Valuations in Asia a challenge, continue to be quite high: EQT Partners’ Tak Wai Chung

A surge in competition among private equity (PE) players and advent of a new class of investors — pension funds, family offices and insurance firms — keen on deploying large amounts of capital in Asia Pacific do not seem to have deterred Swedish PE firm EQT Partners as the firm claims it is currently witnessing a strong deal flow in the region.

Nevertheless, valuations in Asia have remained a challenge, remaining “quite high overall”, the global firm’s Partner and Head of Southeast Asia, Tak Wai Chung, told DEALSTREETASIA in an interaction this week.

The firm, which has raised 24 funds and raised enormous amounts of capital — $43.6 billion (EUR 37 billion) — since it was formed in 1994, has in fact, ramped up its activities in the Asia Pacific region in the last four years, deploying almost $200 million each year in the mid-market control and co-control space, Chung said.

“We are, however, able to secure transactions at very reasonable valuation multiples with reference to the comparables,” Chung noted while commenting on the high valuations.

The firm globally covers six sectors, with an emphasis on business services, healthcare and consumer retail as these three sectors have generated quite strong deal flows for EQT.

“If you look at the capital deployed over a couple of years, the activity has ramped up for us, be it in China, South East Asia or Australia. The EQT Mid Market Asia investment strategy has deployed more than $780 million (including co-investments) between Dec 2013 and Aug 2017 across Greater China, SEA and Australia in 8 transactions,” said Chung.

The firm is also branching out in other parts of Southeast Asia like Malaysia and Vietnam with an investment in Vietnam’s English Language Training (ELT) company ILA Vietnam earlier this month.

Edited Excerpts:

You have been in Asia for over a decade now. Has the company’s activities slowed down in the region, particularly Southeast Asia, in the last couple of years with more people coming in and heightened deal activities?

EQT has ramped up activities in the last couple of years across the board. If you look at the capital deployed over a couple of years, the activity has ramped up for us, be it in China, South East Asia or Australia. The EQT Mid Market Asia investment strategy has deployed more than $780 million (including co-investments) between Dec 2013 and Aug 2017 across Greater China, SEA and Australia in eight transactions.

That’s averaging more than $200 million annually in the mid-market control and co-control space. We see strong deal flows these days. EQT is also branching out within Southeast Asia, including Malaysia and Vietnam where there are a lot of opportunities.

You normally stick to $30-100 million range in deal sizes. Considering this, what kind of deal flow do you foresee in the region? Singapore and Indonesia look strong but what about other markets in Southeast Asia?

It is between $30-100 million equity and obviously, in partnerships with EQT’s LPs for bigger cheques. Late last year and this year, two investments were closed in Greater China, and also one in Vietnam. All of those are in the sweet spots in terms of equity. EQT covers six sectors globally, and we particularly spend more time on business services, healthcare and consumer retail. These three sectors have generated quite strong deal flows for us.

Mid-market can mean different sizes for different countries. For instance, mid-market in Singapore could be different from Vietnam or Myanmar. So, when you see the region as a whole, what are the big challenges in terms of management, disclosure, and corporate compliance?

On the corporate front, one is the presentation of the financials, which calls for a structured approach in terms of accounting principles and financial control. Second is the scale in terms of some of these businesses. We do take advantage of some of these dynamics. The deals would be smaller in nature but then mid-market segment throws a lot of opportunities, and that’s exactly why we find this space so attractive. They are probably slightly smaller in scale.

For instance, in EQT’s case, we develop themes globally and adapt them locally. In.Corp (in Singapore) was a result of a sector approach where we identified that the sector is particularly active and went to source the transaction on our own. It has resulted in a good outcome, where you are not competing in a very heated auction. You actually get some interesting deal flows that way. Sector-approach is key to supplement these intermediated processes.

What are the key sectors in this region where it’s not super-competitive looking at valuations? The sectors where deals are still available, where you can acquire companies and make a significant difference?

We see interesting deals closing in the business services sector. EQT has invested in a number of services companies in Greater China and Southeast Asia.

We started with Dataflow, which is a credential verification business, followed by an investment in a supply chain audit and solutions firm called ELEVATE, and In.Corp was the third one which is a buy-and-build strategy in corporate secretarial services. The fourth investment was in GPA that is into premium speciality packaging solutions.

