Swedish private equity firm EQT Partners, which raised its largest-ever buyout fund worth over $13 billion this year, is looking to expand its investment portfolio in the Asia-Pacific region by tapping opportunities in the mid-market and infrastructure spaces. Incidentally, the fund received 24 per cent of its commitments from Asia Pacific investors.
The firm, that is currently said to be on road to raise $800 million for its Asian mid-market fund, also set up a joint venture last year with Singapore investment company Temasek to scout for deals in the infrastructure space in Asia Pacific. It will allocate funds from its EUR 4 billion Infrastructure III vehicle that it had closed in 2017. Temasek will also spend for the selected deals with EQT, out of its own pocket, a top Asia executive with the firm has said.
EQT’s Asia exposure is currently at only 3-4 per cent but over the medium to long term, the PE player wants to have more business lines come to Asia. “There are already some movements on that (front)…over time the objective is to get other business lines – large buyout, venture capital and also get to credit,” said Martin Mok, Partner and Head of EQT Mid Market Asia, in an interaction with DEALSTREETASIA last week.
Mok added that while there is not a specific hard target in terms of percentage but EQT has been growing rapidly in Asia and hopes to have a sizable fund size growth. “We would like to grow mid market Asia in a broad range as the EQT growth rate,” he added.
Having invested $1.3 billion in Asia Pacific since 2006, the firm already has a presence in the mid market space in the region, also investing out of its EUR 1.6-billion mid market Europe fund in Asia. The next business line, as Mok noted, is infrastructure which has been successful in the firm’s core markets such as Europe and the US.
With the latest partnership with Temasek in 2017, EQT Infrastructure will scan investment opportunities in Southeast Asia, India, Korea, Japan, Australia and New Zealand. The ambition is to identify companies with existing assets within communication, transportation, energy, environmental and social infrastructure with a potential to grow.
In an interaction, the Hong Kong-based EQT executive discussed about opportunities in the Asian mid-market space, competition, valuations and its role in investee companies’ growth.
EQT has had a long presence in the Asia Pacific. How do you see the region in terms of deal flow and ease of deal-making in the mid-market space?
We have a run rate of approximately $150-200 million per year and we are targeting around $200 million investments. First of all, about mid market, many people define it differently. In the US, it can be up to a $1 billion but here in Asia, we define it as a $200 million of enterprise value and that seems to be quite applicable in our core regions which is China and Southeast Asia. Also, we do Australia, a little opportunistically but as Australia is more mature so the size is bigger than $200 million. We can go up to roughly $500 million in mid-market in Australia.
The space we are in, we see very interesting deal flows. We see about a 100 deal opportunities every year which has been pretty consistent. Usually, we get about 50 per cent of them from small brokers, 20 per cent from large auctions and then 30 per cent from sector research and proprietary deal sourcing. So, that is a healthy mix of corporate spinout and a lot more on entrepreneurs looking for a partner to cash in a little bit of equity and to put in an institutionalized process eventually to have a generation change.
How do we become different? A lot of people call themselves mid-market players but they start aping growth players and they may not be equipped with the buyout strategy that we have. We have done 180 buyout transactions globally and we have a lot of experience from those sector teams – the CEOs and the Chairmen and we have assembled about 200 industrial advisers. That becomes a force then, rather than only talking from a growth equity perspective. We say (to the entrepreneur) that we share the risk with you and share knowledge from the other regions. That makes a very powerful proposition and makes it easier for the deal to happen.
We do not find it more difficult to make a mid-market deal happen than a larger deal. A larger deal would have a confirmed seller, a large private equity or institutions and typically you are competing more on price. However, in a smaller deal, you make contact with the entrepreneur and you prove that you can help and share the risk. I would say, it is a pretty good space we are in because once you get to a certain size, the price competition also heats up.
So, would you say there is lesser competition in this space. We are also seeing many others like pension funds, family offices and wealth funds jump into the deal space in the region. Does that impact you ?
