Do GPs really want to give carry to operational advisors?
We do participate in professional services fees, although not in a traditional consulting model, we are more like contracted employees with advisory skill sets – so one of our partners will assume a management position, for example a CEO, COO or head of supply chain for [up to]18 months.
We would potentially be given the opportunity to be granted carried interest. The GPs [may] say they’re not necessarily opposed to that, but if they’re going to put an equity component on the table or carry incentive, they want to see [us] have some additional skin in the game so [we might] co-invest with them on the deal. Especially when you start to get into the distressed scenarios in portfolio companies, if a businesses is [in trouble], there is a very different view in terms of wanting to give equity as really an upside incentive for people to get involved and stick around through the tough times to get the value that you are trying to achieve.
We have also done direct investments and we've founded companies, but the funding is from our own private capital.
Value creation is said to be increasingly important in Asia, but isn’t much of that just talk?
It is the middle market or smaller to mid-sized funds [in Asia], so sub-$500 million, and their SME portfolio companies that we have worked with. There is increasing ‘buzz-word’ sentiment around value creation – but it is real and it is important, especially in Southeast Asia. The funds we work with are setting up value creation boards and, as part of their fundraising roadshows with LPs, they are making commitments that they are going to develop or bring in operating capabilities because that comprises some aspect of how they are going to grow and expand multiples and deliver on performance.
What’s your general approach to value creation?
We use what is effectively the GE operating system. Above and beyond the everyday business model, we layer on top an additional value imperative during each of the four fiscal quarters. For example, Q1 we do the people review, Q2 we do a strategic planning review, Q3 a process and operational set of reviews and Q4 we do financial year-end and subsequent year budgeting and projections. We make sure that on a standalone basis, each portfolio company has at least basic capability and competency in all four of those categories through the course of an operating year.
How do the business culture differences in Asian markets impact on what you do?
What is happening in China is that Chinese don’t really need foreign talent anymore and they damn sure don’t need our money, although they are interested in co-investments. So we’re finding it is becoming increasingly difficult to position as foreigners in China, which is why we leverage local resources, our China team, who are mainland guys who we’ve known since we hired them [at] GE back in the mid-nineties.
China is now a mature market [relatively], with sophisticated foreign and local players, focusing on larger companies and more complex acquisitions where you can get involved.
It is a different game in Southeast Asia, which is where China was 15 years ago. They need a lot of help at every level. They don’t have the skills or competencies yet. Specifically, they need money, operating support and supervision to execute [governance]. The operating model approach in Southeast Asia is actually now a much more interesting value proposition for the SME space.