Former L Catterton managing partner and Aspirational Consumer Lifestyle Corp CEO Ravi Thakran is training sights on the more developed parts of Asia (China, Japan and Korea) as well as countries still on the path to development (India and Southeast Asia) for investments from his two private equity funds.
GCC Asia Growth Fund, a small-cap investment vehicle, will focus on the Middle East, India and the emerging markets in Southeast Asia, while Asia 3.0, a mid-cap fund, will look at investments in Japan, Korea China, Southeast Asia and Australia.
Speaking at DealStreetAsia’s Asia PE-VC Summit 2020, Thakran said, “Asia 3.0 is all about building world-class consumer brands. Most Asian entrepreneurs come to us, not for capital, but for the value add: particularly when navigating the journey from product to brand. They do not want to learn how to make the product cheaper, or earn more gross margin, but on how to sell it for a better price by becoming a brand.”
He was speaking to Stefania Palma, Singapore correspondent, Financial Times, in a keynote session titled ‘SPACs & building global consumer brands – The Asia opportunity’.
Thakran left L Catterton Asia earlier this year as managing partner and chairman and LVMH as group president, south and Southeast Asia and Australia /New Zealand. However, both LVMH and L Catterton remain partners in a SPAC that Thakran is putting together that intends to bring European and American companies to Asia and build them to be listed on the NYSE.
The SPAC will have a broad focus on categories that have matured in the US and Europe but are just picking up steam in the Asia region: health, wellness, plant-based proteins and milk alternatives.
Read on to find out more about Thakran’s response to critiques of SPACs and views on why Asia will lead the US and Europe in recovering from COVID-19.
Stefania Palma (SP): First off, I wanted to talk about your changing role at L Catterton Asia. You’ve headed it for a very long time and are now chairman emeritus. What spurred this transition and how does your role now differ?
Ravi Thakran (RT): I have concluded my 20-year-journey with LVMH a couple of weeks ago and also my 10-year-journey with L Catterton to concentrate on my new ventures – Asia 3.0 and the SPAC. In the case of the SPAC, LVMH and L Catterton remain partners. Our Asia 3.0 is a venture where I’m being joined by 10 of the partners who were with me in L Catterton. Asia 3.0 will concentrate on mid-cap: over $50 million to $200 million with a focus on Japan, Korea, China, Southeast Asia and Australia.
We also have another platform called GCC Asia Growth Fund, which is a small-cap $10-50 million ticket investment vehicle, focusing more on GCC (the Gulf Cooperation Council which includes Bahrain, Oman, Qatar, UAE and Saudi Arabia), Southeast Asia and India.
The SPAC focuses on American or European brands that we can bring into Asia, provide contextual intelligence on the region and build them to be listed in New York.
The Asia 3.0 PE fund aims to raise $1 billion to $1.5 billion, targeting Asia’s consumer industry. Could you tell us more about the companies and entrepreneurs that are you looking for via Asia 3.0?
Let me first define why it is Asia 3.0.
In the 1980s and 1990s, Asia played out as 1.0 – emerging markets like China, Southeast Asia and India. It started with China’s opening in 1979, India’s real opening in 1991, and everyone else in between. Asia became the factory of the world. We brought 500 million people out of poverty and started making everything that required cheap labour.
Over the last 20 years, we saw Asia 2.0. We were not satisfied with making cheap goods but wanted to move to sophisticated products. They required quality manpower, vertically integrated systems, global processes and world-class physical infrastructure. Asia has already built all of that. Today, if you land in LaGuardia Airport, you realise that it is the US that needs infrastructure, more than China or Southeast Asia.
Via Asia 2.0, we brought a billion people out of poverty. Today, we manufacture everything from iPhones to cars and aircraft. However, we missed out on one big area.
So far, there have been brands that have served local populations in China, India and Southeast Asia. Asia 3.0 will be all about building world-class consumer brands. In the next two decades, Asia will produce the same amount of growth that it did in the last 40 years. This is the largest economic expansion in the history of the world. And consumption is going to drive this GDP growth.
Having focused on the consumer segment, we want to be a catalyst in this change. And to help Asian entrepreneurs in sectors like fashion, beauty, health, wellness and fitness that have become fairly developed in America, Europe and parts of Asia. Emerging Asia is just coming into all these things in a big way.
When do you expect to actually hit the first and the final close?
The first close will be in quarter one and the final ideally by quarter two or maximum quarter three next year. However, we will start investing from quarter one, because we have a lot of anchors already with us.
We are already chasing some fantastic assets and have a very good pipeline in the market across the categories that I mentioned.
Some of the sectors that you will be focusing on depend on discretionary spending. And right now, we are in a full-blown crisis, where the consequences and aftermath are still unclear. To what extent do you think COVID might impact these sectors? How could that affect your plans?