Services offer a very interesting opportunity to us in the sense that there are a lot of sub-segments in the space where you are able to find sector champions in the mid-market equity size bucket. Here, you do not need to compete in a heated auction but in a smaller sub-segment where they will have a specific focus. You can buy number one or number two in those sub-segments. At the same time, there’s a lot of consolidation opportunities as these sectors are quite fragmented, where sub-scale players can grow inorganically. So, we see quite interesting opportunities in the services space.

You can buy number one or number two in those sub-segments. At the same time, there’s a lot of consolidation opportunities as these sectors are quite fragmented, where sub-scale players can grow inorganically. So, we see quite interesting opportunities in the services space.

Healthcare, too, continues to be very interesting. It is one of the largest verticals for EQT overall globally, and there are a number of interesting investments going on in the space currently. EQT has invested in LaoBaiXing, which is one of the largest discount pharmacy retail chains in China, and I-MED, which is Australia’s largest medical imaging provider.

So, that is done in conjunction with a lot of expertise that we have generated from EQT’s healthcare vertical globally. We are also using the theme-based approach to source deals in healthcare. And we have found good value in healthcare in general. It is just that the sector is more pricey.

Valuation is a huge concern because everybody is looking at healthcare across all regions.

One of the things we leverage is definitely EQT’s industrial advisor’s network. This is done globally where we employ ex-CEOs and ex-chairmen of large global companies. As advisors, they are very important for EQT in all the processes from sourcing to due diligence and overall management, and they also invest into the companies.

The network consists of more than 250 independent Industrial Advisors, of which about 40 are based in Asia. So they are very seasoned managers. In sourcing, for example, an Australian deal, we used an Industrial Advisor, who got us a very good valuation. So, they help EQT in value creation. That approach has been in use in the European markets and has been deployed in the Asian market too and is delivering good results.

Is that how you source local expertise because being a global player, you would need local expertise to source the deal?

EQT also competes with the local firms but at the same time what we bring to the table is also potentially something different. What we offer is a global perspective. In China, the investment in Qinyuan Bakery, the company was a local one, founded by two founders and now about 25 years old, and had a network of 200 stores in 2010. Back then, it started out as a minority investment, a typical growth expansion round.

They were looking for an investor for some 20 per cent stake in the business and we were able to showcase EQT’s value add. So they were looking at specific technology to bring into the production and EQT actually did a bakery manufacturing deal in Finland called Vaasan & Vaasan, and we were able to get the ex-CEO as an Industrial Advisor.

He helped us with due diligence and after closing helped bring the production technology from Europe into China. That boosted Qinyuan’s growth and generated over 20 per cent same-store sales growth for the company at its peak.

EQT has a strong and leading position in Europe which is one of the key propositions to help entrepreneurs to expand. For the ELEVATE transaction, even though we were competing in an intermediated process, EQT was able to bring in European clients for the target company, thereby demonstrating a concrete value add to the business, and in the end, winning the process.

Geographical expansion is also important for many businesses and in terms of corporate governance and management structure, we are able to bring in different perspectives to upgrade the management structure. In some of these investments EQT has made, for instance in traditional businesses like inspection or background screening, we help them look at monetizing value of data in their businesses that is a big theme these days.

Does your VC arm also screen deals?

They do. Operationally, they primarily focus on European investments. It helps to have a venture team if you are looking at very interesting businesses in the digital or software world and they help us with the digitisation strategies for traditional businesses. We ping them for ideas in data strategy, and that has been very helpful.

When you look at deals, is there a criterion in terms of how you can synergise? For example, you have business in Europe and US and when you look at deals in China and Southeast Asia, how do you see if any of your existing portfolios can leverage this?

Synergies, yes, in the strategic sense. For example, we leverage heavily on sector expertise. Some of the key sectors at EQT are healthcare and services. There are a lot of investments across EQT globally in those sectors where we benefit from basic know-how. Bakery was one such example. It is also very important to get some Industrial Advisors.

We would have spoken to CEOs of large players across the globe to understand where the industry would be going, what would have happened to some of these more developed markets, and what could be happening to a more local market. That particular know-how is very important for us. We would need to know that EQT as an investor can credibly add value beyond just the capital.

Are you at some stage in future looking to combine all the businesses in the same sector into one entity, and potentially list it? It could be a much larger entity looking at 3-4 broad sectors. Or would you continue to operate portfolio companies as independent companies?

