The Best Private Equity Exit Strategy

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  • 1. Exit Strategy Darwin Jayson Mariano A N I Q P C W O R L D W I D E S P E C I A L R E P O R T
  • 2. Contents Intro 1 Private Equity in Southeast Asia 1 Choosing an Exit Strategy 3 IPO: The success story everyone loves to hear 5 Strategic Acquisition: A simpler, more viable approach 7 Management Buyout: A clashing interests? 9 Exits in Asia Pacific 11 The Interviews Joseph Pacini 13 Chris Chia 17 Edward Gordon 21 Krit Phanratanamala 23 Simon Hopkins 25 Kian Hwa Tan 29 Disclaimer 33
  • 3. What makes an exit, successful? Of all the different strategies that investors can employ, what can be considered as the best one? Perhaps one of the most uncontested truths in the world of private equity (PE) investment is that investors always begin with an ‘exit’ in mind. More specifically, a successful exit. But what makes an exit, successful? Of all the different strategies that investors can employ, what can be considered as the best one? To get some valuable insights on this matter, we spoke with Joseph Pacini, Managing Director for BlackRock; Simon Hopkins, Group CEO for Milltrust; Krit Phanratanamala, Investment Director for Thai Prosperity Advisory Co Ltd; Edward Gordon, Head of IB for Ho Chi Minh City Securities Corporation; Kian Hwa Tan, Senior Vice President for SBI Ven Capital Private Limited Securities Corporation; and Chris Chia, Managing Partner for Kendall Court. Private Equity in Southeast Asia million; and “growth in the region’s six largest economies is forecast to accelerate by, on average, 4.5% to 6.7% compounded annually through 2015.” Great headlines that make global private equity firms take notice. Private equity funds are the reserve of capital that is invested by private equity companies. PE funds are usually set up as either a limited liability company or a limited partnership (LP). There are, however, other types of structures that exist which are also controlled and managed by the specific private equity firm that is acting as the general partner (GP).* In a recent Asia-Pacific Private Equity Outlook 2013 report by Ernst & Young, Luke Pais, Ernst & Young’s M&A Leader for the ASEAN, opined that investors‟ strategy is shifting. “Historically, China and India have been high on limited partners’ (LPs) radars, but increasingly we are seeing a shift in investment strategy and a recognition of Southeast Asia as a destination for that shift.” he says. “Curiosity from LPs is piquing, and Southeast Asia is becoming a very exciting market.” In Southeast Asia, there is much optimism going on among PE investors as key indicators present a promising outlook. In 2011, Southeast Asia’s aggregate GDP topped US$2 trillion**; the region is home to young and increasingly affluent population of 600 ____________________ *Source: secondventure.com **Source: Bain Southeast Asia Private Equity Brief 1 The Best Private Equity Exit Strategy
  • 4. Robust fund-raising activity has also been seen in the region. Let’s look at some deals that happened lately. capital” last year. And that may be just the tip of the iceberg. Gathering from the same Ernst & Young report, we’ve learned that since 2011, Indonesia has seen 13 deals worth close to US$900 million. Deal value in Thailand is at US$114 million over the same period. On the sell side, firms and fund managers are able to take advantage of their investment on Southeast Asian assets. “Three funds focusing exclusively on investments in Indonesia and six smaller ones targeting opportunities in Vietnam are looking to line up more than US$2.5 billion. “Twenty-two funds focused on Southeast Asia are currently on the road, aiming to raise an aggregate US$6.4 billion for investment in the region. This is in addition to the capital that global and pan-Asian funds will deploy into the region.” “In 2011, Navis Capital Partners sold Singapore-based King’s Safetywear Limited, a manufacturer of industrial safety footwear and personal protective equipment, to US-based Honeywell International for US$345.8m. Navis purchased the company in 2008 for US$83.5m. That deal was preceded by Navis’ sale of Linatext, a Malaysia-based maker of specialty rubber-based products purchased for US$31.1m, to the Weir Group for US$200m.” the report says. Even countries that are not a traditional investment destination are making good showing. One such example is the Philippines. “The Philippines awaits its share of investment. Historically, private equity firms have had a fleeting interest in the country, opening and closing representative offices as needed. This was largely due to political instability, but that is changing. The current trend is seeing a rapid shift away from corruption Robust fund-raising activity has also been seen in the region. According to Bain Southeast Asia Private Equity Brief, PE funds focused on Southeast Asia “attracted US$1.6 billion dollar in new www.private-equityseasia.com 2 The Best Private Equity Exit Strategy
  • 5. Given the relative confidence vested in the region, choosing an appropriate exit strategy for private equity investments becomes an imperative. Choosing an Exit Strategy to transparency, fostering a more welcoming environment for international businesses and creating confidence among foreign investors,” says Renato Galve, Head of Transactions Advisory Services in the Philippines. Given the relative confidence vested in the region, choosing an appropriate exit strategy for private equity investments becomes an imperative. There are a couple of exits available for investors but among the top considerations are: a) Initial Public Offering or IPO b) Strategic Acquisition and c) Management Buyout. In fact, Bloomberg reports that the Philippines beats global stocks by an amazing 124% as of Feb 2013, showing signs that things are doing well, economically, in the country. Initial Public Offer (IPO) In an IPO, you come out with a public offer of the company, and sell your own shares as a part of the IPO to the public. As the case may be, you may sell your share immediately, or sell the shares allotted to you after the company gets listed and the shares start trading on the exchange. Using this approach, your company will be subject to additional regulations, analysts and institutional investors will scrutinize your quarterly performance. Bain & Company and the Singapore Venture Capital & Private Equity Association (SVCA) ran a survey lately to look at the region’s prospects and results revealed that there are clear signs of optimism going around, “which could mark 2012 as the start of Southeast Asia’s time to shine.” The financial foundations for PE expansion look solid. Debt issuance is at record levels. Mergers and acquisitions activity is buoyant. Singapore’s pipeline of initial public offerings is full. www.private-equityseasia.com 3 The Best Private Equity Exit Strategy
  • 6. There are a couple of exits available among the top considerations are: a) Initial Public Offering or IPO b) Strategic Acquisition and c) Management Buyout. Strategic Acquisition Another alternative is strategic acquisition or trade sale, where the company you have invested in is sold to another suitable company, and then you take your share from the sale value. This is one of the most popular exit routes for private equity funds. The buyer will usually have a strategic advantage in acquiring this business as they both may complement each other. For this reason, the buyer will often pay a premium to acquire such a business. One common disadvantage of this exit is that you are likely to lose operating control. www.private-equityseasia.com Management Buyout A management buyout is when you decide to recapitalize and sell the company to the next generation of managers. This type of transaction is usually financed through some combination of debt, with the debt collateralized by the assets of the company. Typically, management buyout deals would require external financing, which is a challenge. 4 The Best Private Equity Exit Strategy
  • 7. While IPO’s always make a nice headline story, the real story on the ground could spell a far more different picture. In Southeast Asia, there has actually been a slowdown in IPO’s with only a few notable transactions that come to mind, such as Courts Asia. According to Joseph Pacini, Managing Director for BlackRock, IPO “isn’t actually the most profitable exit,” as what many people tend to believe. Joseph Pacini, Managing Director, BlackRock: There’s a common misconception that an IPO is the most profitable exit. It actually isn’t. If the IPO market is hot, an IPO can be a great way to exit. It’s fairly clean, it’s straightforward, and management can remain in control. But the timing must be right. More difficult IPO environments might not give the best position to sell. However, private equity investors have to sell at some point. So if you can’t get that, management might be willing to strategically acquire the company or potentially buy you out. On the IPO side, management can retain control generally, and can get liquidity. But the downside is that the exit has to be timed. today, that is still the case. Furthermore, IPOs are not an exit; they can only ever be a partial exit. It is highly unlikely that you'd be able to sell all of your PE investment through an IPO. Krit Phanratanamala, Investment Director for Thai Prosperity Advisory: I think if we invest in certain kinds of companies, taking the company public could be a good option because it would make for an easier exit. Because if we start with, for instance, 10% or 15%, once an IPO is done, we could dilute this to maybe 7%, 8%, so that portion should be easier to release to the market. But, by contrast, if we hold a majority, say, 50, 60% or more, going with an IPO may not be a good choice. After the IPO, our share would be diluted to maybe 40 or 50%. This portion would be quite huge if released to the market. Simon Hopkins, Group CEO for Milltrust: Taking the company public through an initial public offering (IPO), I think this is often overplayed. If you ask most regional private equity players whether they have successfully exited an investment through an IPO, you'll discover that they have almost never done so. For instance, there are companies in the Asian markets that seek to raise capital in Hong Kong or Singapore because they feel that they'd be more likely to attract international capital there than on their local stock exchange. That will change in time, but www.private-equityseasia.com Edward Gordon, Head of IB for Ho Chi Minh City Securities Corporation Obviously an IPO would be subject to market conditions. In the Vietnamese market, towards the end of last year, we saw not only the values go down but volumes as well. There were days we were looking at US$20m of total market turnover. I think these conditions obviously put a great deal of constraint on the company’s ability to exit via IPOs. 5 The Best Private Equity Exit Strategy
