Lau warned that general partners (GPs) randomly or hastily putting capital to work, would only result in bad performance.
Indosuez, the wealth-management arm of Crédit Agricole, has taken a cautious approach to doing private equity (PE) deals in India due to high valuations, as well as foreign exchange fluctuations, Brenda Lau, senior director and head of private equity-Asia, at the firm, said in an interaction. With PE firms sitting on record dry powder, and market watchers touting Asia as the answer, as it can absorb capital, Lau warned that general partners (GPs) randomly or hastily putting capital to work, would only result in bad performance. “GPs will have to think twice whether it is sensible to just deploy money in a place where there are a lot of deals or in a place that they don’t know very well,” she added. Edited excerpts:
A lot of capital invested by PE that got stuck in India post the global financial crisis (GFC) is finally beginning to get recycled. PE has made a strong comeback in India. How do you see India? What are the challenges you face in India compared with China?
We have investments in India, but we take quite a cautious approach. Sometimes we see that the valuation is too high, and we are a little uncertain about the forex too. When you compare US dollar and the rupee, the difference and returns can be large. For us, we’re a little closer to China, and of course, the bank has a lot of expertise in China. In India, you really need a team that fits the culture, knows the market and they need to be sitting right there to know what’s happening. To us, both India and China have a lot of opportunities, and both are big markets. We think the India market will continue to grow.
What is your take from a PE perspective?
We see some up-and-coming managers with solid deals and track record in areas such as pharma, which is a huge opportunity. Consumer is huge, too. In India, we are also interested in payments. We’ve seen deals related to banking and financing side and feel this could be interesting.
Are you looking at the private credit space in Asia?
Yes—we are looking into it. But the market is still very small compared to the US and Europe. I think the first quarter of this year, there were maybe only 30 private debt/credit funds raising money in Asia. Of course, there’re a lot of reasons—some firms cannot get financing, and companies need money for growth. Our clients’ appetite (for this sector) is huge. In Europe, we do a lot of mezzanine and distressed (deals).
In Asia, we are still studying the market. Of course, China and India are very interesting, but the dynamics are different compared to Japan and South Korea. There’re a lot of people asking us about distressed and direct lending but we have to make sure the returns justify it and that it fits into our clients’ portfolio.
I’ve seen some of the limited partners (LPs) focusing on Asia that want to do private debt too. The appetite is there. We’ve got a global credit bucket and we are studying (this space) carefully. When our clients look at private debt, I’d say China is the first priority for them, and then India could be interesting.
How is the secondary space evolving in Asia?
On the secondary front, of course, Asia is much smaller than the US and Europe. In secondaries in Asia, sometimes it’s from GPs and sometimes it is from placement agents. We’re optimistic and we do a lot of things—fund restructuring, acquisitions of LP interest and direct secondaries.
Between 2006 and 2010, there is a lot of capital that is still stuck. We did see a lot of opportunities in China and India, but we did not do most of these deals as the valuations are still very high.
How do you view South-East Asia (SEA) where GPs are much smaller? Today, some of the large GPs have Asia-specific funds—while the sellers have a choice, these Asia-specific vehicles are pushing up valuations, and smaller GPs are finding it difficult to compete.
I think there are a lot of opportunities because there are many smaller family owned businesses that really need help. The governments here are very friendly, too, in promoting private equity investments. Some of the governments are trying to decrease the restrictions in terms of foreign ownership. SEA is benefitting from a sustained economic growth, and people are getting richer too—there is more domestic consumption and urbanization.
So, yes, valuation is higher, the GPs in SEA are smaller but the GPs we invest with are still able to find attractive deals at reasonable entry multiples.
We are quite optimistic about the growth in SEA, and this region is a very important part of our Asia strategy. We have exposure in Singapore, India, Indonesia, Malaysia and Vietnam through our GPs.
Today a lot of LPs, especially the pension funds, are doing deals directly now, especially in India and China. How has that changed the PE landscape, considering that LPs are at times competing with GPs?
I think the LPs in Asia are quick learners. Maybe 15-20 years ago, they relied on GPs to do the deals. Now, they have connections and are able to source deals by themselves. So, we see more co-investments and direct investments, and GPs are feeling the pressure too. They now have to find better deals or pay higher to compete with these LPs—some of the GPs even have to decrease their fees in order to retain their existing LPs. This creates competition and the market is getting difficult.
Chinese tech firms and conglomerates are doing a lot of deals—they are also now competing with GPs, especially in infrastructure, real estate and tech. Does this add to the pressure on GPs?
