details of each firm on the list appeared in the October issue of AsianInvestor. We will publish details of the remaining four online this week.
Ally Bridge Group
First fund closed: 2013
Headquarters: Hong Kong
Ally Bridge is a healthcare-focused GP that invests across a wide range of alternative asset classes, including venture capital, growth capital, buyout and hedge funds. While its headquarters are in Hong Kong, Ally Bridge has investment teams in Boston, Los Angeles and Washington.
Ally Bridge invests in Chinese and globalised healthcare companies, particularly in the medical devices and biotech/biopharma industries. In addition to plain-vanilla investments, the firm originates partnerships between companies with different relative strengths, usually between American and Chinese firms, and helps with M&A, capital market exercises, China market-entry assistance and senior-level operational input. In doing so, Ally Bridge gets its foot into deals backed by corporate entities with significant resources, de-risking its equity capital.
The firm has assembled a group of life science experts who have helped to execute the 30-plus investments it has made so far in China, the US and Europe, several of which have been exited via IPO.
Capital Square Partners
First fund closed: Ongoing fundraising
AUM (including co-investment): $600m
Focus: TMT, healthcare, consumer and business services in Southeast Asia and India
Capital Square Partners has a small team still getting off the ground, with hiring and fundraising in the works. Its track record has included successful market manoeuvres in India, not yet in its main target market of Southeast Asia. Judging by the firm’s ability to lead two of the six largest buyouts in India in recent history without having raised a fund formally, it seems likely to prosper.
CSP is the only firm on our shortlist that explicitly focuses on buyouts and is still in the process of raising its maiden fund, targeting $300 million, though it has put together deals already.
The firm’s intended strategy is to focus on Southeast Asia and South Asia, with the former receiving 70% of investment funds. It always targets investments with a cross-border angle, to take advantage of regional growth opportunities.
First fund closed: December 2012
AUM (including co-investment): $700m
Headquarters: Kuala Lumpur
Focus: Financial services, consumer, business services in Malaysia, Indonesia and India
Growth-equity player Creador counts many of the funds profiled in this feature as rivals for deals, as they invest in the same region, in the same deal sizes and in overlapping industries. However, in Malaysia, credible competitors such as Navis Capital are scarce, and Creador appears to be reaping the rewards of occupying this uncrowded space.
After raising $130 million for its first fund in 2012, Creador closed its second fund in August 2014 at $330 million. Less than eight months later, in April 2015, the firm was raising its third fund, to be capped at $500 million. Such traction is usually a reliable indicator of outperformance.
Creador invests in growth equity deals, taking minority positions in most cases. It is typically allocated to Southeast Asia (although the fund has only targeted Malaysia and Indonesia so far), and also looks at Indian assets.
In addition to the popular trends of chasing businesses serving the emerging mass-affluent market and pursuing Asean regionalisation, Creador seeks industries that are moving from “disorganised to organised” formats. These are small-scale, local businesses that can unearth value by standardising and professionalising operations, in order to scale up rapidly and consistently.
Fund closed: February 2011
AUM: S$200m ($142m)
Focus: SMEs in Southeast Asia involved in manufacturing, ICT, supply chain and logistics, and services and consumer products
Credence Partners’ commitment to portfolio management and operational value creation is reflected in its hiring strategy: the fund’s three vice-presidents have spent much of their careers in in-house operating roles.
The firm focuses on growth/minority equity and on strong relationships with founder-entrepreneurs. This approach reduces the need for complicated deal structuring.
Running counter to asset managers who seek to increase their fund sizes rapidly, Credence chairman Koh Boon Hwee says the firm intends to keep future funds at roughly similar sizes, allowing the partners to reinvest their profits and retain significant skin in the game: exactly what LPs want to see.
Credence raised its first fund in 2006, but only started accepting institutional funds when it raised its second fund that closed in 2013 at S$200 million.
The firm tends to look for SMEs led by strong founder-entrepreneurs, acquiring significant minority stakes and providing growth capital, connections and input on strategy and scaling. In particular, it seeks companies with plans to expand across Southeast Asia.