  • 8. Your exposure and your volatility in the market – those are downsides. There are certain other technical areas, such as the level of corporate governance, that also place constraints on this exit strategy. Chris Chia, Managing Partner for Kendall Court: I think going for an IPO always makes for a nice story – building a company to a certain level and then securing an IPO – but it can be risky. Firstly, it’s clearly a binomial equation: either you get there or you don’t. What happens when you don’t? And you’ll be subjecting yourself to a lot of forces that you may not have control over. We’re living in a practically zero-interest rate environment at the moment. What happens when interest rates start to rise? Have economies grown enough to be able to compensate? Are they enjoying real growth, low inflation, and full employment? If not, all the easy money floating around will be sucked out pretty rapidly when conditions change. Kian Hwa Tan, Senior Vice President for SBI Ven Capital Pte. Ltd. Although an IPO is definitely an option to be considered, it’s important to note that it’s all about financial returns. You would probably go for listings, but there are constraints in pursuing this option: the regulatory compliance to the target exchange, the lockup period, liquidity of the capital markets, just to name a few. One recent success story that comes to mind is Courts Asia’s IPO. But that is just one relatively large deal in the PE world. So my point is that definitely it’s a good consideration, but I don’t think we can just rely on IPO as the main sort of way to exit. www.private-equityseasia.com 6 The Best Private Equity Exit Strategy
  • 9. In the current economic climate in the Southeast Asian region, selling the company to a strategic acquirer seems to be a more reliable option. Strategic buyers are usually a business partner or someone who understands the industry very well, in which case convincing said buyer will be relatively easier. However, “trying to get one single buyer might be far easier said than done” says Edward Gordon. Edward Gordon, Head of IB for Ho Chi Minh City Securities: In a sense, if you are talking to one player, there are less moving parts, and it can be a simpler process to go through. However, there’s always that meeting of the minds and often enough, not just in Vietnam but in many markets, everyone is looking for the perfect match. Sometimes, that can work against you. Trying to get one single buyer might be far easier said than done, given the market conditions that companies must consider. lot of value to a lot of people at a certain size and scale. You feel that at some point, a natural buyer of this business will be a bank, an MNC, or an industry leader. If you’ve got a lock on that strategic advantage, then well and good. If not, however, you might have a very hard time selling. Joseph Pacini, Managing Director, BlackRock: I would say the wisest decision is to identify multiple exit options before entering into a deal. When BlackRock Alternative Investors look at any deal, we always consider the management team. We need to see that everyone is aligned regarding the exit strategy, that everyone has a very clear picture of what they’re going to do when you get to that point. Then you can decide on the timing. In the case of strategic acquirer, the exit has to be timed correctly. Kian Hwa Tan, Senior Vice President for SBI Ven Capital: I think this is a more reliable option. It’s easy to convince the strategic buyers because they are probably business partners already, or they understand the industry very well. Also, there’s a stronger need for these guys to look at M&A nowadays. But I would look at that as a more likely avenue for creating a liquidity event for PE investors. The assumption could be that your business is attractive enough or big enough that you can get attention from a few strategic players. Simon Hopkins, Group CEO for Milltrust: There is likely to be far more opportunity in strategic acquisition because the Southeast Asian marketplace is extremely fragmented. You may have a contract to supply or distribute an international product in the province of Mindanao, for example. And it may be a powerful franchise - but it is not a nationwide business. So the opportunity Chris Chia, Managing Partner for Kendall Court: This will always be at the back of one’s mind if you’re going into an industry and you know that your company will carry a www.private-equityseasia.com 7 The Best Private Equity Exit Strategy
  • 10. is for you to develop that franchise into other regions by acquiring other franchise holders and then to start to extract value from the logistics and supply chain that you manage, potentially with respect to other products too. Krit Phanratanamala, Investment Director for Thai Prosperity Advisory: This would be a better choice. Especially because the Southeast Asian market is going up, I think in terms of a company’s potential selling price, we could be able to earn more from selling said company. We can see that this market will be growing very fast as well, which adds another element to the equation. But take note, selling to strategic acquirers isn’t perfect; there would be a downside to it too in terms of negotiating prices. www.private-equityseasia.com 8 The Best Private Equity Exit Strategy
  • 11. Management Buyout (MBO) is an interesting concept and one that could result in a Catch22 situation. There are not a lot of buyouts that have taken place in recent years and all the ones that Milltrust’s Simon Hopkins has seen “all taken place within families.” One key advantage of this option though is that it increases the likelihood that the business will survive and grow as the acquiring party will have a keen familiarity with the business already. Simon Hopkins, Group CEO for Milltrust: Management buyout is interesting, but the buyouts that I have seen have all taken place within families. This can be very challenging for private equity investors; they have to be able to ensure that when they make the initial investment, there is a clearly understood path which will lead to monetisation at a fair price. Krit Phanratanamala, Investment Director for Thai Prosperity Advisory: This is another option for companies, when they are manned by us because they have already served their investment and you can see that the company may need another four or five years before it is ready to go public. But this, of course, would depend on the company’s strategy – it would be the choice of the company whether or not to embark on this venture. Chris Chia, Managing Partner for Kendall Court: It can be a Catch-22 situation to agree early on that management will buy you out at a certain point in time, or to try and instigate such a purchase three to five years down the road. Management may give you a price that you don’t like. If you reject it, will you continue to work with them and constantly second-guess their intentions? A misalignment of interest can occur in such instances. Edward Gordon, Head of IB for Ho Chi Minh City Securities: One of the benefits is that the management has been involved in the business, so they know exactly what it requires to survive and grow the company. It can be a very good option to consider. However, getting returns for everyone may be a problem. In markets with high interest rates, the classical model comes under some strain and can make the dynamics of the deal different. Joseph Pacini, Managing Director for BlackRock The downside risk of management buyouts is that if the business goes through a problem, management can’t buy you out. The upside risk is that you can always get out at a certain point. I think it’s good to look at multiple options. A deal in which all three exit strategies (IPO, strategic acquirer and management buyout) are potential options would be ideal. www.private-equityseasia.com Kian Hwa Tan, Senior Vice President for SBI Ven Capital: Management buyout is possible, PE exit through management buyout is considered as secondary sale, which is not usually the favorite of PE investors. Typically, management buyout deals would require external financing, which is a challenge as evident in the observation that not many PE investors exit via MBO (though entry via MBO is fairly common). 9 The Best Private Equity Exit Strategy
