Global private equity investor Partners Group is eyeing tech opportunities in Asia, as the sector’s growth in the region accelerates.
The Swiss alternative assets manager is expecting to allocate 15- 20% of its global tech investments to opportunities in Asia to start with, according to Cyrus Driver, now managing director of Partners’ Private Equity Technology business unit.
Partners Group has recently reorganised its business units sector-wise, from geographies previously. Driver was previously designated as managing director, Private Equity Asia.
In an interview with DealStreetAsia in Singapore, Driver notes that software-as-a-service (SaaS) businesses in the region, in particular, are potential investment targets.
“A whole generation of SaaS companies that have been venture funded in the past 10,15 years – some of them are now reaching a scale where they would need or want a global player like us,” he says.
Other areas of interest would include online financial services and classifieds. The size of investments would range between $150 million and $400 million.
While Partners Group has invested in software services providers in the US and Europe, its exposure to similar opportunities in Asia remains limited.
“In Asia, we have relatively fewer mature software product businesses. Most of them are SaaS businesses, and are fast-growing,” Driver says.
“On the tech side, and with our strategy, the opportunity set is huge in the US and Europe. In Asia, the opportunity set is still developing.”
In Asia, Partners Group’s investments include the Philippine provider of business process outsourcing (BPO) services, SPi Global, which was acquired from CVC Capital Partners Asia III in May 2017 in a transaction that valued SPi at $330 million.
Partners Group had some $109 billion in assets under management, as of December 2020. Nearly half, or 48% of it has been invested in private equity; while the remainder is in private debt, private real estate, and private infrastructure assets. The majority of its AUM is in Europe; 6% is in Asia.
In 2020 the firm invested $8.6 billion; allocations to the Asia Pacific and emerging markets amounted to 7% of capital invested during the year.
Edited excerpts from the interview:
Where are the opportunities in technology in Asia for Partners Group?
We’re exploring what we can do in faster-growing, younger segments of tech. We’re very excited about SaaS. Because we know a whole generation of SaaS companies that have been venture funded in the past 10-15 years – some of them are now reaching a scale where they would need or want a global player like us.
We still haven’t concluded which segments within the internet ecosystem we could be relevant to. There are some that are very intended for a VC firm, and there are some that are amenable to private equity.
In the US and Europe, for example, classifieds – businesses that are focused on a single country, focused by geography or by vertical – many of them are now private equity-owned, because they tend to, at some point, reach dominance in their category, then it’s very sticky. If you’re the number one or number two player in the marketplace, you don’t grow very fast from that point forward, but you’re profitable, you’re stable – private equity kind of characteristics.
We find classifieds interesting, we find fintech of high interest, broadly online financial services – there’s a lot of opportunities.
We’re still making up our minds around edtech. We like the end demand growth, we’re just not sure whether there are profitable enough models around. Or at least if there is eventual profitability visible, unit profitability.
In the West, we do a lot of software deals. Just this year, we invested in a company called Idera, which makes developer tools. We’ve invested in a company called unit4 in Europe, which makes [enterprise resource planning] solutions for small and medium enterprises. That’s the bread and butter of what we do in the West. And that will translate here as SaaS businesses.
But most of tech is still unprofitable, especially in Asia, or at least is based on the probability of profitability at some point in the future. As a PE firm, how would you assess the opportunities?
We see software businesses as one big bucket.
In Asia, we have relatively fewer mature software product businesses. Most of them are SaaS businesses and are fast-growing. If we see unit profitability, or gross margin level profitability, we can get comfortable with the fact that they are unprofitable at the EBITDA level, because we can see that they’re overspending on growth, on customer acquisition. There’s visibility, there’s a path to profitability, there is core profitability – that we can live with.
In the IT services and BPO space – there is no question that there are profitable businesses. The third segment is around internet business models, within which I would distinguish, again between B2B and B2C models.
In the B2C internet models, somewhere there is no visibility to profitability. We are not the right partner for those businesses. But there are some with at least visibility to profitability; there is profitability at gross margin level or unit economics level. And there is a long track record of that, and you can therefore judge at what scale they become profitable. We would be cautious, but we could be the right partner.
But there’s a big group of those where profitability doesn’t seem to be anyone’s concern right now, and monetisation will be figured out later. It’s not just a question of investing in growth. There we are clearly not the right partner.
[Businesses we invest in] have to be close to profitable, and they’ll have to be consistently profitable across margins, across contribution levels so that we can mathematically extrapolate to profitability. Even then, that would be a minority of the kinds of deals we do. The majority will still be focused on profitability.
How would you create value in these companies, compared to the non-tech businesses that private equity typically invests in?
We work with industry experts, who tend to be people who have built a business in the same industry in another part of the world. So we bring along an entrepreneur or an executive who has scaled that kind of business.
M&A is very often one of the levers for value creation. So we bring that capability. We have the ability to reserve more capital for acquisitions as well. And finally, when they’re headed for an IPO, we would like to believe that, our investment has a little bit more credibility as a global investment firm. Many of our portfolio companies have listed successfully.
There are significant funds that are targeting Asia, and tech. Venture capital fund sizes are also getting bigger, and they can move faster. With increasing competition for assets, and valuations rising, how do you fit in?
The majority of what we do will be buyouts. We will do some growth, minority growth deals, but only where we have a substantial seat at the table.
What we try to offer to target businesses are a global presence and genuinely active engagement. So SPi Global for example – we’ve helped source and close three acquisitions that have transformed the business. We will build out the strength of the management team. We’ve continuously funded each of these acquisitions.
We are not in a rush to be in every transaction. We will find our spots.
We may have to be cautious for a while. But some of the valuation uptick, in our view, is well deserved. We do believe that technology will keep becoming an even bigger and bigger part of what we do in every industry.
We tend to be more active in B2B businesses on the tech side. In our approach, we have a very low loss ratio. We have visibility on how we get from here to there, we have a plan of what we want to change, we want to have some control over the outcome, the ability to fix things if they go wrong, etc, that allows us to have that low loss ratio.
But then if there’s an asset that [the VC fund] likes and we like, and only 5% is available, and they can move much faster than us, then they belong there more than we do.
What returns are you expecting from investing in tech, compared to non-tech investments?
We plan for the same returns or we target the same returns. Within tech at this point, it is a really strong market for exits. So we just exited business for global logic. We made almost six times our money; it was a very large transaction. When we entered we were underwriting to approximately the same returns. The one distinction I would make is, if we enter a business that has more risk, then we can also expect a higher return.
On the tech side, and with our strategy, the opportunity set is huge in the US and Europe. In Asia, the opportunity set is still developing, because we’re not a VC. We look for control in small businesses, we look for visibility to profits in younger, fast-growing businesses. We are deliberately focused on the part of the tech ecosystem, but it’s growing.