PE and funeral services: Untapped eternity

The private equity industry has been prodding around the funeral services space in Asia for several years, but despite a number of convincing macro indicators, investor sentiment has failed to gain any noticeable momentum. Such malaise, however, tends to evaporate after a $1.1 billion deal.

CVC Capital Partners’ acquisition of Malaysia-based Nirvana Asia for that sum last year clarified the industry’s potential in dramatic style. Not only is Nirvana the largest funeral services company in Asia, it was the first Hong Kong-listed company of any kind to be taken private by a PE firm. As a result, expectations of growing investor appetite are beginning to bubble in the bereavement industry.

“We expect more investors and fund managers to come and look for M&A opportunities,” says Larry Kwan, business development manager for the Asia Funeral & Cemetery Expo and Conference, which will take place in Hong Kong this May. “They now see funerals and cemeteries as having a comparatively higher profit margin and want to start in the industry.” 

The biggest angle for investment is customizing the funeral for each family and making the experience as memorable as possible – Daisuke Murakami

GPs taking notice of this market for the first time may confront an unexpected set of business variables around the fact that monetizing last respects can be an uncomfortable, even taboo, topic in Asia’s traditionally minded circles. At the same time, it is increasingly coming to light that few consumer lifestyle segments can boast such a potent combination of cultural and demographic drivers.

The aging effect

Private equity enthusiasm for death care services in Asia was signaled as early as 2010 when Yunnan Hongfu Venture Capital launched a fund with a view to investing about $30 million across 40 funeral parlors and graveyards. The plan included a promising contextual backdrop with provincial government pledging funeral industry support, but it was scrapped early due to lack of LP interest.

The notion that such a scheme might gain more traction in the wake of the Nirvana deal is not so far-fetched considering how the environment has changed for a key investment rationale. While issues around Japan’s aging population have been an investment industry touchpoint for more than 20 years, China’s emergence as a graying market has been relatively recent.

It wasn’t until around 2010 that over-65s began to approach 10% of China’s total population, doubling a longstanding historic average. Since then, seniors have been periodically projected to represent 15-20% of the world’s most populous country by 2030. 

The Carlyle Group and Farallon Capital Management reacted to this outlook with a $35 million commitment to Shanghai-based funeral service provider Fu Shou Yuan International’s IPO in 2013. More substantive entries into the Chinese market, however, have proven elusive. Nirvana, notably, has enjoyed a relatively unfettered proliferation across Southeast Asia but remains restricted to a marginal Chinese footprint due to local regulatory and land cost issues.

Such roadblocks are particularly critical given that one of the best strategic gambits private equity brings to the table is growth through acquisition and consolidation. Funeral service markets worldwide are characterized by small, independent and unprofessionally run businesses that can be cleaned up in the back-end and synergized through familiar buy-and-build plays.

“There are players who literally take money from customers and put it straight in the bank earning 1% or less interest per year,” says Jason Shin, a managing partner at VIG Partners. “They aren’t doing any fund management because they don’t see that as part of their core business. In many regards, it’s a well suited industry for private equity.”

VIG became the first PE firm to invest in Korea’s funeral services space last year with the acquisition of an 84% stake in Jo-Un Life for KRW65 billion ($58 million). It is targeting demand related to a local trend of dwindling family sizes and leveraging its experience in the life insurance industry via a pre-need subscription model. Jo-Un operates much the same as an insurance company except if the loss of a family member occurs within the contract period, clients are required to pay the balance of the service costs in a lump sum.

Although generations of financial scandals due to bad bookkeeping by local operators have made acquisition targeting difficult for VIG, the scattered playing field suggests there is potential to accumulate a leading market share. This effect is exaggerated by a lack of chaebol participation in the industry, arguably for reasons related to avoiding associations with death. The two biggest funeral service companies in Korea control 20-30% of the market combined, while Jo-Un and a host of independents compete for the rest with shares of 1-5% each.

Consolidation play

This scenario has already played out in other markets with varying results. Nirvana, for example, has exploited patchy competition in Southeast Asia to take 80% of Singapore’s pre-need market but only 1% of the overall market in Indonesia. An extreme example of the fragmentation effect can be seen in US-based Service Corporation International, which commands only 16% of its domestic market despite being the country’s largest operator with some 1,500 parlors and 470 cemeteries.

