Q&A: ShawKwei & Partners’ Kyle Shaw

Q: What is the investment environment like right now?

A: We are very busy, and our fund is now about two-thirds deployed. It’s a good environment for investment but you must be more willing to fly around and see things – people aren’t coming to you and pitching you at your desk. We are a control investor, and we try to be a value-added investor, so we need to spend time with companies. The pandemic slowed us down, for sure, and now maybe it takes twice as long to do a deal as before.

Q: It often seems to be the case that investors are working on deals but not necessarily getting them across the line because of valuations and general market uncertainty. Is this true of ShawKwei?

A: In my small world, that’s not the case. The things we’ve been looking at are moving. There have been some where we stopped because after conducting detailed due diligence, we didn’t think they were worth pursuing. On another, a couple of weeks ago, we stopped because we lost. It was a two-horse race, and the other horse was willing to pay more and close faster than we were. And then recently we signed a letter of intent for another deal. A lot of people talk about deals not moving, but that’s par for the course in private equity.

Q: So, global macroeconomic issues are not proving to be a hindrance?

A: We live in a world where interest rates are rising, so there is a natural hesitation to wait until we tip into a recession or interest rates stop going up. There is also a lot of concern about geopolitics. Other than that, it’s not so bad. US-China decoupling creates interesting opportunities for people outside of the US and China; the price of oil isn’t all that high; the stock markets aren’t all that bad. Things could take a turn for the worse in a month or so, but the markets are telling me that people have accepted the status quo. I think we are exposed to some interesting trends around global supply chain redeployment, energy, and marine services. And we’ve tried to position ourselves in Southeast Asia, which is a vibrant spot right now.

Q: Is that why you personally relocated from Hong Kong to Singapore last year?

A: I was in Hong Kong in the late 1980s and early 1990s and then I moved to Shanghai in 1992, staying there for five years. It was a useful experience. A lot of people in Hong Kong were saying, ‘I should move to Shanghai,’ but they were comfortable in Hong Kong and thought they could do China on fly in-fly out basis. My view has always been that you need to be somewhere to understand what’s going on. After five years in Shanghai, I felt I did understand, so I came back to Hong Kong because I wanted to be more than just a China investor. Moving to Singapore wasn’t so different. You must be all-in, not fly in-fly out.

Q: Is ShawKwei now more Southeast Asia-centric than Greater China-centric?

A: We did a deal in Australia recently; we are expanding our portfolio companies into the Middle East; we have a large business in India; and we are looking at deals in the US involving companies that are Asian in their focus. Singapore isn’t just a Southeast Asia play; it gives me the ability to pursue regional opportunities.

Q: To what extent does this reflect customer appetite for China at the portfolio company level?

A: Almost daily, customers of our portfolio companies are expressing their desire to reduce manufacturing in China and reduce their exposure to China. More recently, they have wanted to reduce exposure to Taiwan as well because of concerns about a blockade or an invasion cutting off supply chains. No procurement officer sitting in the US or Europe wants to be in a position where they can’t put anything in the warehouse, so they just aren’t taking risks. They are going to Southeast Asia and asking suppliers to provide the same components. We don’t spend a lot of time hunting for business, it’s more like business is coming to us, it drops in.

Q: Which countries are the biggest beneficiaries of this phenomenon?

A: Malaysia and Thailand are picking up business. Vietnam was but in the last six months they’ve suffered a credit crunch and a property price collapse, so things have slowed a bit, but they will come back. Indonesia is going to benefit. India is already benefiting, and people are trying to figure that out. There is also a re-shoring angle, which benefits the US, Mexico, and Canada. People want to be closer to production.

Q: Does Southeast Asia have the infrastructure to handle this additional demand?

A: Two US companies we have as customers have set up major facilities in Malaysia over the last couple of years – we are talking 20–30-acre sites and hundreds of millions of dollars of investment. That’s just two companies that come to mind because I was dealing with them yesterday. A lot of foreign companies are setting up shop in Southeast Asia and they are creating the infrastructure. It might be slower than they would like – 24-30 months rather than 18 months – but it’s getting done.

Q: What do these shifts mean for exits? Are you seeing more interest from private equity buyers?

A: There is a lot of interest in Southeast Asia, so there is no shortage of natural buyers for assets in the region. We haven’t sold much to private equity in the past, but I think that will change. Private equity is more liquid nowadays and may be underinvested, so they are looking to put money to work.

Q: You’ve owned precision manufacturer Beyonics for more than a decade and last year you expressed a reluctance to sell given efforts to reorient the factory footprint towards Southeast Asia have started to pay off. What happens next?

A: We keep getting new business that is 6-9 months out and we don’t want to sell until it comes in because people aren’t willing to pay for something when they aren’t sure if it will happen. We need to stop getting so many opportunities that are further down the road or forget about selling based on what we think we can get in 6-9 months. The challenge is that the business hasn’t plateaued or matured yet – we are still in an extremely high-growth mode, and we are catching and harvesting a lot of interesting customers. At the same time, the business isn’t highly levered. In a classic leveraged buyout, you pay down the debt and get some improvement in EBITDA and there is a multiplying effect on the equity investment. However, it diminishes the longer you hold it because debt is expensive, so you are incentivised to pay it off quickly. With Beyonics, we are seeing earnings growth and the pick-up in multiple is driven by the quality of those earnings.

Q: You’re also invested in CR3 Group, an engineering services provider that wants to transition from oil and gas and chemicals to low-carbon areas. Is this reflective of your broader approach to energy?

A: Yes. We want to participate in energy transition. CR3’s traditional carbon-based customers are moving towards clean energy, and we can accompany them on that ride. There is strong cash flow from the traditional business, so we can use that to make investments for the future while remaining profitable. It’s not like a start-up where success is based on our ability to continue raising capital. Energy transition will be a significant part of our strategy going forward. We are already exploring opportunities involving clean energy-type businesses on the battery side.

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• Topics
• Southeast Asia
• Industrials
• Buyouts
• Trade sale
• Technology
• Asia
• ShawKwei & Partners
• Singapore
• manufacturing
• China