Q&A: Sylvan Group’s Gerald Leong

Q: How did you come to join Sylvan Group?

A: I was head of origination for Southeast Asia at UBS Capital and helped pioneer LBOs in Asia during the Asian financial crisis. I went on to operate in Korea and Southeast Asia, where I met Kyungsun Chung and Scott Jeun. Kyungsun is a grandson of Hyundai Motor founder Chung Ju-Yung and very strong in ESG [environmental, social, and governance], which he has been doing for several years with various initiatives. Scott has extensive corporate M&A experience. They hatched a plan in 2019 to do impact investing with a profit element. I joined the following year as the LBO specialist and helped launch the Sylvan Asia Growth Fund.

Q: What progress have you made?

A: We haven’t taken the fund to market yet. But we’ve raised almost half of the target USD 400m through our relationships at institutions like United Overseas Bank and Hanwha Life Insurance. With impact funds, it’s important to have institutional investors, and we expect to leverage some synergies with LPs in the long term. For now, the intention is to have a sponsor close, do a few deals, and complete the fundraising over 18 months. We have two geographic lenses, targeting emerging markets in Southeast Asia as well mature markets such as Korea and Japan.

Q: Your first four deals are in healthcare and pharmaceuticals. Can you explain?

A: We’re trying to build two thematic roll-up platforms to invest at lower entry valuations. The first is for healthcare, which we want to be a vertical model to create high quality service integration. People tend to build healthcare platforms on a horizontal basis to scale, which is less distinctive. The second is an in-licensing pharma platform, which has two components. One component is focused on targeted therapies, orphan drugs and drugs that alleviate suffering, which is in line with the UN’s third SDG [sustainable development goal]. The other platform component is focused on in-licensing drugs in the final phases of development as a strategy for growth so we can control acquisition costs and arbitrage valuations selling them to more challenging markets like Southeast Asia and the Middle East.

Q: Biotech companies are not often framed as SDG investments…

A: It’s a lot about quality of life and very closely aligned with social needs. For example, one investment [Juniper Biologics] focuses on cancer support drugs, so patients can manage nausea and vomiting during chemotherapy. The pharma industry is so big, you need to segment it to get to the impact business, but private equity firms have typically not acquired specialist drug companies as a sector focus yet. I think that will come as the investment industry and banks bring in more specialist pharmaceutical teams. You’ll see that because specialist drugs will be an important part of social impact.

Q: How would you describe your strategy?

A: The first bottom line is always about financial profits. Once we have that, we look for impact. Because impact and ESG are so new in Asia, we believe we can play a special role in introducing and implementing those strategies if we are able to take control of companies. But it has to be an investment that is also profitable. If you don’t do that, when you go on to raise your second, third, fourth fund, and investors don’t see returns, they may get impact fatigue. They need to be able to see that the team can hold itself together and generate enough income to grow.

Q: Are you pursuing buyouts exclusively?

A: We’re focused on softer control deals in Asia rather than buyouts in the US sense because transportable management talent is not as pervasive in Asia yet. We want financial control but operating companies and achieving returns requires cooperation with existing management or founding shareholders. I know a lot of funds in Asia have trended their performance expectations down to 12% returns and 2x multiples because of strategy drift, but we’re targeting upper quartile returns. There’s no reason we can’t do that with a USD 400m fund. We will only do impact projects that are quite capable of upper quartile returns.

Q: What other sectors are of interest?

A: We’re looking at energy transition, which is very interesting, but if you apply a double bottom line approach, only 10-15% of the opportunities will be profitable. You need to do your homework in that sector, analyse your value chain carefully, and go into sub-segmentation. In general, due diligence really needs to be up to speed in impact and ESG. If you just received your MBA and did a course on impact, that’s not going to cut it. You need to have been a practitioner for the last 4-5 years to implement concepts like IMP [Impact Management Project] measurements.

Q: What’s your process for assessing companies?

A: We have a concurrent process, where we launch a typical financial due diligence process and almost immediately carry out the ESG diligence. We work closely with an organisation that specialises in impact, and they come in just a step behind us once we establish the strategy and the elements of the company. By the time we send the first-round report to the investment committee, we have a clear idea that the financial goals and the impact-ESG goals can be met. This was the approach for the Juniper Biologics deal when we looked at it during due diligence. If we like the ESG element but the financial returns cannot be met, we will not do the deal. It’s a true double bottom line.

Q: What’s your reaction to scepticism that financial returns and impact can be equal priorities?

A: That is a symptom of the embryonic stage of impact and ESG investing, where nothing is clear. But today, we’re talking about the introduction of Article 8 and Article 9 funds [in the UN’s sustainable financial disclosure regulation], so there’s no excuse for confusion. In Article 9, the financial outlook is secondary to ESG and impact. Then you have funds like ours, where financial returns are equally important. There’s nothing difficult about it. It’s about having the will to do it and not paying lip service. In Asia, impact-ESG is so new, it’s still a debate, but that’s fading away. Placement agents already talk to me about Article 8 and 9.

Q: What challenges will the industry face in this transition?

A: It goes back to core competence. What are the building blocks in terms of competence that you need when you move into a new era of investing? By definition, anything that’s innovative means that it’s never been done before – but that doesn’t mean you can’t have the basic components to succeed. It’s not about marketing. It’s about reinventing yourself and understanding how to set criteria and assemble a team to meet those criteria. In 1997, the industry was mostly minority investments, so we had to pioneer LBOs. Now, it’s another new era of investing. ESG and impact are here to stay. People who are just toying around with the idea are not going to last.

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• Topics
• Southeast Asia
• GPs
• Fundraising
• Buyout
• Healthcare
• Singapore
• Pharmaceuticals
• energy
• Impact investment
• ESG