Yes, definitely. This is quite inevitable. Many clients in Asia want to do things themselves—if they own a firm, they often want to expand business and acquire other firms. They think if they have the money, resources and the team, they can do it themselves—why would they need GPs to do this for them?
Rising interest rates—will that spoil the party for PE?
I’m more worried about the US-China trade war. This may affect deal appetite.
For PE, dry powder is at a record high. Can Asia be the answer to PE’s dry powder? If any region can absorb capital and grow, it is this region.
As a GP, it is very important that they know where their expertise is and the sectors and the geographies they are investing in well. Randomly or hastily putting capital to work will only result in bad performance, and then LPs will not give them another chance. So I think GPs will have to think twice whether it is sensible to just deploy money in a place where there are a lot of deals or in a place that they don’t know very well.
We are seeing some reports in the US that some LPs are willing to wait a lot longer, and that they feel the traditional PE cycle may not generate the best exits. Besides, LPs are also willing to wait longer as, often, GPs are only flipping deals. For us, we are long-term investors but I think the mentality is different and it really depends on the LP; pension funds and endowments may be willing to wait longer. But for some LPs, anything beyond 10 years is too long for them and doesn’t fit their asset-liability model.
For us, we still stick with a 10 year-ish timeline for now. We will have to see how things develop because in the US, many funds are now raising 15-20 year-long funds. In terms of flipping deals, we are keeping an eye on that. There are many people talking about one PE firm selling to another PE firm, but that is actually value add. Maybe the first PE firm can help take them to a certain stage, and then another PE firm can help take them to a more mature stage—so we still think that there is value that can be created.
Another trend we are seeing is that there are a lot more Asian LPs. Family offices here in Asia are willing to put capital into private equity. How is the risk appetite of Asian LPs?
Asian LPs like direct deals. There are certain sectors that they want to do more in. For example, technology, because they see a lot of success stories in China, and for others, it is biotech and healthcare.
Big picture, when it comes to technology, or rather the new-age digital companies, they have received a lot of attention from investors but traditional PE players are still seen to be cautious about it. When traditional PE firms have entered tech, especially in SEA, they’ve come in only at a very late stage.
We like tech, especially disruptive technologies that change people’s lives. It is one of our core themes. Although we don’t pick sector-focused funds, we look at tech. (However), we try to avoid something that is too new. It has to be a proven technology with the right people to manage it. I don’t see many GPs in SEA doing a lot of tech deals though, and you are right, when they do, it’s usually at a later stage.
How big of a concern are valuations?
In general, when valuations are high, in Asia, it may be even higher. In Asia, we have to look at the country and the sector—if it is a very low-tech firm and you’re buying it at 20 times multiples, I’ll be a little hesitant and we have to see the growth prospects. If compound annual growth rate (CAGR) is low single digits, I’m not sure where value can be added.
Looking ahead, in terms of your deployment to GPs, will you see more allocations for PE firms in China, India or will it be SEA?
We will do a bit of everything. Definitely, China. For SEA, I think we will take a more pan-SEA approach, instead of going from country to country. We are looking at a Japan and South Korea fund as well as India and Australia. It really depends on the opportunities, our views, and where it fits into our bigger portfolio. Australia is interesting as there are so many family owned businesses that PE firms can actually add value to.
Do you also see an opportunity in SEA with the family owned businesses?
Definitely. We have friends and clients who own businesses in Malaysia and Singapore, and the next generation does not want to take over. They’re scratching their heads on who they can rely on, or who they can sell to, and we tell them that maybe, they should speak to a PE manager. We see a lot of these happening—not just in SEA, but in Japan, too. In China, it is to a lesser extent because it is still the first generation (running companies)—so, the problem is not that imminent. Earlier promoters wanted their sons to take over, but today they are more open-minded.
Since Chinese conglomerates and tech companies were competing with GPs for deals, does the slowdown in Chinese outbound investment provide a fresh window of opportunity for GPs?
Could be. Last year, in the case of Europe, there were actually fewer Chinese buyers—so, to an extent, there are opportunities for other buyers like PE managers. Going forward, I think it really depends on the relationship with the US, too—that affects the appetite of these Chinese companies to acquire companies elsewhere. So, it’s hard to say.
In SEA, apart from Vietnam, most markets are not doing too well. Does this provide an opportunity for PE to take many of the listed companies private, because the listed entity may not be capturing the right valuation for the firm? Once privatized, GPs can look at doing a slew of value additions and re-listing them later. Yes, it is an opportunity. Asia is a very scattered market, and there is no single currency, and in general, it is still developing.