Profile: EmergeVest's Heath Zarin

For Heath Zarin, the breakthrough moment in his logistics investment strategy came in 2015. Twelve months earlier, his boutique investment firm – EmergeVest – had entered the UK market as a complete unknown and prevailed in a competitive process for NFT Distribution. But Palletforce represented a more significant challenge.

The target was a UK PLC, not listed on any stock exchange but with a large shareholder base whose support could only be achieved through a formal takeover process. The sense of uncertainty was exacerbated by the funding structure. EmergeVest was operating on a project fund basis, it had to put down a fully funded GBP32 million (then $50 million) offer, and a rival bidder could have entered the fray at any point.

On top of that, Palletforce had a network of business partners who were also shareholders in the company. Any decision to sell to EmergeVest would not be based on economics alone – they were also thinking about their future relationship with the new owner. An education program was required to explain who the buyer was and why it could be relied upon to behave as a credible long-term player. Privatizing Palletforce through a scheme of amalgamation took three months, but it was preceded by six months of careful groundwork.

“That was when we felt we became cemented as an investor in the logistics sector and we had a model that worked in terms of being able to aggregate capital and complete investments,” says Zarin. “We were also starting to attract operating executives. You aren’t offering huge amounts of money in the early days, so people must believe in the mission and the strategy. We had enough visible markers of success that I felt we had made it as a business.”

Buy and build

EmergeVest went on to acquire four more logistics assets and make a string of bolt-on acquisitions – the firm has completed 25 transactions since its founding in 2013 – that have helped the portfolio companies expand into Asia. It has also transitioned from raising capital on a project-specific basis from Asian family offices to closing a dedicated logistics fund with $205 million in commitments, more than two-thirds of it coming from traditional institutional investors.

NFT, Palletforce, Adjuno, Allport Cargo Services, CM Downton, and Jigsaw together represent the largest privately-owned logistics business in the UK with interests spanning transport, logistics and freight-forwarding services, and logistics technology. Annual revenue is GBP850 million ($1 billion). Last year, they were consolidated under a single entity – EV Cargo – with a view to creating a platform that appeals to strategic buyers and the capital markets.

Once an exit does come, it will mark the completion of an unusual journey for a private equity firm that was founded by Asia-based private equity professionals, raised much of its early capital in the region, has an investment team located in Hong Kong, and brings an Asian angle to every deal. Zarin – who describes EmergeVest as “an unconventional Asian financial sponsor” – admits that building a portfolio with substantial UK exposure wasn’t part of the initial blueprint.

“We have developed our strategy, portfolio and funding base in an iterative way, learning as we go,” he says. “We did not know this is how the development of EmergeVest was going to occur. But we knew that logistics would be part of it, we knew that being operationally focused would be part of it, we knew that control transactions would be part of it.”

While the interest in logistics came later, the importance of control and operational involvement was drilled into Zarin in the early 2000s when he cut his teeth at DLJ Merchant Banking, which was then one of the largest leveraged buyout players in North America. He chose an opportune time to swap a legal career – as a fund formation counsel – for one in private equity. Within a year, DLJ was sold to Credit Suisse and opportunities emerged globally.

“It was a great place to be a part of and learn about institutional private equity. Many of my colleagues from DLJ went on to join Blackstone, so I attended investment committee discussions with the likes of Tony James, and I made note of their approach and the types of questions they asked,” Zarin recalls. “Having an integrated operating team and an industry focus – both those things I first learned at DLJ and then applied at EmergeVest.”

He arrived in Asia – via a stint doing turnarounds in Eastern Europe – in 2005 to establish Credit Suisse’s PE business in the region. The first step was to form a China joint venture with a team led by Mark Qiu, formerly CFO of CNOOC. China Renaissance Capital Investment’s (CRCI) first fund, which closed at $540 million in mid-2005, was at the time the largest China-focused PE vehicle ever raised. The bank participated in the fund and made a significant commitment to start the investment management business. CRCI remains active in the market, though now fully independent.

In addition, Credit Suisse launched a pan-Asia private equity strategy and recruited a group of investment professionals from Ritchie Capital to run it under the leadership of Harjit Bhatia. Credit Suisse Private Equity Asia ultimately spun out as Asia Growth Capital Advisors.

