Taking on the China challenge

The ‘near-term goal’ of Permira’s Asian business is to invest in Mainland China. But with a minimum equity cheque of €100 million and no team on the ground yet, getting there isn’t easy, says Henry Chen, Permira’s co-head of Asia.

Does Permira plan to open an office in Mainland China?

As we continue to progress I would say structure-wise the next stage of development would be to have an office in China. We have made investments that are really supported by the overall China economy, for example the investment in [Macau-based casino operator] Galaxy, but we have not yet made an investment in Mainland China and that is very much our near-term goal.

What kind of investments are you looking at on the Mainland?

Because we are investing out of an €9.6 billion global fund [Permira IV], there is a limit as to how much we can invest in terms of minimum size, otherwise it’s not going to move the needle. So while we are quite prepared – and quite keen – to look at minority deals, we really think of them as partnership deals with entrepreneurs with whom we feel comfortably aligned. I think Galaxy, in which we are a 20 percent shareholder in a family business, is a good example. It’s unusual in the context of Permira globally, but I think in Asia, and more specifically China, we’ve come to a point where we’re prepared to do that subject to picking the right partners. From that perspective, we’re not that different from our global peers, but I think that for minimum size we’re really looking for about €100 million in equity. This probably doesn’t enable us to look at a lot of the investments since in China, equity investment size would often range from €25 million to €75 million, but at the same time we feel we’re looking at a universe that attracts less of the local funds at the moment – they are more focused on the smaller deal side.

We focus on the sectors we know well, for example satellites [Permira last year invested $200 million in Asian Broadcast Satellite], consumer retail and apparel retail, specialty and general retail from supermarkets to frozen foods, TMT, financial services and so on. We try to pick our battles, because going into a 20 percent pre-IPO situation that is well known by everybody is not going be the successful formula for us where we are able to differentiate ourselves.

One other area we are looking at as well is helping Chinese strategics with cross-border acquisitions. It’s tricky because there are more than two parties at the table in the process: You have to first get aligned with the partner, and then eventually converse with the vendor on the other side, which is more challenging. Also, the strategics in China that are large enough to be able to look at sizable acquisitions abroad are typically state-owned, and that makes it a bit more complex, but we’ve gone through the various stages of the process, and hopefully something that makes sense will materialise in the coming year. What we offer in this space is really simple: we believe we are very well entrenched in Europe in particular. That’s attractive to a number of Chinese strategics who, in taking on a global mandate, find Europe hard to navigate, whereas the US is a lot easier to figure out from a language or culture perspective. We think that local expertise and understanding is exactly what the Chinese government and the strategics expect the value of the foreign private equity fund to bring.

How confident are you that Permira has the political connections to be successful in that space?

We have had ongoing dialogue with some of the key government agencies and state-owned enterprises from the network I brought from my investment banking days [Chen spent nine years at Goldman Sachs, ending up as co-head of general industries for Asia ex-Japan]. I think that we are quite happy with where we are in terms of the relationship with the government and major state-owned enterprises at the moment, but at the same time there is always scope to strengthen them further. If you have looked at China long enough you’ll see it’s almost like the proverb of the blind man feeling out an elephant: He’s just feeling out parts and no one really has the complete scope. I would not profess that Permira has gotten China – and all its layers of government – all figured out. We have a good set of people that we’re comfortable with, but over the next one, two, three, four years and so on, we expect to continue to build and widen those relationships.

That’s part of the thinking behind the appointment of industrial advisors. We recently appointed David Ho [as an adviser in the telecoms sector]: Obviously he has a very consistent telecoms background and we wanted him for the industry view and the network, but his government relations will also be very important to us. Having been in the most senior China role at Nokia, Siemens, Motorola, etc, David has built quite a broad web of government relationships. David’s appointment is working out very well and we will of course look for another advisor in another industry sector.

What are your recruitment plans for China?

There’s one professional joining next month [April], and we are possibly looking for two to three more people. For all of these candidates, we are looking for someone who is comfortably within the context of Mainland China. One other focus is to recruit the future head of China.

How are you finding the recruitment process in China?

It’s not easy. It has to be a subset of the talent out there and the way I define that subset is that through the time we have been recruiting, there has been a gravitational pull toward the domestic fund: There may be people who want to do buy-side opportunities who are averse to a global investment committee because they think it just takes too long to communicate China to the rest of the world. We’ve seen a few people like that in China who are really not willing to share the upside of China with the rest of the world. And then there are also those people who are very convinced that only a very local China fund can land the deals in China. We have to take out those two sets of people and what you have left is, I think, primarily driven by people who recognise that in terms of the experience, the historical perspective, the key businesses in certain sectors, and the overall technology, there’s still quite a lot to be learnt from working in a more structured global fund. Those are the candidates that we attract; and that’s where we will find a meeting of minds.

Permira invests from a global fund. Are there any thoughts on launching an RMB fund in China?

That is probably further down the line. I don’t think we think 100 percent rigidly that it’s going to be one fund for the rest of our lifetime, but it’s been our heritage for quite a while and it’s worked well, in particular for building the kind of global support that has opened up the opportunities for us. But then, we are also historically quite adaptive to movement and changes in the market, so I don’t think it’s in the near-term thinking, but it is something that we are monitoring.

How much of Permira’s focus in China is on the expansion of Western portfolio companies, for example some of the big brand names like Hugo Boss and Valentino?

Quite a bit – we do this in conjunction with our deal team because at Permira the deal team will find the investment, make the investment and then monitor the investment. We help our overall deal team have a good perspective in China and Asia, not only from a corporation sense but also on a more macro level in terms of the strategic or equity interest that might be out here. For example, one trend right now seems to be that any company with any sort of association with Asia may be looking to list itself in Hong Kong, so we try to stay in very close interaction with our various deal teams on things like that. On the other hand, having Hugo Boss and Valentino in our portfolio helps to open doors here and leads to interesting discussions – people are intrigued and Chinese entrepreneurs are quite interested in global brands like these.

Some say if you’re not already in Mainland China, it might be too late. What’s your view?

If you haven’t got a team in China or looking at China, it’s probably not too late but it’s not as easy as poaching a team, even an integrated team on the ground, to be able to go to business. We haven’t made an investment in China but that doesn’t mean that we haven’t looked at investments quite closely and extensively, and I think that’s helpful in having a collective experience of what it means to be doing deals in China. We’ve come a long way over the last two and a half years, and it’s important that we’re moving closer to the end of the continuum.