Q&A: Permira's Alex Emery

Q: What are the advantages and disadvantages of investing in Asia out of a global fund rather than a regional fund?

A: Both models work, but what matters most is being competitive in the market. To date, being able to bring global expertise to a deal, whatever and wherever it is, has been a differentiating factor for us. We are well stitched up across the world: one firm, one team; no regional P&L or carried interest. If someone expects to do a deal every six months, clearly there is a mismatch in expectations. A global fund doesn’t need to diversify in the same way as a pan-regional fund. An Asian fund might have 10-plus deals, whereas with a global fund two or three big Asian deals out of 20 across the world is fine. However, we proactively staff teams from around the world – people based in Asia might be working on deals in California, not just deals run out of their own office. You can be successful with a global fund and you can be successful with a regional fund, whether it is run as a franchise model where the local team doesn’t interact that much with others or in a much more collaborative way. It’s less about the fund structure and more about being clear as to what you want to do and having the systems in place.

Q: Does having a global fund lead you to a certain kind of deal?

We are well stitched up across the world: one firm, one team; no regional P&L or carried interest

A: If you are a single country firm, there is a certain skill set you can offer and you can probably claim to be deeper in that market than groups with just one office there. But there is a whole spectrum of companies that don’t identify with one market and want a partner that can help them expand into the US or make acquisitions in Europe. For the John Masters Organics deal, we assembled a team that included people in Tokyo, because the center of gravity of the business is in Japan, but the Hong Kong, London and New York offices were also involved. It was not only valuable in evaluating the opportunity and the value creation possibility to justify the price we paid, but it also helped us to convince the founders that we are the best partner for them.

Q: Permira strengthened its China capabilities by absorbing Unitas Capital’s country team. What are your expectations for this market?

A: We wanted an experienced team in China and some of them have worked together for more than 10 years. They also have a track record of doing control deals in a market where control is still relatively rare. Since they joined, there has been a real step change in the quality of opportunities we are looking at. On the other hand, we are taking a cautious view on China, there is no pressure to do deals for the sake of it. There are concerns about valuations and then some of our competitors have made mistakes in China – it’s a market that has risks that don’t appear in other markets.

Q: Are you concerned about rising fund sizes in Asia and the impact on valuations?

A: Increasing valuations are a global phenomenon – it’s been a long bull run and debt is cheap. I don’t think dry powder is necessarily responsible for driving up valuations, it is more a symptom. Investors have more capital, so they want to allocate larger amounts to private equity. The nature of Asia means it matter less here than in Europe or the US. The US is big and quite fungible. There is some sector and regional specialization, but it’s a very fluid market. Europe has many national specificities and the same is true in a more extreme way in Asia. The Asian continent is vast and you have to look at it country by country. What is the real driver of competition – the amount of capital or the number of groups looking for deals? For the markets we are interested in, like Japan and China, I don’t think we have seen a step change in the level of competition because those markets have grown as well.

Q: What can you do to prepare for the end of this bull run?

A: We need to have the right capital structures in place in our portfolio companies. The kinds of capital structures we have today are very different from what they were in 2008. We have been very cautious about leverage levels and the majority of portfolio debt is covenant-lite. On the operating side, because it is a high valuation environment we are committed to ensure we get the best out of companies through the value creation work of our portfolio team. At the same time, you have to maintain discipline. It is about taking precautions – making sure to protect companies and not overpay or over-lever them – but also being able to keep investing through the cycles.

Q: Given the rise in co-investment, is there a limit to how large a deal you could theoretically do?

A: Size is not so much the issue as governance. Our funds can underwrite large equity checks and we can double that by bringing in a partner – preferably an LP co-investor. If you go beyond that, are you really speaking for the money? Is it really a control buyout where you are in driver seat, adding value? You could work with another fund, but we prefer to stay away from big consortium deals because there is not enough control. Say you get somewhere near maxing out your equity commitment and LPs put in the same amount, and there is a clear understanding about how the governance would work, that would be attractive. Another lesson learned from the global financial crisis is that consortium deals where there is no clear captain can be tricky when there are shocks to the system. Sometimes you have to act fast to help a company and if there are different views around the table, you can get bogged down. Occasionally we team up, but we have to think carefully about the governance.

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• Topics
• Greater China
• North Asia
• GPs
• Buyout
• Permira Advisers
• Japan
• China
• Asia