Q&A: Headland Capital Partners' George Raffini

Q: How did the spin out first come under consideration?

A: Following the financial crisis, as more regulatory issues started appearing on the horizon, it became clear that there was the prospect of growing uncertainty in the firm. In 2009, we started having initial discussions with HSBC about a buyout and in January 2010, these conversations turned into negotiations. In June 2010, we signed a sale and purchase agreement that was conditional on receiving approval for the spin out from our LPs.

Q: How significant is your third-party LP base?

A: We have always placed great emphasis on third-party capital - historically, HSBC has committed less than 30% of our funds' capital. Each fund has about 15 large and experienced investors, so the buyout was a pretty concentrated discussion. HSBC also understood this and it greatly facilitated the dialogue with all parties.

Q: Do you expect to see more spin-outs in Asia?

A: A couple of cases have been talked about, but obviously I have little insight into what will happen. Apart from the uncertainty affecting the team and LPs when a spin out possibility arises, investors also have less visibility about the future support of what might have been a very supportive parent. These three things combine to make ongoing life as a captive much more difficult. But if a spinout hasn't occurred yet, it's probably behind the curve given the present environment.

Q: Regulatory restrictions are likely to restrict HSBC participation as an LP in future funds. What are the differences do you anticipate between fundraising as HSBC and as Headland?

A: The HSBC participation will likely be much lower, but it seems that only the balance sheet commitment is affected by Basel and other pending regulations. We also have relationships with other HSBC entities - such as the private bank and insurance business - and I don't see that changing. In terms of fundraising, we have been told by placement agents that, as a captive, we were only targeting about 20% of the LP universe. This was due to some investors' concerns about captives in general and the prospect of conflicts. Our target LP base has now broadened enormously and that should more than mitigate a lower contribution from HSBC.

Q: What about losing the power of the HSBC brand in investments?

A: Entrepreneurs have grown so sophisticated during recent years in terms of the types of people they want to work with from a commercial perspective. I find that they are choosing individuals and teams rather than broader corporate entities. HSBC was at times a door opener but the colleague who actually walks through the door is the one who is going to be sitting on the company's Board and building a long-term, hopefully value-minded, relationship with senior management. It boils down to the team and the extent to which they are good business people, not just good investors.

Q: So your investment approach hasn't changed...

A: We are running our business as before but 17 colleagues and I now own just over 80% of the firm. In terms of investment strategy and how we implement it across our core geographies, that remains unchanged. We invest all of our private equity capital in Greater China, South Korea and Southeast Asia while our venture business is also active in India. Since the spinout, we have completed six investments. One that came shortly after the buyout was SK Shipping in South Korea. The severe downturn in vessel values and freight rates in 2008-2009 created the opportunity to invest in a large, well managed business that is well capitalized in an industry where there are a lot of smaller players that are less well capitalized. Although our investment themes will vary somewhat by country, this has been the case for us over the years and is driven by our view of the local opportunity set.

Q: To what extent are deal valuations a concern right now?

A: There is a tension between a more difficult economic climate and the weight of private equity money pursuing deals which could send prices one way or another. In China, the weight of capital is quite substantial, but because of the recent credit tightening and lower visibility regarding the health of many export markets, we are seeing somewhat lower deal pricing. Nonetheless, the degree of multiple arbitrage has, at times, narrowed as the public markets have also come off. In any case, entry prices in China remain higher than in Korea and Southeast Asia, where they have also trended down, but this is not surprising.

Q: Indonesia is attracting a lot of attention from the private equity community. What do you make of the investment prospects there?

A: One of the attractions is the potential scalability of companies in Indonesia. Elsewhere in Southeast Asia, to achieve this type of business scale, companies are often compelled to expand across a number of geographies which is not a straightforward exercise. In Indonesia, businesses have the prospect of achieving material critical mass if they are able to execute well.

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• Topics
• Funds
• GPs
• Headland Capital Partners
• George A. Raffini