  • 12. The consensus from all the experts that we’ve spoken to is that, focus must be given on the underlying business at hand and ensure its natural growth One size fits one There is clearly no single strategy that works best across all markets and industries. In nonmature markets, the “best strategy is still keeping it as simple as possible and to get things right” says HSC’s Ed Gordon. The truth is no one can predict what will happen three, five or ten years from now. The consensus from all the experts that we’ve spoken to is that, focus must be given on the underlying business at hand and ensure its natural growth. If the business can at least redeem a bond, pay a preference share, and/or have some point of liquidity, then deciding to get out will be easier and much more profitable. “If I have 10 companies in my IPO portfolio, and if not all of them have reached the IPO point, at least I know I’ll exit most of them naturally and in a manner that I’ve structured and worked on from day one,” concludes Chris Chia of Kendall Court. www.private-equityseasia.com 10 The Best Private Equity Exit Strategy
  • 13. Exits in Asia Pacific # of Exits 125 140 120 90 78 100 80 60 40 20 0 2009 2011 Up to Q3 2012 Exit Deals 50 45 40 35 30 25 20 15 10 5 0 US$44.96b US$14.5b US$12.22b 2009 2011 Up to Q3 2012 Source: Asia Pacific Private Equity Outlook 2013 by Ernst & Young www.private-equityseasia.com 11 The Best Private Equity Exit Strategy
  • 14. www.private-equityseasia.com 12 The Best Private Equity Exit Strategy
  • 15. Joseph Pacini Interview with Joseph Pacini, Managing Director, Head of BlackRock’s Alternative Investment Strategy Group for Asia What are the most significant developments in the Private Equity industry in Southeast Asia and what are the impact? I think we’re in a very interesting position when considering private equity in Southeast Asia. There are some firms that have been investing in Southeast Asia for 10, even 15 years, and on a case-to-case basis as well. But most of those firms are global firms. Over the last five to seven years, what we’ve seen is what I would call ‘phase 2’ of the private equity maturity. If in Phase 1, the aforementioned global players invested in Southeast Asia, phase 2 now involves new, homegrown, private equity businesses that are coming forward and joining these global players. So what the market is experiencing is additional investors in the region. Another benefit is that it provides entrepreneurs with a better understanding of what private equity firms as potential partners can provide. By doing so, it helps that kind of private equity environment to mature. www.private-equityseasia.com Regardless of the kind of regulatory environment and funds coming into the region, I think what’s most significant is the expertise that exists – it’s really homegrown expertise now. It’s interesting that you mentioned that Phase 1 started when global players invested in the Southeast Asian region on a case-by-case basis. As we’re now on Phase 2, how do you see the situation evolving? At this point in terms of deal size and number of deals, there is still room to grow. But when dealing with an entrepreneur and with growth equity, for instance, considerations such as these will become more familiar. Additionally, I think people are also finding that partnering with private equity players adds significant value. I believe it’s a three-step process. There are the global players initially in Phase 1, and Phase 2 involves some local talent creating its own funds alongside the global players in the region – that’s where we are right now. I foresee that Phase 3 would be a continual kind of 13 growth and maturation of that process, involving more players, bigger deals, more deals and more financing available – with all of that becoming more sophisticated as time passes. So I do think it is a progression. A lot of private equity professional investors will expect, for instance, Singapore to invest in Indonesia, Malaysia, even all the way to India. There’s a lot of exciting growth in those markets at present. If private equity can be used as a way to bring about efficient growth regionally, that would be quite compelling. Specifically, Indonesia’s GDP growth is about 6%, and the IMF projects that by 2017 Indonesia’s economy will grow by about 6.8 or 6.9 percent. As for India, in 2012 its GDP grew by 4.8%, and we’re looking at a 6.9%, almost 7% GDP growth. Each year from now until 2017, it’s going to keep growing. That’s pretty exciting when you have this kind of fiveyear outlook. Plus there is additional consumer spending in countries such as Indonesia and India, and it’s similar in Singapore as well. It will take baby steps to get there; investors have to be The Best Private Equity Exit Strategy
  • 16. “The most important consideration when making private equity investments is knowing the management team.” - Joseph Pacini, Managing Director, BlackRock cautious and can’t just jump at every deal. But global investors are also going to be more and more focused on where the growth in the world is occurring, and how they can benefit from that. I’m cautiously optimistic on the opportunities for Southeast Asian private equity over the coming years. In making private equity investments, what are your typical considerations? The most important consideration when making private equity investments is knowing the management team. There are lots of good businesses that go bad when run by bad management teams, and, conversely, there are also lots of bad businesses that improve because of a good management team. There’s a saying that when you go to a horse race, you always bet on the jockey and not on the horse – that rings true in private equity. Do you know the management team? Can it deliver in the future? Sometimes to get there you might have to www.private-equityseasia.com have a very honest conversation with that management team. Maybe they knew how to get from zero to a certain size, but maybe they can only go so far. If that’s the case, maybe professional investors with private equity experience can help them leap forward. Does a company have the talent pool that can augment existing management to make sure that it’s even more efficient going forward? Can managers incorporate best practices from global experience into those markets to help them become more efficient? That’s really the model of private equity: partnering with a good management team, working with a company that boasts a good product or good business, and helping them become even better over time. These are the key movement areas that we focus on. Also, investors always need to keep legal and other considerations in mind. How would you characterize Southeast Asia’s frontier 14 markets? How do you see it improving in the next 3-5 years? With private equity investment, many different questions have to be asked. These are some of the most important: Is this a market you want to be in? Is there going to be growth in this market? More importantly, can you get out when you want to, or when you need to? These frontier markets are still developing. If the right time is picked, investors may be able to make a lot of money in a single deal. However, there are opportunities but there are also some substantial risks. Investors could get completely stuck in a deal, for example. To be safe, it is always good to mitigate those risks. I think there’s potential in those markets, but I would exercise caution when investing in them. Potential investors need to make sure they’re not placing all of their eggs in one basket. My preference would be to tiptoe in on a case-by-case basis, and as part of a more diversified The Best Private Equity Exit Strategy
  • 17. portfolio. Investors are already going into something that’s less liquid; if it becomes even more less liquid, no one will buy it from them. Additionally, there are plenty of issues that could prove problematic, such as infrastructure-related concerns. Even if you own a business, can you efficiently transport your goods to your market? There are a lot of things that need to be considered. Is BlackRock currently looking at investing in these markets right now? BlackRock Alternative Investors looks at all markets and weighs them on a case-by-case basis. I would not rule out any market; however, I would say that regarding frontier markets in particular, investors would need an exceptionally compelling opportunity to be willing to step in because of the additional risks that are present vis-à-vis other markets today. That said, of course, there are plenty of opportunities around the region. Part of the decision where to invest boils down to where the opportunities are. If investors can still find opportunities in regions where they may face fewer risks, they might be giving up some of the upsides, but the trade-off is greater security. www.private-equityseasia.com Can you share some insights on the following exit strategies? Pls tell us the ups and downs of each option: Taking the company public through an initial public offering (IPO); Selling the company to a strategic acquirer; Management buyout Compared to strategic acquirers or management buyouts, there’s a common misconception that an IPO is the most profitable exit. It actually isn’t. Strategic acquirers tend to be more willing to pay a premium for something that will enhance their businesses. I would say the wisest decision is to identify multiple exit options before entering into a deal. So if there is a situation where you’re in a growth equity position, could the management buy you out after five to seven years, could