EQT’s upcoming acquisition of Baring Private Equity Asia represents something of a win-win for both parties. The former gets to rapidly scale in a region that has been comparatively underrepresented in its portfolio relative to Europe, and the latter gains access to a vast arsenal of resources that would have taken years to develop single-handedly.
The €6.8 billion transaction is expected to close later this year.
Private Equity International caught up with BPEA managing director Kosmo Kalliarekos, 14-year veteran of the firm and chair of its portfolio management committee, to discuss the transaction and its potential implications for the firm and its investors.
Next to €5.3 billion of shares and a €1.5 billion cash consideration, one would imagine that carried interest cheques will start to look a lot smaller. How do you ensure alignment with LPs after a deal like this?
First of all, the vast majority of the value is in the equity stake, not just in the cash component. So it really is much more of an investment, and it’s a long-term commitment that we have in order to make sure that we see the full benefit of the shares. Nobody’s doing this for the cash component and, in any case, we have carried interest that would be flowing. Certainly, I’m much more motivated about the value of my stock and how that can grow over time, rather than rather than the cash component that we received.
At the end of the day, what drives long-term value is performance. And we believe that our LPs absolutely get that. They are extremely supportive of it, because this is all about creating a firm that has the institutional capability to deliver performance year in, year out.
What would you say to critics who might argue that listed PE firms have an economic incentive to generate more fees to drive earnings and, by extension, the stock price?
[BPEA] and EQT are both performance-driven organisations, which is why we think the combination works so well. Our funds provide strong economic alignment with our clients to deliver performance, and ultimately the best way to deliver long-term sustainable growth of our business is to remain focused on delivering strong performance for our clients.
This merger resulted from a conversation about IPOs. What was BPEA’s motivation for wanting to raise capital?
Our world is changing, and our industry is changing: it requires significantly different capabilities and assets than we required 10 years ago, and 10 years from now they’ll require even more. That was one of the fundamental reasons that we wanted to really go public, and now we can actually do it a lot faster and a lot better. To create an organisation that can deliver industry-leading returns consistently and at scale is not an easy thing to do – it would require sophistication, scale, investments and insights that are unprecedented. We needed to think about what we can do to stay relevant over the next 10, 20 years, so in some respects what we did here is necessary, not a luxury.
EQT already had a family of Asia mid-market funds and staff on the ground. How will the new combined entity operate in Asia?
BPEA will be leading all activities in Asia with respect to private equity, and that makes sense because we have the knowledge. [EQT is certainly] bringing a set of additional LPs that we can tap and capabilities that would be extremely helpful to us, such as tremendous digital scale, ESG investments, technology investments and advisory networks, which we can absolutely leverage.
EQT’s Asia resources will effectively become part of our organisation. I think their latest Asia fund was pretty much fully invested, so in that respect, it’s actually ideal in terms of timing. Obviously, we have the opportunity to raise new funds.
You’re co-head of BPEA’s education business. To what extent did last year’s regulatory crackdown in China impact your appetite for that sector, and the market more broadly?
We have little overall exposure to China education, and we are one of the largest investors in education around the world. We’re a great believer in the premise of China, which, like any other country, has its own peculiarities and waves. It’s not the first time that you’ve seen regulation impacting certain sectors, and not the first time that geopolitical events are going to affect economic environment.
We’re getting paid to assess all of these risks and identify the best investment opportunities. Sometimes you need to be patient, and that’s the great opportunity of an Asian strategy: we don’t have to continuously invest all the time in any particular country. We can bide our time.
We didn’t invest in India for, I believe, three years, but we then subsequently saw great opportunities and became one of the largest private equity investors in the country, focused on specific themes and sectors that were particularly potent in India. China will not stop growing, so we just need to adjust and see where the opportunities are.