There is a lot of competition all the time. Generally more of these newer players, who traditionally are the Limited Partners (LPs) and now the lines between the LPs and the GPs are blurring. We understand that some of them like to take a co-investment approach. When we have a larger deal, we are very good at providing co-investing. For example, for our fund II, 40 per cent of our capital is offered through co-investors so we do have a track record to incorporate some of the LPs who want to invest in the deal and not in the fund or both.
What we often find is that in the mid-market space, if it is a very large fund, they do not have a bandwidth to spend 6-12 months with the entrepreneurs ahead of the deal happening. If it is a very large scale auction based on price, clearly these funds have a lot of capital and they are at an advantage as compared to a mid-market fund. While competition is always strong, we are able to do 2-4 deals every year and we are able to demonstrate a track record of good returns.
There is EQT’s Asian mid-market fund worth $800 million which was said to close last year. What is the status of the fund?
I cannot comment on fundraising. We had two funds earlier, the first one was EQT Greater China in 2006 and then we had in 2013 a mid market fund as you can see on our website, a EUR 1.05 billion fund and we tried to invest one third in Asia. While the earlier $535-million fund was purely for investing in Asia, in the later fund, we switched back to invest-in-Asia only vehicle.
EQT VIII launched this year has a huge corpus of EUR 10.75 billion and the commitments from Asia Pacific (LPs) have increased to 24 per cent. Have you seen the contribution and clout of Asian LPs increase over time and what is it that they are likely to demand?
In EQT, we have an infrastructure fund, buyout fund, mid-market space, credit fund and we are also in the venture space. The fund that you are referring to is the big buyout fund and, in that one, the Asian LPs are increasing. It was about 17-18 per cent from EQT VII and then we went up to about 20-21 per cent in EQT VIII. It is increasing in percentage and the fund size has also stepped up. So, the monetary amount is also significantly higher. We think it is well justified as the Asian institutional investors are trying to increase their returns and they are evaluating all kinds of asset classes. Private equity still remains a very strong proposition.
When you look at Europe – Nordic and German speaking – EQT has been the second largest fund raiser in the past five years because of that it is offering a very solid and focused regional approach with the larger buyout fund. This becomes a great proposition for Asian LPs and this trend is here to stay.
In terms of preference for Asian LPs, they classify us in the mid to large buyout space in Europe and that is how they have invested in EQT VIII. If it is an infrastructure offering they are evaluating a space in infrastructure category and those two are the major ones to attract Asian LPs as those are the larger ones that offer global diversification strategy for Asian LPs.
In terms of specific themes and countries, they are not very targeted. If you talk to a large sovereign or pension fund or insurance company in Asia, we have not found them to pin-point on a specific TMT trend or a Spain exposure. They are looking at buyouts in the European space, that is the category.
What are the challenges that a mid-market investor like yourself faces in Asia, in a market as diverse in size and culture. How do you wade through that?
It is true, each market here is so different in the stage of development. Different GDPs, different legal and social frameworks and themes. We have invested in this space for about 12 years now and the way we have thought about it is — China is quickly becoming EQT financing lead, evolving into looking for global leadership and outbound knowledge and basically trying to build companies that are exitable to exchange to large multinational buyers. China is half of our investments and that is the theme which is very recurrent.
When you migrate towards Hong Kong, once in a while, you could find a nice service oriented company. Then when you switch gears to Southeast Asia, we have done a lot of Singapore. You can branch out from a local business to a regional business there and we have done quite a lot of that. We did ILA in Vietnam. It is the people in the team who have done it, the experts have identified the trend and bring it in the middle of a fair likelihood expectation. The other point is that one has to find the right partners. So, yes every country is different but fundamentally it is not that different. We need to crack Indonesia and Thailand and these other markets in due course but the platform companies in Singapore have branches in these other countries so in due time we will be getting there.