you potentially work with them on an IPO, or could there be a strategic buyer that might acquire the business? This is very important especially for Southeast Asia, where most of the investments today are still growth equity-oriented. In most cases, the founders themselves are managing businesses. They may have a great opportunity to grow, but they may not want to sell to a strategic buyer, 15 especially after some may have fought off such buyers for long periods of time. They may only want an IPO; conversely, they might balk at being bought out by management. When BlackRock Alternative Investors look at any deal, we always consider the management team. We need to see that everyone is aligned regarding the exit strategy, that everyone has a very clear picture of what they’re going to do when you get to that point. Then you can decide on the timing. If the IPO market is hot, an IPO can be a great way to exit. It’s fairly clean, it’s straightforward, and management can remain in control. But the timing must be right. More difficult IPO environments might not give the best position to sell. However, private equity investors have to sell at some point. So if you can’t get that, management might be willing to strategically acquire the company or potentially buy you out. On the IPO side, management can retain control generally, and can get liquidity. But the downside is that the exit has to be timed. This would also be the case with a strategic acquirer. Going with one would allow for a potentially greater premium, The Best Private Equity Exit Strategy
  • 18. however management would no longer retain control under such circumstances. Regarding management buyouts, if the business goes through a problem, management can’t buy you out – that’s the downside risk. The upside risk is that you can always get out at a certain point. . www.private-equityseasia.com I think it’s good to look at multiple options. A deal in which all three exit strategies are potential options would be ideal. Are there any exit strategies that you would like to add? A reverse IPO involves buying a public company. But you become public to that acquisition; that’s another option to explore. 16 There are also different types of investing. Businesses can issue private shares and can have a distribution for certain share practices, so there are other ways to get returns. I think these are the most straightforward ways as they tend to be the most preferential. The Best Private Equity Exit Strategy
  • 19. Chris Chia Interview with Chris Chia, Managing Partner, Kendall Court What are the most significant developments in the Private Equity industry in Southeast Asia and what are the impact? I think Southeast Asia has grown into one of the most dynamic regions in the world. Today, Southeast Asia boasts of a macro outlook that’s far more favorable than even that of China or India. This is primarily because of the region’s assets: 600 million people, heterogeneous markets, sound domestic economies with Forex reserves at record highs and sound monetary policies – all of which present a pretty dynamic case for investors. Within that context, the private equity market in the region, which was somewhat of a laggard in the early ‘90s, has now become ripe for investment. A lot of private equity flows are starting to head here. This is a development that’s really matured in the last three or four years. Even during the bubble-like environment in the region during 2004 and 2007, the flow of private equity was not this strong. www.private-equityseasia.com One of the factors has been the growth of Indonesia as a country, the immense scale and size of which has created a major need for investment. Indonesia by itself has provided a vertical lift to the general sentiment regarding private equity. In fact, a lot of large transactions are happening over there. Thailand is starting to look a little bit more interesting, the political crises of the past notwithstanding. The Philippines has become one of the fastestgrowing economies of the region, thanks to the care and attention its economic managers have been lavishing on its economy. Malaysia has been showing a lot more maturity, and we’ve also gotten wind of big private equity deals taking place over there. Most of the multinationals in the region are out there pursuing strategic transactions. You’ve seen this in the recent F&N deal with some also looking to close private equity interest deals. We’re in a very liquid environment at the moment. We can see that the deployment of capital may not be in lockstep with the opportunities that are 17 available. Some markets can get quite hot in terms of people looking for transactions. I think what would be good for Southeast Asia’s overall development would be more opportunity sets for the midsized space. The bigger boys are looking to do mega-sized deals, but the mid-sized space still presents a lot of opportunity. The percentage of private equity vis-à-vis stock market valuations is still relatively small across the region. Obviously, it’s not going to be all smooth sailing; some people will win and others will lose. So we’re going to have to put some thought into which parts of the cycle need more investments. But I think our local entrepreneurs or companies know more now about attracting private equity investors, and they’re also being chased for opportunity sets. It’s starting to look a little bit like a seller’s market at the moment. We hope that, over the course of time, this doesn’t negate the available opportunity sets. In making private equity investment, what are your typical considerations? The Best Private Equity Exit Strategy
  • 20. “We cannot predict what will happen 3-5 years from now. I’d rather focus on the underlying business and see what its natural growth would be like.” - Chris Chia, Managing Partner, Kendall Court We typically work with the existing sponsor or management of the business, and we provide them with growth capital. We also determine what’s in it for the person. We look for confidence: business owners have to believe that his business is going to double, triple or even quadruple in the next five years. I think the first thing I would consider is management capability and integrity. You’re going to have to rely a great deal upon your partner on a daily basis, so you’re going to need an excellent partner. The second thing I would look for is a risk-adjusted structure that serves both partners. In return for giving a partner some level of freedom to run the business, based on his commitment to his success, I require a level of comfort – markers that let me track how his business is performing, how it’s governed and so forth. The third thing is compliance with environmental, social and governance standards. ESG is www.private-equityseasia.com very important for us. It’s about making sure that the business governs itself in a very sane way, servicing the triple bottom line. It’s an indication of a good, sustainable business, one that can govern itself in a way that evinces transparency and a bit of integrity. These are three things that we watch out for as we enter into a transaction. We make sure that these issues are continuously at the forefront. How would you characterize Southeast Asia’s frontier markets? How do you see it improving in the next 3-5 years? I see the frontier markets as going through a natural cycle. None of the four or five countries we’ve mentioned is big enough for anyone to play with by itself. Larger markets like the U.S.A., China or India can absorb a tremendous amount of capital. That is not the case with a smaller market like, say, Thailand or Malaysia. You will hit 18 that saturation point at which the opportunities in those smaller markets do not match the capital you need to deploy. At this point, the capital will start flowing to these frontier markets. For this to happen, the more developed Southeast Asian markets must grow consistently. Also, these frontier markets are going to have to be seen as good prospects. So these markets need to have a very good track record, good governance policy, leverage ratios that are under control and sane monetary policy. That said, we’ve always preferred to stay where we are familiar and do what we know best. There is enough to do in four or five countries we are focused on, so we don’t need to head to frontier markets as a first-generation investor. We could perhaps support a Singaporean firm going to Cambodia to expand its products, for instance. Doing so would give us some local, onthe-ground knowledge, without which, we will refuse to work. The Best Private Equity Exit Strategy
