LP interview: Pantheon

In his six years at private equity fund-of-funds Pantheon, Brian Lim has seen the private equity market blossom in Southeast Asia. From a group of mainly commodity-focused funds, the investment community has now shifted to take advantage of the appetites of the region's growing middle classes.

The first signs of this transformation came in 2013, when CVC Capital Partners made its first - and largest - partial exit from Indonesia's Matahari Department Store, selling a 46% stake alongside local partner Lippo Group for $1.3 billion. There were five more share sales over the last two years as CVC generated cumulative proceeds well in excess of the sum paid when acquiring a majority stake in the business in 2010 at an enterprise valuation of $892 million.

"The successful exit of Matahari points to how it's possible to actually make significant amounts of money by backing the Asian consumer," says Lim. "In many ways that's the theme that we're backing generally in Asia, and we see that very much in action in Southeast Asia: finding opportunities to tap into that demand for products and services by the middle class, by the consumer class."

Consumption plays in Southeast Asia represent a growing set of opportunities for Pantheon, as GPs in the region build their confidence and ability to establish strong relationships with portfolio companies. While the level of experience is still limited compared to more developed markets, the LP considers Southeast Asia a highly attractive target for investors who are able to recognize talent in fund managers.

"We're now at a stage where there is a lot of experience around people who've been investing in companies, who've been running companies, who've been through cycles of investing and exiting companies as well as funds," says Lim. "It's important to find those investors who've had that full cycle experience."

Asia vs the world

With $3.5 billion invested in Asia out of its total $33.3 billion in assets under management worldwide, Pantheon sees the region as complementary to its operations in other markets. The lower levels of sophistication among Asian GPs are balanced by the strong growth component to Asian companies. PE investments in consumer-oriented businesses have seen explosive returns that would be hard to duplicate in developed markets.

Rising consumer demand does play a part in this growth story, with increasingly affluent households hungry for services at the same level available in Western markets. Entertainment is one area seeing massive expansion - cinema ticket sales in China are expected to overtake the US in the next 18 months - but the opportunities extend to home buying, car sales, and travel.

"The opportunity that comes from building these products and services is very much the uniqueness of Asia," Lim adds. "I think a lot of the sunset industries in Western markets are very much sunrise industries in Asia. It could be cinemas, gyms, or provision of broadband services, for instance, in some of these emerging economies."

Companies in Asia also tend to have unique characteristics that make them more attractive than investees in other regions. For one thing, growth tends to be unleveraged, which means companies have less debt to pay off as opposed to their Western counterparts. GPs in this region can typically also find more possibilities for streamlining companies' operations and bringing new insights to management teams.

Pantheon considers this last aspect to be a critical factor in its judgment of potential investees. The LP believes that while growth opportunities are huge in Asian markets, taking advantage of them requires GPs to provide more than just financial support. Managers must be able to secure a good level of influence over the company, to gain access to essential information about the company's operations, and to ensure that all of their guidelines are being carried out.

"The way we deal with them can vary from country to country, depending on the norms there, but certainly the commonality is that there should be a basic set of governance rights by which you are able to monitor your company and effect change if that is required," says Lim. "That's the common theme across all of these geographies."

In addition to insistence on strong governance terms, Pantheon also looks favorably on PE firms willing to walk away from deals that in which the potential portfolio company will not agree to the terms that the GP requires, no matter how financially attractive the investment. This shows that the manager has the discipline and the discernment to wait for good deals rather than taking any opportunity that comes along.

Pantheon's ideal funds also have experience in the markets where they operate. Funds from newly launched firms, or funds raised by experienced GPs from outside the market, are unlikely to receive commitments. A strong sense of fiduciary responsibility is another requirement.

While the majority of Pantheon's investments are made through funds, it does make direct commitments through co-investments. The LP finds these deals attractive, but it does not actively pursue them; it only considers opportunities brought to it by GPs, with participation dependent on certain firmly held conditions.

First, the investment must be alongside a GP with whom Pantheon has an established relationship. This approach helps the LP to feel comfortable with the firm's abilities with the particular sector and company type, its deal team, and its strengths and weaknesses in various kinds of transactions. If the GP is investing outside of its core sector, or if Pantheon does not have a clear enough sense of the manager's capabilities, it is likely to pass. In addition, the LP conducts its own due diligence to assess the state of a company and the market in which it operates, as well as whether the valuation is realistic.

Once a co-investment is made, Pantheon takes a hands-off approach, letting the GP handle the interaction with the company. The firm feels that its role should be that of a supporting partner rather than an independent investor; this is also why it does not pursue direct investments, since it does not want its GPs to feel that they are competing with Pantheon.

"We would not be there to second-guess them," Lim says. "We would obviously challenge them when appropriate, and there would be checks and balances in place to make sure there is a solid framework to monitor the investments and a solid framework of looking into the investment prior to going in, but post-investment we would certainly rely on them to lead the charge."

Sectors of interest

In addition to the consumer plays available, Lim identifies several other sectors that are seeing favorable investment opportunities as a result of Asia's rising middle classes. In education, for example, increasing income levels have combined with a traditional focus on schooling to create numerous openings for new companies. Private schools, which seek to satisfy parents' demand for educational investments for their children, are one outlet for investment; another is those institutions that focus on adult education, as grown customers with increasing disposable income seek to improve their skills and employability.

The LP also sees potential in healthcare, driven by consumers wanting to spend money to buy a better quality of life for themselves or their loved ones. Investments in healthcare can also take many forms, and Pantheon already has considerable exposure to hospital chains, maternity clinics, diagnostic laboratories, contract research outsourcing firms and more, both through its fund investments and through its co-investments alongside GPs.

However, regardless of sector, geographical distinctions once again emerge over exits. As Pantheon builds its GP and co-investment portfolio in Southeast Asia, liquidity is the one area where it continues to await positive developments is in exits. Outliers like Matahari notwithstanding, the region has yet to see the kind of major exits generated in India and China.

The LP is not unduly worried by this. Lim believes that existing investments are on the way to maturity, and their coming payouts will provide all the proof that investors need to get involved and contribute to a much larger market.

"The consumption investments that have occurred in the last three to five years are not yet ready for exit," he says. "But there also isn't a huge mass of GPs operating in Southeast Asia. The more GPs there are the more exits there will hopefully be, and the more examples there'll be to talk about successes."

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• Topics
• LPs
• Fund-of-funds
• Fundraising
• Pantheon
• Asia