Cashed out in Macau

Galaxy is just one of the casinos lighting up the skyline of Macau, the former Portuguese colony that reported $33.5 billion in gaming revenues in 2011 – five times more than Las Vegas, according to Liberum Capital data.

The old adage suggests that the casino always wins. But UK-headquartered private equity firm Permira has fared better than most from Galaxy’s gaming tables. In late 2007, the firm invested €594 million to buy a 20 percent stake in Hong Kong-listed Galaxy. Last year, it sold 34 percent of its Galaxy holdings, realising $615 million, a 2.2x return. This August, it reported a roughly 2x return after a further $755 million partial exit.

Back in 2007, the casino (then named Star World) was just a “small property” across the street from mega casino Wynn, explains Henry Chen, co-head of Asia for Permira.

The deal was neither a financial engineering nor an operational play, according to Chen. Permira did recruit chief financial officer Robert Drake and chief operating officer Michael Mecca from Las Vegas, and managed the cash flow carefully. Aside from that, it just watched the business grow.

“This was not a usual Permira deal where we have a majority and drive the board, which drives the management and business,” he says. “The investment thesis was centred around the fact that Macau is the only legalised place for gambling in China. So we saw significant upside through the growth of the Macau market.”

Its timing was perfect. Since 2007, gaming revenue in Macau has grown on average 35 percent each year, according to Liberum.

Macau casino investment is not easy, however. The well-publicised influence of organised crime poses extraordinary risk for investors, according to Jack Clode, founding partner of risk consultancy firm Blackpeak Group. This has kept private equity at bay, with almost no other deal activity in the special administrative region.

Officials from Permira say identifying links to organised crime was a “significant focus” for the firm when it assessed the investment.

“We did background checks to look into the [people involved], the entity, the junket operators – to see if in any of the relationships there was something that would not only pose a business risk but also a reputational risk,” says Chen.

Clode says the biggest risk for private equity firms is getting a license suspended by Macau regulators if the casino has been involved in corruption or with junket operators using violence against gambling addicts unable to pay their debts. This could be highly detrimental to returns and reputation.

Either way, investors looking for a future casino jackpot may be disappointed. Although Permira still holds roughly 7 percent of its original 20 percent stake in Galaxy, Chen is sceptical about future casino investments.

“Now there is categorically no cash need for any of the six [casino] operators. Any of [them] could comfortably fund the next phase of construction with operating cash flows and debt financing.”

Have other firms missed the ferry? Chen thinks so. “It could be quite possible that we have made the last private equity investment in Macau.”