  • 21. So I think the frontier markets will clearly be very interesting within the next five years. If Southeast Asia continues to grow at this pace, I think you’ll start seeing private equity money running off to those frontier markets. Can you share some insights on the following exit strategies? Pls tell us the ups and downs of each option: A. Taking the company public through an initial public offering (IPO) I think going for an IPO always makes for a nice story – building a company to a certain level and then securing an IPO – but it can be risky. Firstly, it’s clearly a binomial equation: either you get there or you don’t. What happens when you don’t? And you’ll be subjecting yourself to a lot of forces that you may not have control over. We’re living in a practically zerointerest rate environment at the moment. What happens when interest rates start to rise? Have economies grown enough to be able to compensate? Are they enjoying real growth, low inflation, and full employment? If not, all the easy money floating around will be sucked out pretty rapidly when conditions change. www.private-equityseasia.com I think that if you’re investing in a business today and then exit suddenly in the next three years, you’ll have to consider where you are in the investment and liquidity cycles, and map as well what’s going to happen over the next three years. Even if the company might be doing well when you undertake an IPO, you might have a lousy IPO as a result. We’ve seen that happen time and again. B. Selling the company to a strategic acquirer I think this will always be at the back of one’s mind if you’re going into an industry and you know that your company will carry a lot of value to a lot of people at a certain size and scale. You feel that at some point, a natural buyer of this business will be a bank, an MNC, or an industry leader. If you go into a business like this, then you’ll need to understand the core competitive value of the business you’re about to invest into, and determine that a strategic buyer will definitely want to acquire it. You’ll need to understand who your supposed strategic buyers will be in three or five years’ time as well as what their plans might be. If you’ve got a lock on that strategic advantage and your potential buyer can’t replicate it, 19 then well and good. Your buyer would definitely pay a strategic premium for it. If not, however, you might have a very hard time selling. C. Management buyout It can be a Catch-22 situation to agree early on that management will buy you out at a certain point in time, or to try and instigate such a purchase three to five years down the road. Management may give you a price that you don’t like. If you reject it, will you continue to work with them and constantly second-guess their intentions? A misalignment of interest can occur in such instances. It’s always a very tricky situation and puts you in a very precarious position. I actually haven’t heard of too many instances where something like this has gone tremendously well. Are there any exit strategies that you would like to add? We cannot predict what will happen three to five years from now. I would rather focus on the underlying business and see what its natural growth would be like. If it all works out – if the business can at least redeem a bond, pay a preference share, and/or have some point of liquidity or at least a fixed tenure to my investment – then I can decide to get out. The Best Private Equity Exit Strategy
  • 22. I think that’s always how we’ve been structured. We started as a need provider that’s evolved into taking on more quasi-equity risks. But we’ve never lost sight of the importance of a certain www.private-equityseasia.com level of certainty on the exit and on the yield that you will get. You’ll have to temper your equity-like returns in exchange for that kind of certainty, and that’s something I’m prepared to do. 20 If I have 10 companies in my IPO portfolio, and if not all of them have reached the IPO point, at least I know I’ll exit most of them naturally and in a manner that I’ve structured and worked on from day one. The Best Private Equity Exit Strategy
  • 23. Edward Gordon Interview with Edward Gordon, Head of IB, Ho Chi Minh City Securities Corporation What are the most significant developments in the Private Equity industry in Southeast Asia and what are the impact? It’s hard to generalize across a market that covers such different areas. For example, in the more developed markets in Singapore, after peaks and troughs in recent years, it’s true that investors are seeing a greater depth and variety as well as a good amount of capital coming into the markets. In Vietnam, where we are, the development is towards more sophistication, and the market is playing a very significant role. Other areas might be in different stages of development, and for such markets, this outlook would not necessarily apply. In making private equity investment, what are your typical considerations? Our firm is more of a brokerage, often working with the funds which are actually doing the investment. However, our concern is that when the numbers are provided, people www.private-equityseasia.com have to see the returns on their investment. There are also concerns on how to exit and how to realize liquidity – a very significant part of the investment process. Depending on the investor, the question of which sector becomes extremely important. For example, in a market like Vietnam, “consumer” is a word that you hear quite a lot. This means that there is considerable interest, which means money available for investment, in the sector, but also signals significantly greater competition. How would you characterize Southeast Asia’s frontier markets? How do you see it improving in the next 3-5 years? We are a frontier market along with Myanmar and Cambodia. Each one has a different profile, given that they’re all independent to some extent. There seem to be differing characteristics in terms of which sectors each market is promoting, but again I think that one common objective, especially for growing players 21 that are not yet major market forces, is to obtain straight debt finance or debt finance on terms which are acceptable. Given issues in the banking sector, in the foreseeable future, while there will be good and strong demand, it may not be fully met by regular financiers. As such, for the next three to five years, I think you will only see a greater demand for private equity and alternative financing in the frontier markets. Can you share some insights on the following exit strategies? Pls tell us the ups and downs of each option: A. Taking the company public through an initial public offering (IPO) Obviously an IPO would be subject to market conditions. In the Vietnamese market, towards the end of last year, we saw not only the values go down but volumes as well. There were days we were looking at US$20m of total market turnover. I think these conditions obviously put a great deal of constraint on the company’s ability to exit via IPOs. The Best Private Equity Exit Strategy
  • 24. “I think that, in frontier markets at least, keeping it as simple as possible is still the best strategy.” - Edward Gordon, Head of IB, Ho Chi Minh City Securities Corporation Your exposure and your volatility in the market – those are downsides. There are certain other technical areas, such as the level of corporate governance, that also place constraints on this exit strategy. On the other hand, undergoing an IPO can work to one’s benefit; for instance, it can raise the company’s public profile, thus helping build a company’s presence even in less obvious areas. Also, you may not want to just sell out to one particular company lock, stock and barrel. Selling shareholders may want to retain control of the ship and yet still see some return or some way to liquidate some of their assets. B. Selling the company to a strategic acquirer In a sense, if you are talking to one player, there are less moving www.private-equityseasia.com parts, and it can be a simpler process to go through. However, there’s always that meeting of the minds and often enough, not just in Vietnam but in many markets, everyone is looking for the perfect match. Sometimes, that can work against you. Trying to get one single buyer might be far easier said than done, given the market conditions that companies must consider. So while it is easier in some sense IF you get that perfect match, I wouldn’t say it’s an easy process. C. Management buyout I think that’s definitely an option. Obviously, one of the benefits is that the management has been involved in the business, so they know exactly what it requires to survive and grow the company. It can be a very good option to consider. 22 Getting returns for everyone may be a problem. In markets with high interest rates, the classical model comes under some strain. This can make the dynamics of the deal different, and maybe to a certain extent, alter the way in which the deal is structured. In Vietnam for example, in a management buyout, you rely on your private equity base almost exclusively. Are there any exit strategies that you would like to add? Well, really I think that, in frontier markets at least, keeping it as simple as possible is still the best strategy. I think that for us at HSC at the moment the focus is in getting it right. For me, this would definitely be the first step. After this, I can consider being a bit more fancy down the line. The Best Private Equity Exit Strategy
