Value add

An easy enough concept to digest, but in practice – and particularly in various emerging markets in the region – often a case of easier said than done. Steve Barnes, MD at Bain Capital, made the point that “the game of being world-class active managers is in asset selection,” at the recent AVCJ Forum 2010 in Hong Kong. But it does not stop there, and while many GPs pay lip service to the idea of true value add, there are few that lift the veil and reveal just how they are accomplishing this elusive goal.

The definition of value

Needless to say, there is more than one approach. “We have an in-house operations consulting group,” Joseph Bae, Kohlberg Kravis Roberts managing partner for Asia explained of the group’s more formal way of addressing the issue. “For us, the value-add is not in the capital; it is in [improving] the operations.

Alison Nankivell, Senior Portfolio Manager at Export Development Canada, explained that her group plays a more active role as regards business opportunities for their funds’ portfolio companies around the world. “We invest in niche-oriented and smaller funds. This way we’re able to make connections between companies in Canada and in India and China,” she said, adding that the group has a public policy mandate which “particularly with technology and clean energy,” lends itself to natural synergies abroad. “North America has great technology, but companies need a localization partner in Asia.”

The ability for fund managers and even LPs to play matchmaker for businesses is central to a growing number of groups’ strategies. Intel Capital makes a point of this in everything from origination to exit discussions. At the Intel Capital CEO Summit 2010, portfolio companies opened up on just how helpful – and indeed integral – to success these steps have been.

The portfolio company view

The group holds annual events like the CEO Summit, as well as Intel Technology Days, which partner major technology players with a list of smaller firms that may be potential suppliers. Although the model strays from traditional venture, one portfolio company CEO said the value-add was so great that, although the company did not need the capital, “their connections were too good to pass up…”

“We’ve been working with Intel very closely even before they invested,” said Babu Mandava, CEO and Co-Founder of Beceem, which its investors recently exited through a sale to Broadcom for $316 million. “The first step was to define the standard. We wanted to revolutionize the way that people think about 4G and make sure that it would be fully functional for next-generation 4G.” Intel as a group had been instrumental in the WiMax 4G standard through its work with operators like KDDI. Says Mandava, “We worked together [with Intel] to sell the technology to the operators,” which would have been impossible for a small company like Beceem if a larger industry player like Intel had not made the introduction.

One of the positives for portfolio companies of a niche investor - particularly relevant to venture capital groups and their investees - is that the fund managers know what they are looking for in a company and what they can add to the proposition; and they know from the start. Althea Systems’ CEO, Vinod Gopinath, said of his experience with the group, “We actually went out pitching our story to VCs, and it turned out that Intel was the most receptive and fastest to invest, so we closed the deal very quickly; maybe in about a month [from our first meeting to closing the deal].”

Alignment from the start

The right partner relationship built on, as Barnes put it, “trust-based, high influence… not control,” is of course in seeing the value beyond the capital. And really, only the companies themselves can say whether this has been accomplished over the course of the investment relationship. Andrew Liu, the CEO of WinChannel, the leading software and service provider for the automation of consumer electronics, said that while he knows his business, “Intel is on the business side [as well as] the technology side for the consumer business; I needed someone who understands electronics.”

This type of alignment of interests beyond modeling and structuring is becoming increasingly crucial to the private equity model in Asia, particularly in highly competitive markets like China and India. As Jean Eric Salata, founder and CEO of Baring Private Equity Asia explained, “Deals are relationships even from origination, and with entrepreneurs you want to know that you can help them to grow; we’re not just deal-makers.” With much less reliance on short-term capital, companies across Asia are seeking true value add, and the groups that can provide it – and prove to the market that they know their way around the operational side of a business – will be the long-term winners in the private equity game.  

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• Topics
• Performance
• Joseph Y. Bae
• Bain Capital Asia
• Intel Capital
• KKR