It will depend on the case. If there are good commercial reasons to combine, we may consider it.

Many large firms have venture arms because of the kind of deals they look at. They may not be the companies operating in that particular space. What is the reason for you to have a venture arm?

The venture investment strategy is not in Asia today. We benefit from speaking to the venture team. But as of today, there are no plans to get into venture in Asia.

Has this region become receptive in terms of private equity? A lot of businesses in the region are family owned and they may not have an experience with private equity which has its own sets of demands like board seats or others?

In both China and Southeast Asia, we have seen more opening up for the private equity business model. I would say, 10-15 years ago, there was much more of a pre-IPO minority market with easy access to capital and a robust market for IPOs where valuations became a key term for negotiations. It has definitely opened up a lot in terms of control and co-controlling deals in the last couple of years. First, the markets’ overall growth is slower, there is no denying that but competition is still there.

It has definitely opened up a lot in terms of control and co-controlling deals in the last couple of years. First, the markets’ overall growth is slower, there is no denying that but competition is still there.

In any market, if there is slower market growth but more competition, then each player would have a harder time to grow. So, when we speak to entrepreneurs nowadays, they often look for investors with experience in a particular sector, and that is what EQT can bring to the table.

These days, we bring EQT’s Industrial Advisors to the management meetings. So, when you open that up, the founders would see that it makes sense to bring in a PE firm for not just the capital but the value add.

What is your comfortable position in terms of a stake- majority or minority positions?

EQT can do both but in the 17 transactions done to date, 11 of them are with majority control. For the remaining 6 transactions, ownership is between 30 to 49 per cent making EQT a very significant minority investor with key co-controlling rights.

The rationale for that is that EQT does not want to be a passive investor but one with active involvement, with the Industrial Advisors and working with local entrepreneurs. Among the things we could bring are technology, people, governance and product expansion.

By combining such skills, the companies can be upgraded even when it is already number one or number two in the space. And that strategy has worked well. We are not in the five to ten per cent kind of space where you might or might not even get a board seat or a monthly management account. Not to say that it is not possible to make money that way but it is a different kind of strategy.

You have stayed out of new age sectors like e-commerce, consumer Internet, ride sharing. But we are increasingly seeing private equity coming into this space. As a firm are you more comfortable with sectors that you know and bring expertise to?

That is related to the investment mandate. For us, it is indeed important to look at profitable businesses with a long-term track record. That would by definition exclude venture deals.

For this region, there are a lot of good listed companies but the multiples they are trading may be lower than Hong Kong. Does it make sense for you to take them private and build on it? Does this region present that opportunity?

There has been one transaction where EQT took a company private from the Singapore Catalyst Stock Exchange and we definitely see opportunities in that pocket, even though they are listed.

Exits have always been a concern for private equity firms. Overall and specific to your firm, have exits been a concern?

Not as much due to the control and co-controlled strategy. Most of EQT’s exits have been through a trade sale to either strategics or other PE firms. We are open to opportunities for trade sales rather than only IPOs. That plays well for EQT as opposed to other GPs who may face challenges if they only cater to the IPO window.

How is your fund cycle structured? Do you have the luxury to hold on to an investment?

EQT has a typical kind of fund cycle structure like most other PE firms. But again, if you go back to the strategy, EQT in Asia is not investing in startups that may take many years to become profitable or go public.

Investments are made into profitable businesses so if you define what the value creation plan is, it caters to quality business plan and these are business platforms who are market leaders with a good management team who can implement that plan in a defined timeline.

I would like to mention one of EQT’s most successful investments in Asia, a discount pharmacy chain in China called LBX. The investment was held for nine years but that is because that business has done extremely well.

For private equity, what is a concern for this region?

It is valuations and if you look at the valuations they continue to be kept quite high overall. We are, however, able to secure transactions at very reasonable valuation multiples with reference to the comparables.

Do you see competition going up further as you are competing with many more players — family offices, pension funds, other PEs– and there is already a lot of dry powder?

I think so, maybe potentially more GPs coming into the market and larger LPs doing direct investments. So, competition has gone up. At least for us, it is about how EQT differentiates compared to peers. We believe in the sector approach and identify value creation strategies very early on.

Also Read:

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CapitaLand launches first $300m Vietnam private equity fund

Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.

Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.