Asia presents a different set of challenges for operating partners when compared with markets such as the US, delegates heard at Private Equity International’s Operating Partners & Value Creation Forum: Asia in Singapore on Thursday.
In Asia, where the numeric shareholding percentage in a given portfolio company means less that it does it the West, mindset is more important than organisation or design when it comes to operating partner models.
Here are three key takeaways from the forum.
Communicating operating partners’ roles to LPs is crucial
For firms considering establishing an operating partners team, it is critical that they decide on the common language and vocabulary they will use to describe this function.
“Don’t hire anyone until you know how you’re going to explain this to LPs and how specifically you’re going to tie that to the capabilities that it adds to your fund,” said Shane Lauf, a Hong Kong-based principal at Permira. If you can figure out how to explain the role of your operating partners team to your LPs, you have won the right to start explaining it to management teams, and if that makes sense to them, hiring can begin, he added.
“There have been a lot of examples where people have got that a little bit back to front and have had to course correct with ultimately what are fairly expensive resources and lost a lot of time doing so,” Lauf said.
Measure, measure, measure
For Clayton, Dubilier & Rice – the firm that introduced operating partners to the industry – focusing on measurable change is critical. Managing director James Ahn said his firm brings in a third-party accounting firm every quarter to look through CD&R’s results and break down how it generated its returns. He added that about 80 percent of the firm’s value creation always comes from EBITDA growth, not from leveraging multiple expansion: “That’s something we’re constantly tracking because that’s how we know whether we are doing something differentiated and value added.”
On-site due diligence in the pre-deal stage can reveal important surprises
Brian Bunker, Hong Kong-based managing director at Riverside, shared a “horror story” that illustrates the importance of operational due diligence.
“We’re looking at a company about two hours outside of Shanghai in windows [manufacturing],” Bunker said. “I arrived at the factory to see a cordon of Chinese police. Inside the cordon of Chinese police there was a cordon of very irate demonstrators. I naturally thought there were problems here with staff, bonuses etc, so I asked one of the senior policemen what was going on. He said that they were not staff, the staff were all inside. These are very irate suppliers who haven’t been paid because the company is bankrupt. That was the end of the due diligence.”