Marks: Value creation unproven in Asia

The founder of Oaktree is unconvinced about private equity in the region, but is bullish on distressed debt

Private equity firms should adopt a “go-slow attitude” in Asia when investing with the intention to make operational changes in their portfolio companies, Howard Marks said at a media briefing in Hong Kong today.

The Oaktree Capital Management founder and chairman said, “In the [US] or Europe, most private equity investing takes the form of buying whole companies. In Asia, that’s harder to do, much of the private equity investing is buying minority interests and that raises the question of whether you can add value.”

There have been questions raised by industry professionals over whether private equity can make money in Asia with minority stakes, given the difficulties faced when it comes to exit. An exit backlog in China and India has plagued GPs in recent years, with many trying to do more buyouts in the region to avoid further difficulties.

The issue has now extended to firms’ ability to generate value through operational changes due to their lack of control.

Marks continued, “When you attempt to transplant an investment strategy, you have to be very conscious of the economic and even cultural differences and I think it calls for a very go-slow attitude.”

He also admitted that Oaktree is not sold on private equity in Asia as a whole.

“Oaktree is primarily characterised by three words – credit, value [and] opportunistic. To be a private equity investor, especially in Asia, you probably have to be equity, growth and strategic. So for us to make a big play in Asian private equity we would probably have to retool, and that is a serious decision we haven’t decided we want to make [or] attempt, because when you attempt a transition it is not always certain to work.”

Nevertheless, Oaktree continues to look for distressed debt opportunities in Asia, where they have enjoyed some success.

As well as being a senior lender in the $3.4 billion debt-for-equity swap of Nine Entertainment, owned by CVC Capital Partners in Australia, in November the firm signed an agreement with China Cinda Asset Management to jointly invest in distressed assets in China and to cooperate in distressed investments outside China, Private Equity International reported earlier. 

Each party committed up to $500 million to invest, with the firm looking at more opportunities like this in China, Marks said.

“The corporate debt market here has grown quite a lot in the last 10 years. There is more corporate debt out there and in tougher times there will be plenty of distress.”

Oaktree’s investment in China Cinda, which was intended as a financial investment as well as a strategic tie-up to expose the firm to the China market, has been successful.

“We made an investment [in China Cinda recently], and this is something we are very pleased to have done and we are gaining exposure to the Chinese distressed debt market, and learning and growing as we had expected. We would do it again.”