Roy Kuan, managing partner of CVC Asia, looks back on a busy first half of 2012 in which the firm closed five deals. Falling valuations, planning and patience are among the key factors
Q: Following C.Banner International last week, you've now completed five deals in six months. Why so active?
A: Our target is 4-5 deals per year. Each of the five completed this year was a proprietary transaction. Some started off last year and have taken a while to close; a few have taken years to groom and develop. There are a few trends emerging: Firstly, valuations are more attractive now in Greater China than 2010-11. C.Banner would have been valued at a price-to-earnings ratio of 20-25x last year. Secondly, liquidity in China is less because, unlike last year, firms have less access to bank debt, bonds, or IPOs. Thirdly, as a result of the above two factors, terms of deals have improved including better governance terms.
Q: How active is CVC in different geographies? Your activities in Southeast Asia, particularly Indonesia, have received a fair amount of coverage...
A: We have been active across the region, and in fact, we have invested more in Greater China than Southeast Asia but we didn't advertise the deals. We believe in the long-term prospects of the region, but the countries in the region do go through swings in valuations and liquidity. Indonesia is at the higher end on both, while China is on the lower end now.
Q: The Hong Kong Broadband deal was unusual in terms of size and sector. How did it come about?
A: This was a proprietary deal that I started brewing three years ago. I marketed the idea to the parent company, CTI, but there was no deal at the time - Hong Kong Broadband was 95% of the company's business. CTI more recently decided to focus on free television and needed to raise capital for that. We were a logical solution and did a classic management buyout. Over 70 managers will be investing cash into the company with us. It's the nature of our business is to unearth these kinds of deals.
Q: Two of the three China investments - Asia Health Century and Venturepharma - are in the healthcare sector. What makes it attractive?
A: These deals were originated and led by our Beijing team. Asia Health Century is the leading drug retailer and wholesaler in Heilongjiang province, with 500 outlets. Venturepharma is different from most pharmaceutical companies in China because it started off in research, not sales and marketing. Venturepharma was doing contract research for multinationals and about five years ago began developing its own drugs. The company focuses on anti-allergy and central nervous system drugs, which are the two highest growth areas in China because of urbanization, allergies and stress. We believe it might be one of the top patent holders in China. We have a significant minority stake and an agreed business plan.
Q: You've completed one deal in Japan, Technopro Holdings. Isn't it a particularly unfriendly market right now?
A: When investing in Japan or anywhere else, we look at industry growth rate, the multiples we pay - particularly the multiples of cash flow - as well as management's business plan. With Technopro, the industry is growing 5% per annum, there is good cash flow conversion, a reasonable multiple and a solid business plan. Technopro is the second-largest engineering staffing company in Japan, dispatching 10,000 engineers to more than 1,000 companies. At $450 million it's a pretty big deal and there haven't been many buyouts in Japan this year. However, we think there continue to be opportunities.
Q: Also in Japan, CVC exited shoe repair business Minit Asia Pacific to Unison Capital. How did that investment perform?
A: It's a pretty cash generative business, with 300 stores in Japan and an equal number in Australia, New Zealand and Southeast Asia. We acquired it in 2006 and the department store sector probably fell at an annual rate of as much as 10% in some years. Although Minit is based in department stores, sales and profit remained stable. We paid down the debt and got a higher multiple than when we entered, so we did quite well.
Q: You have three operational executives in an Asia team of 32. How has their role changed compared to CVC's first Asia fund?
A: It's completely different. In our first Asian fund we, like most of the industry, did not have an operations team. Now they are involved in almost everything, pre-deal and post-deal. We don't bet on a higher exit multiple; often we bet on a lower exit multiple and look at how we are going to achieve our earnings numbers through concrete operational improvements.
Q: What do you look for in an operations executive?
A: We look for people with both operating experience and consulting backgrounds. It's not good enough to have just operational experience because you have to convey ideas and persuade people to do things. Allen Han worked at Honeywell, General Electric and Booz & Company. Our other Ops team members worked at Booz & Company, Henkel, John Deere, Boston Consulting Group and Philip Morris International. Consultants have the ability to frame things in a very organized way that everyone can understand.
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In 2015, China is expected to experience a "new normal of growth". For private equity investors, China's new stage of growth represents huge opportunities: an increase of 270% in online consumption, the reform of over a hundred sovereign-owned enterprises, trillion-dollar investments into overseas infrastructure projects, the rising entrance of young entrepreneurs, and many more.
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There is a feeling that now is a shrewd time to invest in Japan and take advantage of the favourable conditions for private equity. Valuations are low compared with the rest of Asia and strategic buyers and the IPO market are providing an attractive route for exits. There are also signs that corporate Japan is slowly coming around to engaging PE as a potential buyer for non-core assets and recent developments at the GPIF suggest that PE will be under strong consideration for allocations from pension funds in the near future as well as regional banks committing to the asset class right now.
The macro concerns that have been present for many years still remain in terms of low growth and currency depreciation but these are encouraging times for fund managers looking to both raise capital from Japanese LPs and make investments.
245-26 June 2015, Conrad Hotel, Tokyo