Small still beautiful for Riverside
The story of private equity in Asia is largely one of rising fund sizes and ever larger equity checks. The Riverside Company plans on staying small - a segment it has occupied globally for over 25 years. The mid-market buyout player sees a huge opportunity for this niche in Asia, and expects the region to become the key driver of its growth in the next decade.
Last week, Riverside closed its second Asia-focused buyout fund - Asia-Pacific Fund II (RAF II) - at $235 million after about 12 months in the market, surpassing its original target by 60%.
LPs from Asia and North America account for the largest shares of the fund corpus, with smaller representation from Europe. Investors include Massachusetts Mutual Life Insurance, clients of Macquarie Investment Management, Commonwealth Superannuation Corporation, Development Bank of Japan and Munich Private Equity Partners.
RAF II will target the mature industrial markets of Asia. Around 40% of the fund will be invested in Australia, with Japan and Singapore-Malaysia each accounting for 25%. The remaining 10% will go to South Korea and Hong Kong.
The Singapore-Malaysia axis is a new one for Riverside and investments will be run out of the firm's newly-opened Singapore office. "I think that will be one of our strongest offices in terms of the numbers of deals," says Stuart Baxter, managing partner of Riverside's Asia strategy (pictured).
The firm is looking to buy 11 smaller companies with enterprise values of $25-150 million. RAF I, which launched in 2007 made five acquisitions from a corpus of $28 million. The new fund will follow a similar strategy to its predecessor, targeting family-founded businesses or small corporate carve-outs across healthcare, education, software, specialty manufacturing and franchise-based companies.
"It is difficult for aged owners - in their 60s to 70s - who want to get liquidity from smaller companies to find the buyers," says Baxter. "We are able to find more of these businesses, particularly in the medical devices and manufacturing space, in Singapore and Malaysia than in Hong Kong, where there are more big corporates."
The general objective is to acquire profitable companies with valuable intellectual property and help them institutionalize and go global, doubling or tripling in size over the course of the investment period. Larger PE firms make for willing buyers of these expanding businesses. Half of Riverside's exits have been secondaries, with the rest trade sales to strategic investors.
The principal challenge for the private equity firm lies on the investment side, identifying the right deals and then persuading founders to sell. "In bigger deals, people have representatives or investment bankers to help them. Therefore, those deals are more transparent," says Baxter. "But our markets is far less from transparent. People typically don't use brokers. It's more about introductions - and this makes it much more complicated."
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