Hong Kong Forum: Softly, softly

At Private Equity International’s Hong Kong Forum 2015, delegates agreed that the heady days of reaping spectacular returns in Asia-Pacific with minimal effort on the part of GPs are behind us.

“If you look at the excitement of Asia in this asset class, it’s decidedly off,” Thomas Kubr, executive chairman at Capital Dynamics, said on the opening panel. 

Fellow panellist Jake Williams, deputy group chief risk officer at Standard Chartered Bank, agreed.

“I think there was quite a bit of what I would describe as ‘tide-swimming’ a couple of years ago when country funds would come in and basically they saw growth in China, they didn’t really know what was going on, they weren’t bothered by relative lack of transparency, they weren’t bothered about business practices being unpredictable, they weren’t worried about de facto-ism,” Williams said. “Now I think they’re rethinking all those things that existed three, four, five years ago, and they are saying: ‘Gee, given the relative returns, we are more scared about Asia than we were then.’”

Their sentiments were echoed in a study presented by Stephen Maurer, China managing director at global advisory firm AlixPartners. The 2015 Value Creation and Operational Excellence in Asia survey, commissioned by AlixPartners and conducted by PEI’s Research & Analytics division, has yet to be officially released, but delegates at the forum were given a preview of the findings.

VALUE DRIVER

The survey, which includes more than 100 GPs with investment across Asia-Pacific with assets under management from less than $300 million to more than $5 billion, found that in Asia-Pacific, 73 percent consider operational improvement as the most important value creation lever. This compares with 49 percent in North America and Western Europe. 

In the panel discussion following the survey presentation, Martin Mok, a partner at EQT Partners Asia, said operational value-add accounted for 80 percent of his firm’s returns globally.

“If you look at the returns composition, it’s about 80 percent from sales growth or EBITDA margin improvement, and very little from deleverage or multiple expansion,” he said.

Close to 60 percent of survey respondents felt Asia-Pacific is behind mature markets when it comes to operational value creation competence, and only 37 percent describe their operational programmes as “mature” – down from 58 percent in 2014.

This year also revealed a switch from external factors driving the need for operational work to internal factors. In 2014, market forces and slowing GDP growth was considered the top driver. This time around, generally poor or immature operational management of the portfolio firm topped the list.

“It points to a story that I think would ring true, which is that people came into the market riding a growth wave,” Maurer said. “When the market changed, [they] said: ‘OK, we’re going to change our strategy in order to adjust for the external factors.’ And then they looked under the covers and found out: ‘Gee, this is going to be a lot harder than I thought it was going to be. We don’t really have all the infrastructure in place, may not necessarily have the management teams in place, don’t have the systems in place, don’t have the data in place, and so this operations stuff is going to be harder than we anticipated.’”

The GPs surveyed said the top challenge relating to value creation work in Asia-Pacific is building an operations team.

“We have in many cases fairly immature management teams from a management process data-driven decision-making kind of standpoint. And there’s a lot of competition for top talent, so finding great people and hanging on to great people is a challenge,” Maurer said.