Australia-based Invocare – which has been supported by PE firm Propel Investments – is sometimes called the largest funeral services company in Asia Pacific and claims overall market shares of 33% in Australia, 30% in New Zealand but only 10% in Singapore. Interestingly, the company’s Singapore business consistently tracks sales margins more twice as large as those of the Australasian units.

The discrepancy in sales margins hints at how social differences between East and West can make funeral services more of a big-ticket play in Asia – even at relatively modest penetration rates. In addition to the price hikes caused by more prevalent land scarcity issues, the industry can leverage stronger cultural pressure to observe strict ancestral reverence norms and extravagant memorials.

In Korea, VIG benefits from local customs dictating three-day catered wakes where guests – sometimes numbering in the thousands – can run up a bill as high as $10,000. Likewise in Japan, ceremonies typically last at least two days and can include elaborate services such as praying monks.

“There’s a lot of opportunity to put soft value into this industry because the businesses are often managed in a very old-fashioned manner,” says Daisuke Murakami, a principal at Advantage Partners. “The biggest angle for investment is customizing the funeral for each family and making the experience as memorable as possible by coordinating goods, services and performances associated with the deceased person.”

Advantage was the first PE firm to invest in Japanese death care with a buyout of Epoch Japan that valued the company at around JPY2 billion ($18 million) in 2015. The plan is to add value to an operation that spans 46 existing funeral halls through premium services such as family-customized food options, the production of memorial video montages and the formal organization of speeches that might not have otherwise been coordinated.

This approach recognizes that despite social pressures to pay proper respects to loved ones and the inevitability of a “death boom” in aging societies, funeral services are not immune to the limitations of strained family budgets. Customers will consequently need extra encouragement in the form of unique services before agreeing to pay the high prices associated with modern ceremonies.

As more investors embrace funeral services, premium offerings will also serve as an important differentiator in an increasingly competitive field. If pursued with a locally conscious touch, such value-add efforts offer growth potential in established and emerging economies alike by framing funeral services as an indispensable aspect of middle-class life.

“We’re seeing clear opportunities being facilitated by advisory firms in this space,” Advantage’s Murakami adds. “We think we can grow Epoch through further M&A, so we will keep pursuing opportunities in this area.”

Macro vs micro

The high costs associated with the funerals industry, however, can represent both a driver and an inhibitor of expansion initiatives, as Nirvana’s stalemate in China attests. In many markets, land cost issues have translated into extremely high cremation rates. Japan is the world’s highest at 99%, while Korea follows closely around 80%.  

In this context, much of the recent PE activity has been understandably reluctant to commit to the real estate side of the industry. The hesitancy may erode in the future, though, as hybrid plays come into focus combining relatively modest land components and cash-generative value-add opportunity sets.

VIG has contemplated just such a scenario in Korea’s growing segment for urn depositories, or columbaria. These facilities typically sell urn niches in the range $5,000-20,000 for a 30-year lease. Prices can vary depending on the position of the niche within the columbarium, proximity to a city or the maintenance extras that an investor is able to provide.

The death care industry’s international profile as a disorganized patchwork of small, inefficient businesses is at the heart of this upside, but also a reminder that a local, community-sensitive tact is part of the service. The essence of PE’s advantage may therefore be an ability to balance micro-scale operational flexibility with a high-altitude vision that acknowledges the fleeting nature of a demographics-driven window of opportunity.     

“We see this going from a fragmented mom-and-pop industry into a few very large professional organizations, and we intend on becoming one of the leaders after such industry consolidation,” says VIG’s Shin. “As long as the overall population is not declining and we have this increase in the affluent older customer base, the next 10-20 years could be a kind of golden period that we can benefit from. The question is, after 20 years, what do you do with the aged society?” 

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• Topics
• Southeast Asia
• North Asia
• Greater China
• Consumer
• Real estate
• Buyouts
• Malaysia
• Japan
• South Korea
• China
• VIG Partners
• Advantage Partners
• CVC Capital Partners