  • 25. Krit Phanratanamala Interview with Krit Phanratanamala , Investment Director, Thai Prosperity Advisory Co Ltd. What are the most significant developments in the Private Equity industry in Southeast Asia and what are the impact? Four to five years in the past, the private equity industry in the Southeast Asian region was very young, so nobody quite understood it. There was of course considerable action already at the time; many entrepreneurs were already operating businesses here, and were working with banks. Also, some entrepreneurs were taking their companies public early, through smaller exchanges or by targeting the bigger exchanges. The private equity industry fully started up and information started to flow through at a much faster rate when Indonesia and Vietnam kicked off and Thailand came up next. As for the impact of these developments, from what I can see, they have been boosting the wealth of opportunities in the region. More specifically, they are helping make the pace of development so rapid that people are getting impatient. www.private-equityseasia.com Having to wait for bank loans to help finance growth through investments, for instance, would not be feasible. Additionally, using their earnings to fund these initiatives would be quite difficult too, and equally unfeasible. So they would be looking for some source of equity to fund such vital initiatives. That’s where private equity enters the picture. In making private equity investment, what are your typical considerations? Basically we need to see the type of business model employed by a business we are considering, as well as what the entrepreneur under consideration has in mind. We also want to find out how entrepreneurs plan to implement their business model – that is our key concern. This usually differs from industry to industry. For example, if we look at the rice industry in Thailand, and even in other countries as well, we would want to determine what kind of business model they use, how they work with sales agents, and how they work with retailers. Or even how they 23 invest in their companies as well – we are concerned with that too. And we also try to find out which niche markets they compete in. How would you characterize Southeast Asia’s frontier markets? How do you see it improving in the next 3-5 years? I am optimistic about these frontier markets. One major reason for our optimism: you have to be aware that the ASEAN Economic Community or AEC is coming up in 2015. We see the AEC’s inception as a massive opportunity for entrepreneurs to invest outside of their countries, and an equally enormous opportunity to help grow the market areas of certain countries and boost the access of new products to these markets as well. There are also plans each country is working on that involves being part of what they call the Heart of Southeast Asia. In pursuit of this, they are making significantly more infrastructure investments. Such investments would provide opportunities for entrepreneurs The Best Private Equity Exit Strategy
  • 26. “We want to find out how entrepreneurs plan to implement their business model – that is our key concern.” Krit Phanratanamala, Investment Director, Thai Prosperity Advisory by further expanding their market. So we see a lot of upcoming improvements. Furthermore, we can see opportunities for private equity investors to gain a foothold in these markets before they really take off in the next two or three years. Can you share some insights on the following exit strategies? Pls tell us the ups and downs of each option: A. Taking the company public through an initial public offering (IPO) I think if we invest in certain kinds of companies, taking the company public could be a good option because it would make for an easier exit. Because if we start with, for instance, 10% or 15%, once an IPO is done, we could dilute this to maybe 7%, 8%, so that portion should be easier to release to the market. But, by contrast, if we hold a majority, say, 50, 60% or more, going with an IPO may not be a good choice. After the IPO, our www.private-equityseasia.com share would be diluted to maybe 40 or 50%. This portion would be quite huge if released to the market. And if minority investors see that we are tough financial investors, the market would know that we have time to exit also. So this would make the stock price go nowhere – and it would make it also difficult to get out, too. B. Selling the company to a strategic acquirer That would be a better choice. Especially because the Southeast Asian market is going up, I think in terms of a company’s potential selling price, we could be able to earn more from selling said company. We can see that this market will be growing very fast as well, which adds another element to the equation. negotiating prices, so that it would have to be planned at the beginning when we make an investment if they need income money. Then, if we want to take a significant stake, we need to see who might be the potential acquirer or buyer, or if we are going to put investment A in investment B and start looking for another acquirer. We have to keep these things in mind before we get into the whole process. C. Management buyout Yes, that’s another option for companies, when they are manned by us because they have already served their investment and you can see that the company may need another four or five years before it is ready to go public. But this, of course, would depend on the company’s strategy – it would be the choice of the company whether or not to embark on this venture. Now, take note, selling to strategic acquirers isn’t perfect; there would be a downside to it too. I would say that it would be a little bit limiting to some acquirers in terms of 24 The Best Private Equity Exit Strategy
  • 27. Simon Hopkins Interview with Simon Hopkins, Group CEO, Milltrust International Group What are the most significant developments in the Private Equity industry in Southeast Asia and what are the impact? The culture of business here is one largely of business ownership - ownership of real assets, whether a business, a commercial enterprise or commercial real estate. The private equity market is therefore far more developed than the public equity market in many respects. However, institutional capital is still largely absent from the public equity markets in many Southeast Asian countries, even though these markets have been some of the best performing in recent years. And that is because these markets are historically very volatile, in addition to the issues relating to corporate governance, the way businesses have been managed historically, and the treatment of minority investors. I believe that, while there has been a significant shift in recent years, most of the capital that has been flowing into these markets has come through fairly www.private-equityseasia.com indiscriminate pools that tend to buy index exposure. As Japan has shrunk, the rest of Asia has grown in importance. But investors in these markets only tend to buy the largest cap stocks, and when they leave the marketplace because they want to take risk off the table or because they're concerned about the volatile profile of emerging markets, they withdraw their capital, thus exacerbating the very problems that put them off in the first place. This is the irony of the emerging markets, whether it's the ETFs or the big global emerging market funds. Additionally, there's too little high quality on-the-ground research into companies. With investor capital coming in and out in a very indiscriminate fashion, the development of an essential component of the capital markets i.e. deeper and more sophisticated markets, has been severely hampered. Private equity is increasingly seen as an alternative source of capital in addition to borrowing money from banks and or from local investors. However, it has also been an expensive option in recent years, with interest rates 25 at records lows in the developing world. There's also a global pool of capital, both in the PE and the venture space, which is increasingly seeking out opportunities in the markets of Southeast Asia. And as a consequence, conferences in Asia are increasingly well attended by a pretty sophisticated crowd of international investors. Most, however, are asset managers as opposed to institutional investors themselves, i.e. they are what we call the LPs. They represent people who themselves have to go to the ultimate pool of capital and raise that capital in their own domestic market for deployment into Asia. Many smart people recognize that the demographics in Asia are compelling, that the economies of the Asian markets are amongst the world's fastestgrowing economies, and that whilst some businesses are indeed well-managed others could benefit from the assistance that professional private equity investors can provide. However, a shift away from private equity in domestic markets into emerging markets The Best Private Equity Exit Strategy
  • 28. Many smart people recognize that the demographics in Asia are compelling. Simon Hopkins, Group CEO, Milltrust International Group is only just beginning. Goldman Sachs forecast that as much as 4 trillion dollars of capital could flow into Emerging Markets during this decade, and whilst one can only acknowledge the performance of South East Asian equity markets in recent years, volumes are still relatively small by any comparison with the world's major bourses. There have been some success stories of people raising significant pools of assets through Asia, but there hasn't been a wholesale shift of institutional capital into private equity. This has proved far more challenging for international investors for a host of reasons. In making private equity investment, what are your typical considerations? We're a relatively new company and we've only been in business for a couple of years. And in that time, we haven't yet made a principal investment into Southeast Asia, much to my dismay. However, we have made investments into projects in agriculture in Australasia and www.private-equityseasia.com Latin America. We're also very close to making our first investment in an agricultural project in Africa. And in our agricultural land investment program, we absolutely want to have an investment opportunity in Southeast Asia. In all of the projects we have looked at in this region, our initial co-investors have become the primary investor, and they haven't needed to seek additional capital from the types of investors that we traditionally work with in the West. To give you an example, we had a client that wanted to grow coffee in Laos. We conducted due diligence on the opportunity to acquire land and a license from the local municipality, so that they could vertically integrate. They were seeking co-investors to buy land, plant coffee and harvest it there. As it turned out, however, the company would have ended up being an absentee landlord, so we advised the company not to embark upon a vertical integration strategy and to simply continue to operate as a local buyer, 26 because of the risks associated with not being present. They would not have been in a position to manage the risks properly as an American company operating a long, long way away from its primary place of business. Consequently, no additional capital was required. Our focus so far has been largely focused on real assets, primarily the opportunity to acquire agricultural land. We're also interested in any kind of commercial real estate that generates a recurrent income i.e. some form of yield, because the message that we're getting from our investors is a deep concern about long term inflation, and short term sovereign default, or further currency depreciation, especially with respect to Western currencies. We are also interested in investing in businesses which focus on the primary necessities of life, i.e. power, water, transport and infrastructure, healthcare, education, food. These are the big themes of the developing world, driven by population expansion and changing demographics. The Best Private Equity Exit Strategy