Two spin-outs

Zarin left the bank in 2008 with Roger Moh because he “wanted to be entrepreneurial.” They set up Emergent Investment Group (EIG) and spent two years making investments on a deal-by-deal basis and doing corporate advisory work. However, opportunities were limited as the fallout from the global financial crisis weighed heavily on Asia.

When HSBC came calling with an offer to run its principal investment business in the region, Zarin accepted. The brief was to complete minority transactions involving companies that were relevant to HSBC from a client relationship perspective. This lasted for three years before the urge for independence began to bite again. EmergeVest was formed essentially as a new incarnation of EIG.

“We asked, ‘Why does the world need another GP?’ Strategy is very much deciding what you are not going to do and how you are going to be different to others in your area,” Zarin says. “That’s what led us to focus on certain sectors and on companies we had invested in before or where we had a unique angle - because we had evaluated it as an investment opportunity before or we had a long-term relationship with them or through our networks we had a differentiated source of insight."

For its first two deals, EmergeVest stayed close to home. It raised just under $50 million to invest in JD United and CS Logistics, in both instances taking out positions they had taken while at HSBC as well as putting in new capital. Of the two investments – which have since been exited – CS Logistics was the most instructive in terms of influencing EmergeVest’s subsequent direction.

The company is headquartered in Hong Kong but has a global presence and a strong emphasis on technology-enabled services. It added to EmergeVest’s existing insights into the sector, enabling the GP to identify areas in which it might participate. One clear opportunity was inbound supply chain services for the China market, where the infrastructure is inferior to that used to transport goods from local factories to global customers.

As a specialist in chilled and fresh food logistics – China is becoming a significant importer in this area – NFT Distribution fit this profile. The acquisition was financed using a $70 million fund backed by an Asian family office. Simon Pearson, a logistics veteran who had previously spent nearly a decade with NFT, helped secure the deal and later joined the company’s board.

Pearson’s progression from advisor to his current role of managing director with EmergeVest tracks the development of the firm’s value creation strategy. Operating executives outnumber investment professionals on the team, with more than 20 people who are either on retainer to assist on investment opportunities and projects as they arise or are on full-time, multi-year secondments to portfolio companies. Twelve are currently active.

The NFT investment also led to the introduction of the EmergeVest Operating System, which is a set of value creation guidelines. “We set a strategy for each business, then specific value creation levers, and finally a playbook for each one,” Zarin explains. “We almost always run a procurement and sales effectiveness program, and we will always professionalize the approach to M&A and implement our standardized approach to board meetings. It doesn’t exist in the ether, it’s real. We share a version of it with the management teams of our portfolio companies.”

Looking forward

These internal protocols and the domain knowledge that sits within them will remain part of the firm’s DNA post EV Cargo. EmergeVest operates at the nexus of logistics and technology; one of the six businesses, Adjuno, is a greenfield platform created by spinning out some IT assets and bringing in external specialists. Technology is likely to feature strongly in the firm’s future as the lessons learned with supply chains are applied more broadly in an enterprise context.

However, there may continue to be some flexibility in terms of capital structure. Having started with pure project funds, EmergeVest’s mandates have become increasingly flexible over time. The logistics fund is best described as a traditional blind pool vehicle with a lot of transparency on deal flow. Zarin’s plan is to let the strategy dictate the approach to capital formation, while acknowledging there has been considerable evolution in fundraising in the last five years.

Whatever the course the firm does take, it will be tailored to best suit the themes that have been consistent in his career – not only sector specialization and operational involvement, but also downside protection.

“I have been through numerous cycles in an institutional environment and the takeaway was a tremendous aversion to losing money,” Zarin explains. “We are incredibly focused on capital preservation and finding ways to return capital at the earliest opportunity to de-risk situations. Some people would consider this a conservative approach, but we will focus on making consistently 2-3x our capital on investments where we have little risk of losing principal.”

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• Topics
• Greater China
• Europe
• GPs
• Buyout
• Hong Kong (China)
• China
• United Kingdom
• Asia
• EmergeVest
• Logistics
• Spin outs