Olympus is a mid-market private equity firm that recently launched a structured credit business. What were the drivers?
It’s not one single thing, but a confluence of factors. As a pure private equity fund, we encountered situations where we sat down with the entrepreneurs and tried to understand their needs and they were not in synch with private equity. Maybe they were too resistant to dilution, or maybe they didn't really want to have a real partner in the boardroom — lots of reasons. The structured lending fund gives us an alternative. It gives us another arrow in the quiver.
Add to that broader economic context, the Basel III requirements for higher capital, the Eurozone crisis, a lot of multinational banks looked at the capital costs of their businesses and even though they have liquidity they really don’t like mid-market illiquid lending. A lot of banks have cut back from that. Hedge funds used to do this but their investors generally want liquidity, so they have pulled back. We’re not the only guys, but given the broad supply and demand of capital, there’s definitely a place for non-bank providers of this capital.
Finally, as a private equity firm we are also a consumer of financing. In China and in Korea, when we were looking for mezzanine financing for our portfolio companies, we were horrified by the high terms that were quoted to us. They were not commensurate with the risk and this gave us the signal that there might be an opportunity for us.
Has slowing GDP growth in China and India and lack of IPOs impacted on your private equity investments?
It’s a mixed bag. As an owner of assets those conditions have an impact on liquidity. We’re not momentum investors trying to flip an IPO, so there’s no exit we had to postpone, and a majority of our past investments were sold through strategic sales. But in India, the environment for business has been pretty tough the last one-and-a-half years, particularly infrastructure-related business because the payments are slowing down. On capital market side, the stock prices have gone down. Valuations have gone lower and as a buyer of assets that’s good for us.
With some strong country managers emerging in Asia, where does the regional fund fit in?
As the Asian market develops, we believe there is a critical role for regional, sector-focused funds with local teams to establish a position of competitive differentiation. [As a regional fund], we have local teams and are sector focused on three areas — financial services, agribusiness and environmental/renewables — and in those areas we leverage expertise regionally. When you’ve got that capability in an industry, your ability to compete by having multiple investments around the region is enhanced.
There’s a macro trend you can see in the data year after year. The cross border share of investment and trade that is attributed to neighboring Asian countries has gone up. We also hear about it in conversations we have with companies. Cross border is a regional play and because it is larger than what it’s been in the past, we see this as opportunity for a regional fund.