  • 29. How would you characterize Southeast Asia's frontier markets? How do you see it improving in the next 3-5 years? I think that it's extremely risky for small investors to go into these countries without local knowledge. The risks of not having sufficient resources to deal with unexpected business challenges would be unmanageable for smaller enterprises. Larger, multinational corporations can come in at a governmental level and secure the necessary support from the authorities. For them, a single frontier market is likely to be just one part of a broadly diversified, expansion strategy. Also, countries that have been deprived of capital and haven't developed at the same pace as some of their other neighbours, may not have been exposed to the pressures of the big multinational companies. For example: if you're a manufacturer of any basic, fast moving consumer good in Myanmar as a domestic player, and you suddenly experience international competition, it is highly unlikely that your domestic business will be able to compete with the multinationals on the points of price and quality. Customers will gravitate away from the local product to www.private-equityseasia.com the international offering. This is the "Proctor and Gamble effect". So, from a private equity standpoint, going into an economy like that and acquiring businesses in the hope that you can help them and turn around, or improve them or put them on a stronger footing to compete in the new world in which these countries have entered, could be an enormous challenge. To conclude, frontier markets, while fascinating, and while ready for modernisation - for instance through infrastructuretype investments - are likely to be challenging to private equity investors because of these limitations. Can you share some insights on the following exit strategies? Pls tell us the ups and downs of each option: A. Taking the company public through an initial public offering (IPO) Taking the company public through an initial public offering (IPO) I think this is often overplayed. If you ask most regional private equity players whether they have successfully exited an investment through an IPO, you'll discover that they have almost never done so. For instance, there are companies in the Asian markets that seek to raise capital in Hong Kong or 27 Singapore because they feel that they'd be more likely to attract international capital there than on their local stock exchange. That will change in time, but today, that is still the case. Furthermore, IPOs are not an exit; they can only ever be a partial exit. It is highly unlikely that you'd be able to sell all of your PE investment through an IPO. You might manage to sell some of the investments and be in a position where you retain a portion of the stock - but then you are then exposed to the vagaries of the stock market with respect to the valuation of your investment. This is something to bear in mind. The stock market might be far less kind than a compliant auditor. B. Selling the company to a strategic acquirer There is likely to be far more opportunity in strategic acquisition because the Southeast Asian marketplace is extremely fragmented. You may have a contract to supply or distribute an international product in the province of Mindanao, for example, or in the province of Western Sumatra. And it may be a decent business, a powerful franchise - but it is not a nationwide business. So the opportunity is for you to develop that franchise into other regions by acquiring other franchise holders and then to start to The Best Private Equity Exit Strategy
  • 30. extract value from the logistics and supply chain that you manage, potentially with respect to other products too. I think that a lot of businesses with low cost bases, are in a strong position in their own domestic markets but often haven't developed an international angle to that business. They may have had some inquiries, but they haven't got the capital or experience to develop their business internationally. C. Management buyout Management buyout is interesting, but the buyouts that I have seen have all taken place within families. Let's say a business is owned by fathers and uncles who've reached the age of 70. They decide that they would rather play golf, buy a new car, and relax and spend their money than continue with the business. Their sons or nephews step up and acquire the www.private-equityseasia.com business. So the younger generation buys the older generation out. Otherwise, often there is considerable resistance when it comes to selling companies that perhaps have strong family ties, and broad family ownership. One of the issues that I've heard repeated many times is that many private equity investors make a significant minority investment into a business, but then they find it very difficult to encourage the principals to sell their company once their job is done, so the increased value in the stake cannot be monetised. This can be very challenging for private equity investors; they have to be able to ensure that when they make the initial investment, there is a clearly understood path which will lead to monetisation at a fair price. The alternative is selling to a family member at a price which is not fully reflective of the business's value. 28 Are there any exit strategies that you would like to add? Typically exits for Southeast Asian investments, with the exception of large infrastructure or mining projects or other resource-related investments, tend to be relatively small quantum. Many of the players in Southeast Asia are looking to invest somewhere between 25 to 100 million dollars per investment, which, whilst small by western standards, is significant in terms of the typical Asian business. Many western PE firms would thus be precluded from investing in opportunities in Asia. The opportunity therefore for the mid-sized, local private equity firms is to invest into businesses, nurture them, and then sell them to the bigger, international private equity firms to take the businesses to the next phase of growth. This is probably the most prevalent form of exit in both in Southeast Asia and India. The Best Private Equity Exit Strategy
  • 31. Kian Hwa Tan Interview with Kian Hwa Tan, Senior Vice President, SBI Ven Capital Private Limited What are the most significant developments in the Private Equity industry in Southeast Asia and what are the impact? Over the last few years, I have observed the Private Equity (PE) industry maturing rapidly. More funds have been raised, many businesses accepted investments from PE players and entrepreneurs are generally much more receptive to PE style of partnership. So I think it’s a good thing that private equity is becoming an alternate source of funding for the entrepreneurs vis-à-vis the traditional and more conventional way of raising funds. In making private equity investment, what are your typical considerations? Investments that I make must fit the investment mandates, which could be different from one fund to another but share the same basic elements. We look for good returns, specifically, a company which is more or less at the inflection point where we can nurture it further over the www.private-equityseasia.com next few years before we can achieve liquidity. Sector’s fundamental and strong management is key. A company that has easily distinguishable, clear and strong market positioning and exit potential. How would you characterize Southeast Asia’s frontier markets? How do you see it improving in the next 3-5 years? Southeast Asian countries are more and more integrated nowadays, and trade is flowing more freely. There’s more collaboration internationally – and that’s an encouraging sign. However, investors have to be cautious on these frontier markets like Myanmar. I think everyone should try to understand, or should at least be aware, that this is the reason that expectations should be balanced out. Obviously, the risk profile in these countries is very different and the exit strategies sometimes are not very clear, so I think the risk management plan is very, very important. So is an understanding of the local culture as well as the business environment. 29 Overall, it’s a good thing that people are starting to look at these countries that have not been previously focused on. But I think investable opportunities are still few and far in-between. It’s very important that investors have a way to mitigate the risks that they can identify. Can you share some insights on the following exit strategies? Pls tell us the ups and downs of each option: A. Taking the company public through an initial public offering (IPO) I think logically, IPO is definitely a consideration. However, realistically, given the capital markets and the demand, you don’t see much PE company-IPO story. Although an IPO is definitely an option to be considered, it’s important to note that it’s all about financial returns. You would probably go for listings, but there are constraints in pursuing this option: the regulatory compliance to the target exchange, the lockup period, liquidity of the capital markets, just to name a few. The Best Private Equity Exit Strategy
