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AVCJ
  • LPs

LP interview: Unigestion

  • Holden Mann
  • 27 June 2019
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Asia’s rising levels of private equity talent offer enticing growth prospects for Unigestion’s wealth management clients, but enforcing discipline among emerging markets managers remains a challenge

For many global investors, Asia presents a dilemma. On the one hand, the region’s massive population and rapidly growing economies hold undeniable opportunities. But questions about governance standards, availability of exits, and the ability of fund managers to drive value-add in their portfolio companies can fuel concerns about the risks presented by these markets.

Eric Marchand, a principal who heads the Asia private equity program at Swiss boutique asset management firm Unigestion, hears these worries from his clients on a regular basis. In response, he tries to help doubters understand that the region is far more diverse than most outsiders realize.

“I tell people that investing in Asia is like investing in Europe, with a remit that goes from the UK to Moldova from a GDP per capita perspective – the difference is that the Moldova-like countries in terms of development stage are growing at around 10% per year, which is not the case in Europe,” says Marchand. “By drawing that parallel I think people should realize how vast the landscape is, both from a growth perspective and from a risk perspective.”

Leveraging the differences across Asia’s widely varying markets has been a hallmark of Unigestion’s approach to the region since it launched its Singapore office in 2007, but embracing this variety also creates considerable opportunity for risk. The asset manager has found that enforcing high standards of governance is essential to ensuring productive GP relationships and delivering stable returns from Asia.

Unigestion had over $22 billion in assets under management as of March 2019, with more than 500 clients worldwide including pension funds, insurance companies, financial institutions, high net worth individuals, and family offices. Investments cover private and public equities, liquid alternatives, and multi-asset strategies, with more than half of its global capital managed through bespoke mandates or separately managed accounts. 

The largest share of its capital, $12.5 billion, is devoted to public equities, with private equity following at $7 billion and liquid alternatives and multi-asset investments at $1.3 billion each. Unigestion’s reliance on customized solutions means that the firm lacks a specific allocation to Asian private equity, as commitments to the region vary from vehicle to vehicle. Marchand says that Unigestion has invested around $750 million in the asset class since it entered the region more than 12 years ago.

This is a relatively small proportion of the overall portfolio, but the pace of investments has increased in recent years, with about $100 million committed to Asia in 2018. While not all its vehicles have Asia exposure, those that do tend to allocate around 20-25% of their assets to the region, reflecting a growing appreciation among clients for the wealth creation opportunities that Asia presents.

The three tiers

Unigestion’s approach to Asia is not uniform. The firm sees the region as divided into three major tiers. Tier one comprises the more developed markets of Japan, South Korea, and Australia; Singapore can be considered part of this group as well, though it also serves as a hub for accessing emerging markets in Southeast Asia. 

“These four countries offer opportunities akin to what we would find in Western markets, although we sometimes find that these mature markets in Asia trade at a discount to Europe and the US,” Marchand says. “There’s less competition in those markets for private equity, and in Japan and Korea specifically there’s a bit more skepticism toward the asset class than in western markets.”

The second tier includes Malaysia, Thailand, and China, which the firm calls maturing countries. These markets tend to feature a divide between high-growth sectors driven by an emerging middle class or innovative technology, and traditional sectors where growth is solid but slower. The final leg of the Asia strategy is emerging markets such as India, Vietnam, and Indonesia, where growth remains relatively fast across the board.

“These countries are emerging rapidly on the back of the growing middle class, and whatever sector you’re looking at is experiencing strong growth, which enables us to consider a larger set of industries versus our natural focus on more defensive sectors in developed and maturing countries,” says Marchand. 

As with the overall Asia allocation, breaking down the exposure to individual markets is difficult due to a reliance on separate accounts. But according to Marchand, a vehicle with exposure to Asia will typically assign around 5% to third-tier markets and 10% to maturing markets, with the rest going to developed countries. GPs with a focus on the mid to lower middle market are preferred.

As a result, Unigestion has relationships with a wide array of managers in the region, including pan-regional funds from the likes of KKR and Affinity Equity Partners, along with GPs oriented toward particular markets, such as India’s Everstone Capital, Australia’s Next Capital, and South Korea’s Hahn & Company. The firm also embraces more sector-specific strategies, with commitments to Indian healthcare-focused GP Invascent Capital and renewable energy investor Equis Group.

The macro story is only one aspect of Asia’s appeal for Unigestion and its clients. More important is the number of high-quality investment professionals in the region, which has dramatically increased over the past decade. When the firm began investing in Asia, most fund managers featured Westerners in leadership roles; these days Asia-based GPs tend to be led and predominantly staffed by homegrown professionals who can apply global private equity experience to market-specific requirements.

“You now have a massive amount of talent that has been raised in Asia, studied abroad, and worked in blue-chip companies including banks, PE firms, and brick-and-mortar companies,” says Marchand. “They’re coming back with a bag of knowledge and tools, and they are working in the local private equity industry. You didn’t have that level of talent 10 or 15 years ago.”

This deepening bench of PE talent in Asia means that investment opportunities are stronger than ever before. However, the region is still evolving in many ways, and Unigestion has been careful to maintain a high level of discretion regarding the managers it backs.

A major criterion for the firm is that its GPs must be able to exert a strong influence on their portfolio companies; consequently, passive growth investors hold little appeal. The team prefers managers that will pursue control deals, though it is willing to accept significant minority stakes given the difficulty of gaining control in Asia compared to Western markets. Its highest concern is to avoid situations where a GP has no leverage to force a company to implement internal changes, or to take a company to exit.

“PE managers are realizing that the more you control a company, the more likely you’ll be successful in creating value and exiting it,” Marchand says. “You can’t rely only on revenue growth in China, for example; you need to strategically help the company grow and improve operations, and all these levers are more available if you control the company.”

Managers must be disciplined enough to pass on deals that do not offer significant opportunities for influence, and this can be challenging. In one case Unigestion invested in a fund on the understanding that the GP would pursue only control and significant minority investments. The manager then made several smaller investments, one of which it has written off. The GP seems to have learned from its mistake, but a re-up from Unigestion is unlikely.

Co-invest considerations

One way for managers to pursue larger stakes in deals is by expanding their check size through co-investment, and Unigestion has made several commitments alongside GPs in the past. But the team prefers firms that do not use co-investment too aggressively, which can encourage the pursuit of deals that are out of the manager’s league financially and require larger commitments of time and effort that can take resources away from other companies.

Co-investment can be more useful in situations when Unigestion is considering a commitment to a manager but wants to evaluate it outside of a standard pitch meeting. In the case of one Australian GP, a potential co-investment led to a deeper relationship. “We worked quite a bit on that deal, but couldn’t make it work, and in the end we didn’t do it,” Marchand says. “But during that process of due diligence we got to know the manager much better, discovered that we actually liked its way of looking at a deal, and we ended up making a primary investment in their fund.”

The biggest challenge for the firm is ensuring that its GPs are willing to live up to its standards, particularly regarding adherence to an agreed-upon strategy and pushing their portfolio companies to the needed level of quality to achieve profitable exits. Maintaining discipline can be difficult, particularly in markets where strong macroeconomic growth trends can lead investors to ignore seemingly minor mistakes. In the end, however, the managers that survive when things inevitably cool down will be those that can rigorously honor their commitments.

“Don’t ever accept the excuse that it’s different because it’s an emerging market – you should always arrive with a willingness to expect what you would expect of your more developed markets managers,” says Marchand. “You can’t expect that everything will be perfect, but you need to be with people who have the willingness to target institutional-level behaviors and outcomes.”

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