Private Equity: Although the market faces some challenges, it is growing in Asia, with an increased focus on operational initiatives to create value
Challenges after the Financial Crisis
The Private Equity industry has been challenging since the financial crisis. Many Private Equity funds are holding onto their investments because of the weak economic recovery (so-called “zombie” funds). Besides, the business model of funds has been criticized and is under regulatory scrutiny, because of the level and origin of fees that are being charged to the investors by the General partners. The past few years have seen a focus of companies in deleveraging their balance sheet, meaning that the traditional way of funds using leverage to increase their financial returns is no longer the most favored option anymore. However, the economy seems to be recovering, with for example the recovery in the equity market driving funds towards exiting their investment and bringing back liquidity into the Private Equity Market again. Furthermore, Asia’s Private Equity market is growing and maturing.
Development and Evolution of the Asian Market
The Asian Private Equity market has been historically less liquid, because of the slower development of the capital markets. On the other hand, there has always been a predominance of family-owned businesses in Asia, which has limited Private Equity Funds to hold minority stakes instead of buying out companies. This has impacted on the exit type, which is largely through Initial Public Offering rather than the sale to other strategic buyers in Asia. However, with the economic development of Asia, the market is changing and maturing towards more Western-type Private Equity, which in turn will spur many opportunities for the future. The exponential growth of credit in Asia in the past decade, together with the first major corporate defaults in China last year, are likely indicators of the needs for Private Equity funds in the future for restructuring distressed companies, across whole Asia.
Source: FountainVest Partners
Figure 1: The Investment of Private Equity in China, 2001 – 2012
Rise of the use of value-adding operational initiatives
As mentioned in the first paragraph, Private Equity funds are sitting on a lot of assets. There are more than 3 Trillion USD of assets under management worldwide waiting to be exited. On the demand side, funds have been fighting for a few deals as well. This is making any chance of making a quick profit through multiple arbitrage (buying a mispriced asset at a low price to sell it high) less likely. Adding to that the weak prospect for profit through leveraging, the only levers that are left are real operational value creation through top-line and bottom-line initiatives.
Players and Types of the Private Equities
In the private equity industry, banks, global funds, niche funds and advisors are the main players (Figure 2) with different roles and focuses on the business.
Figure 2: Players of the Private Equity Industry and Their Roles
While banks, global funds and niche funds are creating and managing their own funds, advisors are providing advices on different aspect, e.g. strategy, finance, legal and operational. The knowledge of the specific sectors are important, especially for niche funds, when private equities choose the sectors or companies to be invested. Freelog’s expertise on different sectors, e.g. aerospace and manufacturing, could perform detailed analysis and operational due diligence on the performance and capability of a company.
Private Equity can basically be classified into four types (Figure 3) depends on the stages at the life cycle of a business they are investing on.
- Venture capital: Initial seed capital to help a start-up develop its business (minority stake, generally in the form of redeemable preferred shares);
- Growth capital: Later round fundings, in the form of minority stakes, to help the company grow its business when it has already revenues and/or positive earnings;
- Buyout: Majority stake in a mature business, to improve it operationally and strategically (Leverage Buy Out if helped with debt in order to increase returns);
- Distressed debt: Majority stake in order to turn around a company that is in distress (e.g. after default on some of its loans / debt).
Figure3: Types of Private Equity and their life cycle of a business
Although the management approaches for different private equities could be very different, the ability to create value through top-line and bottom-line initiatives are all critical, in particular when business moves to the later stage of the life cycle, where the majority of stakes are preferred. Freelog is experienced in providing different levers to enhance an organization’s performance (Figure 4) through top-line and bottom-line initiatives, as well as financial structure optimization.
Figure 4: Freelog Levers to Create Value to Private Equality Portfolios
Freelog Values and Offer towards Private Equity Funds
The figure below (Figure 5) shows how Freelog can help Private Equity funds to create value in their portfolio, across the life of their holdings, from investment and portfolio management to exit.
Figure 5: Freelog Levers along the Process of Fund Activities
Freelog is strategically positioned to accompany Private Equity funds, especially in Asia:
- Ideally situated in Hong Kong (one of the top hub for Private Equity fund management) and Australia (one of the top target for Private Equity funds);
- Best practice in Operations learned from top players in mature industries in Europe;
- Mix of people coming from Consulting, Operations and Finance;
- Proven track record in implementing fast and tangible earning growth actions (e.g. cash flow optimization, stock reduction, strategic sourcing, post-merger integration support).
|Charly began his career in China in new technology research and development. Coming from organization and management consulting, specialized in Supply Chain, he developed in FREELOG original project and multi-cultural change management practices and methods. Charly has participated in Brazilian development and is now in charge of Asia Pacific development.|