  • 32. “Investments that I make must fit the investment mandates, which could be different from one fund to another.” Kian Hwa Tan, Senior Vice President, SBI Ven Capital One recent success story that comes to mind is Courts Asia’s IPO. But that is just one relatively large deal in the PE world. So my point is that definitely it’s a good consideration, but I don’t think we can just rely on IPO as the main sort of way to exit because of all these constraints I just outlined. B. Selling the company to a strategic acquirer I think that’s a more reliable option. It’s easy to convince the strategic buyers because they are probably business partners already, or they understand the industry very well. Also, there’s a stronger need for these guys to look at M&A nowadays. But I would look at that as a more likely avenue for creating a liquidity event for PE investors. www.private-equityseasia.com Though the assumption could be that your business is attractive enough or big enough that you can get attention from a few strategic players, the choices could be quite limited if you are operating in a very closely-knit industry where people know each other. If people are communicating, the moment you begin your initiatives, everyone will know about your plans, and this can work to your detriment. C. Management buyout the observation that not many PE investors exit via MBO (though entry via MBO is fairly common). Are there any exit strategies that you would like to add? One typical is exit via redemption clause. Another one I can think of is secondary sales, which is one PE fund selling to another PE fund. Again I don’t see that happening a lot, due to valuation issue. Management buyout is possible, PE exit through management buyout is considered as secondary sale, which is not usually the favorite of PE investors. Typically, management buyout deals would require external financing, which is a challenge as evident in 30 The Best Private Equity Exit Strategy
  • 33. About BlackRock BlackRock is a leader in investment management, risk management and advisory services for institutional and retail clients worldwide. At March 31, 2013, BlackRock’s AUM was $3.936 trillion. BlackRock offers products that span the risk spectrum to meet clients’ needs, including active, enhanced and index strategies across markets and asset classes. Products are offered in a variety of structures including separate accounts, mutual funds, iShares® (exchange traded funds), and other pooled investment vehicles. BlackRock also offers risk management, advisory and enterprise investment system services to a broad base of institutional investors through BlackRock Solutions®. Headquartered in New York City, as of March 31, 2013, the firm has approximately 10,600 employees in 30 countries and a major presence in key global markets, including North and South America, Europe, Asia, Australia and the Middle East and Africa. For additional information, please visit the Company's website at www.blackrock.com About Ho Chi Minh City Securities Corporation Ho Chi Minh City Securities Corporation ("HSC") is a leading, premier investment and financial services provider in Vietnam, providing a comprehensive range of products for customers in one of the fastest growing economies in Asia today. HSC focuses on its core competencies in research, technology and service to cater its customer segment in both retail & institutional divisions. About Kendall Court Kendall Court started in 2004. We started with assets under management of US$35 million. The 3 founding partners were the only employees of the firm. At the end of 2012, our assets under management were approximately US$260 million, and there were 15 employees across Indonesia, Singapore and Malaysia. About Milltrust International Group Milltrust International Group was founded in Singapore by Simon Hopkins, the group CEO, as a multi-asset class investment platform focused entirely on Emerging Markets. Simon formerly served as founder and CEO of Fortune Group, one of the UK's leading investment advisors with a focus on alternatives. Close Brothers Group plc, the UK merchant bank, acquired a controlling interest in Fortune in 2006 with the transaction completing in January 2010. Mr. Hopkins served as head of the global institutional business at Close Brothers, overseeing the integration of Fortune with the asset management business. He left in November 2010 to found Milltrust International Group. Today, Milltrust employs over 20 professionals and has offices in London, Geneva, Buenos Aires, Cape Town, Seoul and Kuwait City in addition to its HQ in Singapore. To know more, visit www.milltrust.com About SBI Ven Capital SBI Ven Capital is the overseas private equity arm of SBI Group. SBI Group is one of the largest Japanese private equity/venture capital firms, with more than USD 3 Billion of committed capital. Singapore-based, we are a leading private equity firm that invests in growth capital opportunities across Asia. We have a proven track record of partnering with growth-stage companies and assembling critical resources needed to grow businesses in Asia. Our investment team combines financial acumen, industry insight and operational expertise to enhance the value of the companies we invest in. About Thai Prosperity Advisory Company Limited Thai Prosperity Advisory Company Limited (TPA) is an investment advisory firm that specializes in equity investments. TPA has advised on transactions including capital raising for growth expansion, financial restructuring, as well as, buyouts. www.private-equityseasia.com 31 The Best Private Equity Exit Strategy
  • 34. Southeast Asia’s leading private equity event brings together the region’s leading CEO’s, chairmen and business owners focused on buyouts, growth capital, distressed assets and venture capital investments. Book now! www.private-equityseasia.com 32
  • 35. NOTE The views or opinions expressed by the speakers are solely their own and do not necessarily represent the views or opinions of the company they represent. DISCLAIMER Please note that we do all we can to ensure accuracy and timeliness of the information presented herein but errors may still understandably occur in some cases. If you believe that a serious inaccuracy has been made please let us know. This article is provided for information purposes only. IQPC accepts no responsibility whatsoever for any direct or indirect losses arising from the use of this report or its contents. ABOUT IQPC Darwin Jayson Mariano is the Online Content Manager and the Regional Editor Asia for International Quality & Productivity Center (IQPC), a leading producer of events and conferences for business leaders around the world. You can contact him on LinkedIn or email darwin.mariano@iqpc.com.sg IQPC provides business executives around the world with tailored practical conferences, large scale events, topical seminars and in-house training programs, keeping them up-to-date with industry trends, technological developments and the regulatory landscape. IQPC’s large scale conferences are market leading “must attend” events for their respective industries. Founded in 1973, IQPC now has offices in major cities across six continents including: Berlin, Dubai, London, New York, Sao Paulo, Singapore, Stockholm, and Sydney. IQPC leverages a global research base of best practices to produce an unrivalled portfolio of conferences. For more information, visit www.iqpc.com 33
  • 36. SOURCES Private Equity Outlook 2013 – Ernst & Young http://www.ey.com/Publication/vwLUAssets/Asia-Pacific_private_equity_outlook_2013/$FILE/Asia-Pacific_private_equity_outlook_2013.pdf Southeast Asia Private Equity – Industry Brief - Bain http://www.bain.com/Images/INDUSTRY_BRIEF_Southeast_Asia_Private_Equity.pdf Philippines Beats Global Stocks by 124% http://www.bloomberg.com/video/philippines-beats-global-stocks-by-124-sA8WLH1xSSWeXPDUFHyQfA.html Private Equity Firm Bets on Asia’s Frontier Markets http://www.cnbc.com/id/46451418/Private_Equity_Firm_Bets_on_Asiarsquos_Frontier_Markets Can Private Equity Strike Gold In Emerging Markets? http://www.forbes.com/sites/baininsights/2012/06/26/can-private-equity-strike-gold-in-emerging-markets Exit Strategies for Private Equity Investors http://financetrain.com/exit-strategies-for-private-equity-investors/ Private Equity Funds and General Partners http://www.secondventure.com/Private-Equity-Funds-and-General-Partners.asp Interview with Chris Chia of Kendall Court Interview with Edward Gordon of Ho Chi Minh City Securities Corporation Interview with Joseph Pacini of BlackRock Interview with Krit Phanratanamala of Thai Prosperity Advisory Co Ltd Interview with Simon Hopkins of Milltrust International Group Interview with Tan Kian Hwa of SBI Ven Capital Private Limited 34