What do you generally look for when entering a company and how do you seek to contribute to its growth?
We like a situation where a company has an already established industry leadership, cash flow and EBIDTA margins and they are still in the growth part of their life. They have an established leadership in a region but they can definitely use capital to grow into other regions. Then it becomes a growth buyout case or a growth co-control case.
These companies can be 5-10 years old and the entrepreneurs are basically looking for people to help them in converting the market. We have been fortunate as people do not choose us only based on price. Obviously, the bet is that we are not overpaying, we are selecting companies that have a proven track record and the team is good as it has a desire to grow and they have their skin in the game. So, that model becomes quite powerful.
Has valuation been a concern in Asia Pacific ?
People do complain there is more competition and valuation is getting out of hand and, once in a while, you get a big correction. The way we look at it is the TMT space is more subject to the wild swing and we do get many large valuation companies raising a large amount. In those late stage venture financing, it is often times subject to valuation swing and when they correct, they correct in billions not small. If you take away that space and focus on the mid-market, the valuation has not been so wild. In general, you invest in a company 7 to 10 times EBIDTA and in some sectors you may go to 11 but that has been fairly consistent.
If you look at interest rates, market valuations, all deals and the EBIDTA multiples, it is true that from vintage 2012-2013 onward, valuations are higher. The interest rate cycles being on the rise and the capital flow in the Asian economy, it is possible for companies to reprice assets. I am not sure when is the correction in pricing going to happen. However, what is important for us is that we pick a 10-year average multiple on the case of entry, we still make our required base case return. A lot of the cases, exit multiples are more conservative than the entry multiples. We have not seen valuation being a big trouble or difficulty for us.
Many mid-market companies and smaller businesses in Asia – Southeast Asia, India and China – are family businesses. Have they been more receptive over the years to PE capital? Some may fear ownership dilution or other factors.
The acceptance is always there if one can provide value add. We have a pharmacy company in China which is one of the largest in the country and, at the time of entry, we were able to convince the sellers that we deserve to be a couple of per cent higher than their share at the entry. We could do that 10 years ago. How has it changed over time? Generally you do not need to do so much education anymore and if we present some case studies of what we have done, then people understand that you are for real, there to help and add professional corporate governance value. Generally, you are not hostile, do not pick up a fight with a partner or the co-investors. We have never had situations where we have not been able to resolve things sitting down and talking. It is much easier to do it now than earlier.
EQT’s investments in Asia Pacific is a small percentage of the global profile. Is there a move to increase this share in the medium to long term and by how much ?
It is currently only 3-4 per cent of the EQT fund space in Asia and over the medium to long term we do want to have more business lines to come and there are already some movements on that. The Infrastructure team has already set up a team in Singapore and joined Temasek to look at infrastructure investment opportunities in Asia. EQT can then bring in the value added way of investing and not only the toll gate kind of infrastructure and Temasek can bring the local network. That is one way.
The credit teams also are doing a lot of activity to understand Asia. They are currently not thinking on the lines of Asia specific investment in credit so far but over time the objective is to get other business lines – large buyout business lines, venture capital – and over time also get to credit. There is not a specific hard target in terms of percentage but EQT has been growing rapidly and in terms of Asia we hope we have a sizable fund size growth. We would like to grow mid-market Asia in a broad range as the EQT growth rate.
What quantum of the infrastructure fund are you looking to allocate to Asia? Any particular focus areas?
I do not think EQT has ever mentioned a number, but it is going to be a decent number.
We have a joint effort in Singapore (with Temasek) and the two teams sit in office together and they would invest out of two pockets, the Temasek pocket and the EQT infrastructure pocket. It is not a loose deal by deal co-investment but the teams are working together. You can say it is a Mastermind co-invest opportunity.
They have also said they will look at a slightly more advanced part of Asia. So, they are not into China at the moment to fund deals but (will) look at Singapore, Hong Kong, Korea, Australia.