Headland becomes a test case for post-bank spinout PE funds
One of the most closely watched of the new wave of private equity team spinouts from major banks has completed with the announcement that the management team who led HSBC Private Equity Asia have now completed their separation from parent HSBC with the launch of Headland Capital Partners Ltd., under George Raffini and Marcus Thompson, Managing Partners of the new firm.
Headland took the entire 16-strong investment team, who Raffini noted have been investing in some cases for over 20 years, and retains the existing advisory relationships with the current and fully invested funds.
Inheriting HSBC’s existing funds and portfolio companies in Asia Pacific, Headland already advises $2.4 billion of committed capital. HSBC will retain a 19.9% stake in the business, as well as significant LP interest in its funds.
Genesis of the spinout
Every indicator suggests that both the GPs of Headland and the parent group saw the spinout, first mooted in June this year, as a way to realize value and energize performance, but the move was of course spurred by Basel II capital adequacy requirements, the Dodd–Frank Wall Street Reform and Consumer Protection Act in the US, and other regulatory moves that made the jettisoning of internal private equity units and alternative assets holdings a must for most major international banks.
HSBC’s banking peer Citigroup has already sold off some $1.1 billion of funds of funds and related PE holdings to Lexington Partners and StepStone Group, while Bank of America spun out Ridgemont Equity Partners with some $1.5 billion under management, and according to Dow Jones, Goldman Sachs has just spun off one of its direct investment units, the former Urban Investment Group, as New Mainstream Capital, with around $250 million to invest in mid-market urban businesses and some real estate interest.
“I look at it through three lenses: the investors, the business and our prior parent company,” Raffini told AVCJ. “It does put the business on a more solid footing, given some of the regulatory uncertainty that [it] would otherwise be facing.”
Raffini also paid tribute to the “great autonomy” that HSBC Private Equity Asia had enjoyed under its old ownership structure. He also observed that the new structure would help the firm’s relationship with its existing and potential investees. “There will be more commonality between us; that’s gong to help us from a marketing perspective.” The spinout, he said, is “a triple win for the investors, the team and HSBC.”
Firm and funds
Headland is advising both private equity and VC funds, targeting respectively Asian mid-market expansion and buyout opportunities, and early to mid-stage investments in Asian technology and high-growth companies.
With a track record that goes back as far as the $35.3 million Pacific Rim Investments fund raised in 1989, Headland is currently advising its fifth and sixth PE funds. Headland Private Equity Fund 6 closed in 2008 with committed capital of almost $1.34 billion, and is around one-third invested. Its second and third VC funds are also in operation, with Headland Asian Ventures Fund 3 closed in 2009 at $230 million and now already 50% invested.
The final cost of the spinout to the team was barely $18 million for the gross assets, with HSBC expecting to continue to recoup as an investor in Headland. And according to Raffini, the extended period before new fundraising is needed will make Headland a good test case of post-spinout performance for the new breed of formerly bank-connected private equity firms. “That two-year runway will really help LPs make a judgment on how we implement the re-launched business,” he told AVCJ. “Investors will also assess us as this freestanding entity that Headland has become.”
Focus and potential
Headland’s regional focus, perpetuating the old HSBC Private Equity Asia norms, is Greater China, South Korea, Southeast Asia and India. “The investment strategy, mid-market consumer in most countries, industrial products and services in some, is not going to change,” affirmed Raffini.
As part of Headland’s “continuing constructive and healthy disc china investment corporatio ussion with HSBC,” he added, the firm would be able to continue levering off the bank’s broad and deep networks and relationships.
Within that thesis, however, Raffini emphasized that Headland would favor propositions that were not only Asia-based, but also that addressed Asian markets and derived most of their income locally. “The best-performing investments that we have generally have an emphasis on Asia. That’s where the biggest and most attractive opportunities lie.” In other areas, he added, “The exporters generally are facing harder times … It’s about gaining market share, management excellence, differentiation rather than a growth opportunity.”
Concluding, Raffini noted that industry peers were already describing Headland as “a 21-year-old upstart … perhaps not inaccurately.”
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