This particular recession is more severe than the great financial crisis. At that time, it was about liquidity and banks. Currently, it’s not so much about lifestyle as life itself. But then, for various reasons liquidity this time is not an issue. In fact, there is almost too much liquidity across public markets, and private equity, with lots of dry powder.
This is a unique situation. On the one hand, the pandemic effect will certainly keep things depressed for another 18 to 24 months. On the other, liquidity is available in a big way. While valuations are depressed given the environment, there is a lot of money chasing quality assets.
Our focus always is on the number one or two in each category. Most of these guys are not looking for capital, even in these tough times. They’re not highly leveraged and are highly profitable businesses. They come to us not for capital, but for the value add: particularly when navigating the journey from product to brand.
Most Asian entrepreneurs want to learn how to sell a product for a better price by becoming a brand, and not how to make the product cheaper, or earn more gross margin. Branding, presentation, packaging, storytelling, narrative building, influencer strategy, social media strategy – these are elements that we can bring to them, and therefore, get a much better valuation than would be available to a pure financial investor.
Do you believe Asia has the possibility to create multiple billion-dollar companies – the kind that you have helped grow during your time at L Catterton? Do you have specific markets in mind where you think it could happen the quickest?
China is a very obvious market. It provides half of the GDP growth for the Asia region. It has a critical mass. A lot of brands are emerging in the Chinese market, which could potentially be good not only for China but could start going regional first and then global.
Secondly, there are very good sparks coming from Japan and Korea, which have already done well on innovation and creativity but are not very good at storytelling. In Japan, you will see phenomenal brands – for instance, ASICS in sports, Royce in chocolate and confectionery and Seiko in watches. The quality is as good as any Western brand.
However, [areas like] marketing is where we could really help. Today organic beauty is becoming a key play with traceability of ingredients, provenance and heritage. Japan and Korea could be huge in that space.
While we make superlative products with great provenance and heritage, we need to learn from the west on how to tell the story better and create an emotional bond with the customers. That intangible value creation, the branding piece is extremely important.
Markets like Australia and New Zealand have been very famous for high-quality food, and alternative food solutions like plant-based proteins, milk alternatives, etc as well as for wine. It is also a market which is into fitness as much as the United States, if not more. We believe Australia will continue to generate a lot of these innovative ideas. We need to pick them up and see how we can build a bridge for Australia with mainstream Asia.
China is the mainstream arena which will be 40-50 per cent source of our investment. Japan, Korea, and Australia will all be strong verticals.
While individually each country in Southeast Asia lacks scale, collectively it is a phenomenal market. We used to say in LVMH, that if you put a SEA together, it will automatically be in the top five markets of the world. And we need to start considering it as a bloc.
I see a lot of sparks in high-growth markets like Vietnam, the Philippines and Indonesia. There are some unique categories emerging – for instance cosmetics business out of Indonesia, with very good brands. But all of these things are in the early stages. You can pick them up at this stage and build them into the next billion-dollar-plus brands. And so, I am very sure we will complete our quest of building 25 billion-dollar brands in the next decade.
To shift tracks to the SPAC – you raised $225 million via a SPAC listing in New York. Why did you opt for this type of vehicle at this moment in time?
There were two reasons. Asia in the last decade provided 62 per cent of GDP growth to the world. In the next decade, it will be the same or more. Asian economies have come out of the recovery phase much faster than the West which is still struggling. China is already back in growth and other Asian economies are going to follow suit. Over the next decade, if 60 per cent of GDP growth is coming from Asia, if consumption is growing at three times the speed of the West, obviously Western brands, be they American or European, will have to look at how to gain access to this market. Now, Asia is not a monolith. Its markets like Japan, Korea, China, Indonesia, India and Saudi Arabia are very complex and hard to penetrate.
Brand after brand from the west over decades have tried – few have succeeded and many have not. We have had the pleasure of working with companies like Apple, Google, LVMH, Nike, Zara. We have done it over the last 35 to 40 years, so many times. But the key element of all of that was understanding the contextual intelligence of each market and its nuances. And then adapting and adopting to that market to create success. My colleague Mark Bedingham who led Moet Hennessy started working on it when it was considered a cheap drink for taxi drivers in Hong Kong. And now it is by far the number one brand for spirits in China. Similarly, the Japanese didn’t drink champagne. And now Japan is the leading market for champagne in the world because they focused on the 25-45-year-old women category. Such nuances are the reason for our success.
There are very good brands in America, particularly in the categories that I mentioned – health, wellness, plant-based, protein, milk alternatives, etc, which have gained great traction. But they do not have a real bridge to Asia. We can help build that bridge. Secondly, in the SPAC world, 90 per cent have been raised by financial investors. And only 10 per cent by people with strong operating knowledge. When the dust settles, and after a lot of studies are done on SPACs, it will emerge that SPACs led by operating managers and where there was an X factor of either market contextual intelligence or deep knowledge of how to build brands would stand out. We, therefore, are rightly placed to exploit this particular segment in a good way.
