In the last year, global private equity firm CVC Capital Partners has struck three deals in Japan and South-East Asia, all of them centred on its consumer-focused investment thesis.
In January firm completed a minority investment in Asia Commercial Bank, the fourth-largest Vietnamese joint-stock commercial bank with more than $11 billion of assets. This was preceded by its purchase of a majority stake in Riraku, the largest budget relaxation therapy chain operator in Japan, and its debut transaction in Cambodia’s largest microfinance company PRASAC worth about $400 million. It also increased its shareholding in Indonesian companies Softex, a consumer goods company, and Siloam, the largest private hospital operator in the country. All these deals were done from its $3.5 billion pan-Asia buyout fund, CVC Asia Pacific IV, which is showing a gross IRR of 29 percent and a money multiple of 1.4x, according to LP documents.
In a recent interview, Sigit Prasetya, CVC’s head of Asia, explains the firm’s approach to investing in Asia and how relationships are crucial to family-owned businesses.
What is the investment opportunity in Japan for CVC?
Sigit Prasetya: Japan is a big focus and has in our view a favourable characteristic for private equity investment. We do see activity levels picking up and have in recent years strengthened the senior team and completed two buyout deals in partnership with the founders. We are optimistic for Japan and expect continued level of activity.
In Japan, you have to be patient, focus on your own strength and pick your spots. A good source of deal flow is mid-market buyouts, where many founders are getting to their 70s and face a clear succession issue. The IPO market is not necessarily an option for them so that provides a good source of deal flow for private equity firms like us.
How would you describe investing in emerging Asia?
SP: I think you need to be focused and disciplined especially in emerging markets, where there might be potential governance issues you have to deal with. In these markets, we typically look at larger businesses anyway and invest in the top three players in the market; we are not looking at tier 2 or 3 players. We also typically have good financial reporting systems, and we remain focused and disciplined with the people we want to work with.
In the short-term there are concerns around valuations as well as around a lot of big money being raised across the board. Against this backdrop we continue to be disciplined and carve out our own strengths and focus on areas we are good, realising that we are not just here to deploy capital but also to make money for our investors.
What does a CVC deal in Asia look like?
SP: The big focus first of all in deal origination is to identify growing businesses that benefit from secular growth trends in the region such as favourable demographics and rising consumption. I’d say about 80 percent of the deals we do are focused on consumer-facing businesses with a good track record.
We also focus on businesses where we believe we can add value. We are not focusing on situations where owners just want to raise money and they just want to be passive – that’s not what we are looking for. We want to be able to drive the management team, look at improving operational efficiency (especially with family-owned businesses there are opportunities in this space), invest for growth, and improve the capital structure.
In order for us to do this in Asia, we need to develop relationships with different groups and families. As you know, most South-East Asian economies are driven by large groups and families; we develop a conversation with them early on. Over time when we build trust with them and then when they look to do something with their business, we hope to get a phone call.
We also spend a lot of time creating our own transactions; four out of five deals we do are bilateral deals, which means we have exclusivity with the owners of the asset since the beginning of due diligence. This means not having to participate in competitive auctions. The CVC type of deal is something we create and shape ourselves. One needs to be patient [in Asia] but over time if you are persistent in doing that will lead to successful transactions.
What differentiates CVC in this market?
SP: What we are trying to do as a firm in the region having been here 20 years now is to have a very simple and focused investment strategy, primarily around investing in high quality businesses. No start-ups, no turnarounds, but mostly in growing consumer-facing businesses across Asia – that’s our DNA. We look at control-oriented investments, so we can control our destiny. For the right assets we are also willing to partner. And partnership has become an important element of what we do that allows us to execute the strategy we want to do in Asia.
The second element we want to do in Asia is to build the platform. At the end of the day it is very much a people business, everything is driven by the team. There’s been a lot of focus and effort especially in the last decade or so to invest in our platform and to hire senior deal leaders across the organisation, a number which has increased quite substantially over the last five to six years.