Navis favours side pocket for future funds – Exclusive

The pan-Asian manager is considering modifying its portfolio construction philosophy for future funds to include around 15 much smaller deals alongside its core $50m to $150m range.

Navis Capital Partners intends to create a side pocket in its future regional buyout funds to make 10 to 15 smaller investments in the $10 million to $50 million range to go “deeper and smaller” into South-East Asia, its founder and managing partner Nicholas Bloy told  Private Equity International

Navis, which typically invests between $50 million to $150 million in deals across the region, has deployed 70 percent of Navis VII, its 2013-vintage $1.5 billion fund and LP sources expect the launch of Navis VIII to be some time in 2018. 

“What we have decided to do after Navis VII is to create an additional dimension to our investment mandate which is to allow for a portfolio of smaller deals to sit alongside 15 to 18 larger deals,” Bloy told PEI. “To some people this bias to include smaller deal sizes may seem odd as the tendency of fund managers is to seek ever bigger funds driven by ever bigger deal sizes. But we feel that by going deeper and smaller into our core geographies, we are doing the right thing for both our professionals and our investors.” 

Bloy said its core countries – Thailand/Indochina, Singapore/Malaysia/Indonesia and Vietnam – continuously throw up attractive smaller opportunities that the firm foregoes because these do not fit the size requirements of its current investment mandate. He noted the return profile of a smaller deal side pocket should enhance returns and create optionality for smaller deals to become bigger deals if a transformative acquisition becomes available. 

He added: “There will be some complexity – more deals in the portfolio and therefore more time and attention allocation processes required – but all the alpha is in the same bucket and all Navis professionals have the same incentive which is performance uncluttered by partial allocation to this or that country fund.

The firm will also continue applying its “rapid results philosophy” for future funds, which is all about delivering a five-year money multiple in three years, accelerating what the firm does in order to minimise the risk of a “black swan” dragging out a holding period by another three years. “If I look at the last 10 exits, which are largely from the end of Navis V and the beginning of Navis VI, data shows that the money multiple is around 2.5x and the IRR is 19 percent,” Bloy explained. “With rapid results and our next 10 exits from Fund VIII, for example, we will also generate 2.5x but the IRR on that will be 31 percent because of the acceleration.” 

Navis VII, which closed two years ago, is the first beneficiary of this philosophy and will have its first two exits in the next year, Bloy said, but he declined to comment on current performance figures.

Capital from Fund VII has been invested in Indonesian medical equipment distributor Tawada Healthcare, Vietnamese healthcare provider Hanoi French Hospital and furniture and lifestyle brand Christian Liaigre

Limited partners in Fund VII include Employees Provident Fund of Malaysia, Thailand Government Pension Fund, Employees Retirement System of Texas and British Columbia Investment Management Corporation, according to PEI data. 

He added the firm has been mulling over the past five years whether to launch a series of country-focused funds in its core countries, but decided not to proceed with it because it will not meet the aggregate needs of Navis and its LPs.

“The problem we have found and can anticipate is in getting the resource allocation and alignment right between country fund professionals, regional fund professionals and the shared resource of Navis operating partners. We want to avoid the Balkanisation of Navis, where our team gets fragmented.” 

“Ultimately the idea breaks down on the allocation of shared resources across multiple funds, which amounts to a de facto allocation of alpha between funds. This makes LPs uneasy,” he said. 

Navis manages over $5 billion in equity capital and has made 70 control investments in the region, of which about half have been exited.