Q&A: Shaw Kwei & Partners' Kyle Shaw
Kyle Shaw, managing director of Shaw Kwei & Partners, discusses the value to be found in taking traditional yet complex industrial businesses and switching them to a high-end track.
Q: Of your existing portfolio, three - CHT, Beyonics and Chosen - are manufacturers that were taken private in Singapore. What's the attraction?
A: Navigating the Singapore system isn't easy - you have to understand it and you must also have a certain amount of perseverance and determination. There are three reasons why we have done it: valuations are reasonable in Singapore; there are rules for taking companies private; and ownership of small cap stocks is dominated by individuals as opposed to institutions. If you offer a fair premium to the trading price, they tend to take it. When we privatized Beyonics it had a $155 million market cap and there were 20,000 shareholders; apart from the chairman who owned 15%, no one had more than 1%.
Q: Do the largest shareholders tend to be founders who want to sell out?
A: Beyonics was not controlled by the founder; the founders went bankrupt personally in the Asian financial crisis, their shares were sold into the market, and a local guy picked up 15%. In the case of CHT and Chosen, the sellers were founders who wanted to retire. People in that situation think about what will happen to their business; heaven forbid they die and their family inherits a very large illiquid block of shares in a company that has no leadership and would likely fall in value quickly. The most prudent option for the founder in his 60s would be to sell the stake, give the proceeds to the family trust, and let someone else manage the business professionally. That's a challenge for many PE firms because they want to partner with management and have them continue to run the business, not take over operations themselves.
Q: And to what extent are these investee companies Singaporean firms?
A: Go back 20-30 years and a lot of these guys set up in Singapore and customers asked them to go to Malaysia, China and Thailand, promising a certain amount of business. A company would set up a facility in Suzhou or Dongguan and end up with several customers and six or seven facilities. If you are producing components for the auto or electronics industries, you need to be near your clients' factories, and Fortune 1000 companies typically have sites around Asia. When we bought Beyonics and Chosen, collectively they had 21 different manufacturing sites, most them relatively small, about 60,000 square feet. Now we have seven sites, three of which are brand new, and they are 300,000-400,000 sqft. This means you can have more process and technology capabilities in one site and higher caliber management teams.
Q: Apart from consolidation, what themes do you see in manufacturing?
A: From 2000 to 2015, a lot of Asian manufacturers were looking for high volume, low margin business. It was all about being able to scale and to do that you needed to be in places with cheap land and abundant labor. Today the opportunity we see is precision engineered products. We moved Beyonics and Chosen out of low margin manufacturing and concentrated on high margin. It's more sustainable in the long term, because if you are chasing low cost it's a vicious game. When we bought Beyonics and Chosen, they were doing about $1.2 billion in revenue; today they are doing about $220 million in revenue, but our operating profit is the same - so the operating margin went from 1% to 10%.
Q: Shaw Kwei also invested in Schmid Group, a German manufacturer. What was the strategy behind this investment?
A: We have invested in two German companies, Schmid being the most recent. Both already had established operations in China, they were generating more than 50% of their revenues from China, and they also had sales elsewhere in Asia. They were Asian in terms of revenue and profit, but with core manufacturing capabilities in Germany and some satellite operations in China. We came in to help them run their Asian business more efficiently.
Q: Is it difficult to find senior management to lead high-end manufacturing companies in Asia?
A: There is a lot of talent out there, but it's expensive. It doesn't matter what nationality someone is - there is an international price if you want a CEO, CFO or chief marketing officer, and you have to pay it. You also have to provide them with an interesting opportunity; if the business is too small or particularly challenged it won't attract people. The good news is a lot of industry people have heard how private equity can make senior management well off by giving them something on the back end, so they are willing to talk. I remember 10 years ago we would try to recruit people and they would say, ‘So I'm going to come work for you, build up the business, and then you will sell it and I'll be out of a job? No thank you.' Now they say, ‘How many years will it take you to sell this? Three? Okay, that sounds reasonable.
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