Asia value play

Firms that aren't thinking about ways to bolster their operational value creation capability in Asia are in danger of being left behind.

Operational value creation was perhaps the hottest topic at Private Equity International’s 2014 Asia Forum in Hong Kong this week.

It's easy to see why. LPs at the conference admitted frankly that returns in Asia had disappointed in the last few years. Now, in an era where a rising macroeconomic tide is not lifting all boats in the way it once did, and where GPs are having to hang on to assets for longer, there's a clear need to think harder about how to create operational value at a portfolio company level.

The question is: how best to do this?

Some argue that bringing in technical expertise from the West is the answer. While it’s generally accepted that local investment professionals are vital for networking, relationship-building and negotiation in local markets, Asian countries for the most part still lack experienced professionals with technical and operating expertise. 

Others think compensation is (part of) the answer: that GPs need to reward operators in the same way they reward the investment team, to reflect how significant their input has become.

Firms like Silver Lake and CVC, whose operating partners spoke at the Forum this week, have both done this. Operators get the same carry deal and comparable base salaries – which hopefully creates a closer alignment of interests.

“We [are] all [in] the same carry pool, so our focus is very simple: how do we get a good investment, manage it in such a way that we are delivering value to it, and get to the return that we want in the fastest possible way,” Serene Nah, senior operating executive and head of portfolio management at Silver Lake in Asia, told delegates at the event.

Ultimately, macro growth clearly makes life a lot easier – particularly in volatile markets like Southeast Asia and India. And a cataclysmic event in the region along the lines of the Lehman collapse (an eventuality some Cassandras are starting to predict) could still undermine the very best-laid operational value creation plans. But the current slowdown should not be used as an excuse for poor private equity performance.

As Tim Sims, co-founder of Pacific Equity Partners, emphasised on another panel: “We as a private equity community should feel a responsibility to make sure that we know what drives our business returns – it is not growth. It is the unique insight into what you [can] add in future value to the thing you buy.”

Building this capability isn’t just essential on the fundraising trail (where LPs are placing ever more importance on it). It’s also hugely important when talking to entrepreneurs in Asia, who want to know what GPs can offer in addition to just cash.

“The next five years, operational work will be more critical than it is now,” Jean-Eric Salata of Baring Private Equity Asia told us recently (in an exclusive interview to be published in the April issue of Private Equity International). “Driving it is the fact that you have today much larger, more complex businesses. Beyond a certain size, a company needs a management team and systematic approach to running a business. Many companies are themselves interested in hearing you out. They want to meet some of the people who can help the company grow.”

At a time when Asia is already seeing a noticeable flight to quality, with capital increasingly concentrated in the hands of the biggest players, GPs who can’t offer that may struggle to stay relevant.

PS. For those of you in Europe with an active interest in operational value creation, we hope you’ll be able join us for this year's Operating Partners Forum in London in May (where, inter alia, we'll be asking Guy Hands what he's learned about how to do it best). For more details, click HERE.