What links a Chinese spa operator, a Korean waste treatment provider and a Middle-Eastern tissue manufacturer? They are three of the 35 companies in the portfolio of Standard Chartered Private Equity, which spun out of its parent bank as part of a deal that won Private Equity International‘s 2018 award for Secondaries Deal of the Year in Asia.
The deal involved London-listed investment firm ICG‘s strategic equity group acquiring a majority of the PE unit’s portfolio from the balance sheet of Standard Chartered Bank for £790 million ($996 million; €878 million). A team of 55 exited with it, taking the name Affirma Capital and receiving an additional £316 million from ICG to make follow-on investments.
Not only is this the largest complex emerging markets secondaries deal so far, it highlights how much the industry has evolved and how specialised buyers have become.
Long time coming
The chain of events that led to the spin-out began in 2015 when SCPE’s portfolio took a big hit. This was partly due to the collapse of commodities prices, which hurt many of the African countries where the firm’s portfolio companies were based. That year, income from the principal finance unit, comprising the private equity and real estate investment businesses, declined 78 percent year-on-year, according to its annual report.
Standard Chartered Bank, which was already using the secondaries market to reduce its exposure to private equity in line with new regulatory requirements, insisted it had no desire to exit completely. In June 2015, it sold a strip of its portfolio worth $700 million to Goldman Sachs Asset Management and LGT Capital Partners, having offloaded a $500 million strip to a consortium led by Coller Capital six months prior. Partners Group, Strategic Partners, GIC, Abu Dhabi Investment Authority and National Pension Service of Korea also gained access through the secondaries market, according to a spokeswoman for Standard Chartered.
In late 2016, with the bank struggling for profitability, chief executive Bill Winters rolled out a new strategy. The bank was to double down on its core corporate and retail banking businesses and retrench from non-core areas, of which private equity was one. Credit Suisse, which declined to comment for this piece, was brought in to help achieve this.
“The available options were a run-off of the portfolio or a spin-out of the business,” a person with knowledge of the events told Secondaries Investor. “They decided to prioritise the real estate vertical first, which was sold to Actis in a transaction that closed in the middle of 2018. Once that process was fairly advanced, they turned their attention to private equity.”
Too big, too complicated
Initially, the proposed spinout was met with some skepticism. Speaking to PEI in July, a Hong Kong-based private equity professional suggested it was a mistake to try and spin the whole business out at once, given its geographically diverse holdings. The Asia business should be split from the Africa business, they said.
Doubts also began to creep in about Standard Chartered Bank as a committed counterparty to any potential deal. In November 2016, it sacked PE unit head Joe Stevens after disagreements on price caused an attempted management buyout to collapse, as PEI reported in 2017.
“This sale has been going on for too long,” said a Hong Kong-based placement agent in July last year. “With the number of spin-out attempts, it wasn’t clear whether SCPE was really a motivated seller or not. Maybe they are now.”
The earlier strip sales were a useful de-risking tool for the bank but presented a challenge. The deals had made Standard Chartered a manager of third-party funds and it was bound by LPA obligations, including the right of LPs to approve the sale of the GP. Would groups such as Coller, Goldman and Partners Group want their money managed by a GP whose largest LP by some distance is another secondaries fund?
According to a source familiar with the process, around Easter 2018, Credit Suisse kicked off a two-round auction marked by “robust” interest. The market was rife with gossip, with a number of the larger secondaries players and several sovereign wealth funds linked to the spin-out.
The portfolio presented a challenge in that, while it was diverse in private equity terms, it was outside the comfort zone of those secondaries firms whose idea of diversity is acquiring positions in hundreds, not just tens, of companies.
The deal would also involve spending a lot of time in the air, flying from continent to continent, absorbing and synthesising information on 35 companies in entirely different industries with varying risk profiles and, at the end, having to come up with a single price.
ICG’s strategic equity team was well suited to underwrite this type of deal. Led by Andrew Hawkins, who spent eight years at Palamon Capital Partners, the team comprises investment professionals with direct investment backgrounds. The firm tried to block out the noise of geography and industry, using bottom-up analysis to come up with 35 cashflow assumptions. Even accounting for a reasonable margin of error, on aggregate it looked like a good deal.
“This is a portfolio of high-quality assets, managed by a team that we have confidence in,” said Ricardo Lombardi, a London-based managing director with ICG. “It represented an opportunity to move into a new geography where the market for complex secondaries is not yet developed and where we would like to establish a significant presence.”
He added: “Sentiment towards Asia and emerging markets was negative [at the time], which allowed for compelling transaction dynamics.”
SCPE’s prospects had improved in other ways since 2015. In November 2016, former global co-head of private equity Nainesh Jaisingh took full charge and was given the responsibility of managing the asset disposals. With him at the wheel, SCPE made some profitable exits and returned capital to third-party investors, including selling its stake in Indian transmission infrastructure business Sterlite Power for 2x money in January 2018.
The portfolio is also more diversified than it was, according to a source with knowledge of it. In November 2017, for example, it invested $80 million in the take-private of Singapore-headquartered crane hire company Tat Hong, the kind of firm that could benefit from the lower oil and gas prices that troubled the portfolio in 2015.
Happy with the price, the performance of the team and the fact that it would be extracted in full and not broken up, the LPs gave the green light.
ICG’s relationship with Affirma is unusual by secondaries standards. It is a limited partner that represents a sizeable chunk of the firm’s investor base. It is a provider of secondaries capital that comes from a direct investing background, used to taking a hands-on approach.
Lombardi is in frequent contact with the team at Affirma, asking questions and making suggestions through text message. The quarterly updates that an LP typically receives are not enough in this situation. He is quick to emphasise ICG’s role as a partner, not a boss.
“Building trust with our underlying GPs enables a direct and constructive line of communication which we hope can add value and optimise GP/LP alignment,” he said. “We are in this for the long term, so treating others with respect, fairness and transparency is prioritised above all.”
Between a secondaries firm that wants a relationship with its GP and a diverse portfolio that requires a backer with an appetite for concentrated bets, the deal is marked by contradictions. It seemed an apt winner at a time when innovation is changing the very purpose and definition of the secondaries market.