Could you give us more detail in terms of timeframe and identifying the targets that you are looking for?
We are already at a fairly advanced level of discussion with half a dozen brands from the US and a couple from Europe. We have 24 months, but within the next six to eight, we should be able to bring an asset to the market. We have some very good and famous brands – I have signed NDAs and so cannot name them. But broadly, wellness and sustainable consumption are huge categories. Spirits are a very unique category where we have in-depth knowledge. All of these are looking very good.
There has been an absolute boom in the SPAC market, especially in the US. Analysts believe these vehicles have a bit of a flawed incentive mechanism. Sponsors of SPACs stand to potentially benefit irrespective of the performance of the company that they end up taking public. It doesn’t create a necessarily equitable, or even sustainable financial vehicle. Bill Ackman in the FT has called SPACs one of the greatest gigs ever for the sponsor. As a sponsor yourself, do you agree?
I read that article and saw the amount of excitement it generated within the industry and outside. Bill and Chamath (Palihapitiya) have been speaking a lot on the subject.
I genuinely believe that the guys who stand tall are the ones who look not at the short term but a clear mid-to-long term. We bring an asset to the market, which we are going to stay on with and invest further than just our original risk capital.
We will not invest in an asset when there is only a short term interest involved. We are looking at assets that are already doing very well in America but haven’t really penetrated Asia. We want to stay with them for the next 5 to 10 years to help them build and get sustainable growth in place.
Eventually, you have the strength of operating guys who have contextual intelligence on the market, but also people who stay on with asset and build it. It’s all about the reputation of what you did last time. If you want to continue to play in the SPAC vertical, I genuinely hope the sponsors will really take the mid to long-term view.
The deadlines that SPACs face in terms of finding a target and taking it public tends to be up to 24 months. As you get closer to that deadline, the quality of the targets might essentially drop, spurring a flurry of reverse listings that actually end up making the market unsustainable. To what degree are you worried about this? A number of analysts are calling SPAC listings a bubble for 2020.
This year, in particular, the activity has been very robust, and a lot of SPACS have been raised. There’s a re-trade market opening up – some people are ready to discuss selling their present SPAC to someone else who will take on the risk capital. If people want to just ride the bandwagon because it’s hot today, I would strongly advise them not to. Your risk capital could really become the risk with no capital left.
If you’re just saying ‘why don’t we just dive in?’, it is not so easy. 24 months is not necessarily critical. The moment you cross 12 or 14 months, the pressure starts to rise.
It is not only the quality of an asset – the seller knows that you have very limited time. As the valuation discussion starts to get tougher, the bargaining power changes. I genuinely believe that people who have a deep knowledge of the sector they want to invest in, and who can bring a true value-add, people with a great skill set and who can draw in talent to the platform should stay. The others really should stay out.
The dry powder for private equity is at an all-time high combined with the increasing number of SPAC listings. Are you afraid of valuations getting pushed up in a way that truly does not make sense for the market?
There are two very contrarian trends emerging. On one hand, it should be obvious that when you have a pandemic and headwinds, typically valuations become a little more reasonable. That has been the case, historically. The great financial crisis led to two years of a great vintage. People who invested post that were able to harvest much better thereafter.
But this time, as I mentioned, the big issue is, on one hand, a headwind particularly in some categories. But on the other hand, liquidity is enormous. As a result, a quality asset will still be able to command a good valuation. Things are very buoyant in companies that are in a high growth mode, in the right categories driving the mega themes of wellness, fitness, etc.
Of course, one has to be careful not to be chasing superfluous targets. The next 18 to 24 months, we’ll still see deflationary pressures. Seven or eight years after that will be great growth. I hope that the vaccine will get distributed fast enough and we’ll all be back to recovery.
On Asia-backed SPACs: the proceeds from these kinds of vehicles have actually surged threefold from 2019 to this year as of October, but they still account for a very small percentage of SPACs listed in the US. Will we see this percentage increase?
I am still learning. Mature economies like Japan have their own robust capital market. Technology is hot across all markets – particularly so in America.
Technology that enables people to connect to a large Asian consumer base, becomes doubly hot. Companies like SEA or Razer certainly have been good candidates. But in terms of pure consumption play, when you take a business for listing in New York, you would want the investing community to know the business and category, so that they can relate to it.
On that front, unless we have concepts in Asia, which are already are resonating well outside, it will be difficult. It would need good storytelling to the investing community first, on what they are about. I hope that going forward, we can take a respectable share in this by bringing good quality assets to market.