Industry Q&A: Stephen Greer, Oaktree Capital

Q: What are some of the key messages you’d like to convey, from your career as an entrepreneur, to potential entrepreneurs or investors in Greater China?
A: The most important thing for me as an entrepreneur, is it’s about being in control of your business and/or your investment. I don’t mean in terms of doing a deal at 51% or 80%, or whatever the threshold is. It’s really about being actively involved enough that you’re seen as a partner by your partner. Because as an investor, the value that you bring to the table the day before you write the check is the check: the value you bring after you write the check is, in the minds of most businesspeople, pretty much nothing.

Q: Is there any way of dealing with such situations, rather than simply avoiding them in the first place, either to secure adequate controls from the start or work them in?
A: You can have various partners with various roles, but if someone is a 10% partner, they should be doing 10% of the work. And as soon as they’re contributing more than their 10%, then they might get to a point where they’re seeking to gain more than the 10%. If you’ve got a partner who can get your licenses, if you have a Chinese partner who is good at getting land, or at sourcing materials, great; but you don’t want to become over-dependent on your local partner. If you look at the situation and say, this business can’t survive without my 10% partner, then they are controlling you.

Q: What’s your evaluation of the quality of the Chinese businesses you’ve seen?
A: Better, better and better. We’re seeing marked improvement of operating and management ability. But again, and it may be something it takes a generation to achieve, you do have a kind of family-business mentality. There’s a founder and leader, and that person controls the business as a king. Until that can get to the point where it’s a power-sharing system authority, backed up by management systems and controls, then your fate is in the hands of one man, or woman.

Giving up power is something that’s challenging for anyone, and it’s a hard sell to convince anyone that the value of the business will be greater if people on the outside can see it’s a team effort and there is shared power.

Q: What is the contribution you can make to a financial investor in terms of supporting what they do?
A: This is something that’s really new to the industry. When you had booming stock markets and fast-changing multiples and growth, you didn’t really have to tinker with the businesses. Now we’re in tougher economic times, and six guys in the conference room are going to struggle to manage $100 billion of businesses through difficult economies. All of the major private equity firms I can think of have people like me who are more from industry, or have more operational backgrounds. What we can bring to the table is, when looking at investments, we look at them from a different perspective and ask different questions – more along the lines of how is this going to practically work, as opposed to how are the valuations going to work out.

Once you’re in an investment or have portfolio companies, sometimes it is about managing HR issues, or sourcing raw materials, or things of that nature. These aren’t the things that private equity guys necessarily have a lot of experience in.

It depends on what the problems are, and some businesses need more tinkering than others. But I think the model has shifted. We are now owners and operators of businesses, not just people who are betting on horses. That’s here to stay.

Q: What’s your view of where the market is now?
A: It’s a very different investment style in the US and Europe, and in Asia. Asia is very much a growth capital investment market. You’re paying out a high price for something that’s growing at a high rate, and you’re going to make your return out of growth. Whereas in the US and Europe, you’re looking for distressed valuations, and trying to figure out how you can salvage something. Both have interesting aspects to them, but distressed investing in Asia has not really been on the radar. It’s much more growth investment.

You’ve had this unbelievable runup in valuations over the past year, in the middle of very trying economic times. My own personal view is, it’s a very challenging time to invest. If the nature of growth investment is an aggressive multiple on current earnings that is going to pay back out of future growth of earnings, if this turns out to be the peak of a short-term cycle, this could be a dangerous time to write a check.

[Stephen Greer’s book, Starting from Scrap, has just been published by Burford Books.]

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• Topics
• Performance
• Funds
• Greater China
• Oaktree Capital