Q&A: L Capital Asia's Ravi Thakran

Q: What does L Capital's merger with Catterton mean for L Capital Asia?

A: L Capital Asia will still have separate funds, our geographical focus remains the same, and our industry focus remains the same. We might widen our scope a little bit to include a few other categories like packaged consumer goods, fast food and beauty services because Catterton has expertise in these areas and can advise us. If we have Asian companies wanting to go to America, there is a Catterton team that can advise them on how to get started, where to go, and who to talk to. Similarly, if they want to bring companies to Asia we can provide assistance. Furthermore, while our front end is operations and our back end is investment, they are the opposite. Together we will get good leverage on their investing rigor and our knowledge of building brands. And as part of a platform that will have $12.5 billion under management once we've raised our next fund, we will have the capacity to do larger deals. In the past it might have been difficult for us to look at a company in Australia with US operations, but as L Catterton we would be more confident in investing.

Q: How will the ownership structure of the GP change?

A: L Capital was 100% owned by LVMH and Groupe Arnault. Now they will retain 40% of the GP and the rest will be owned by partners of Catterton and L Capital, including members of the Asia team. It is a shift from to a partner-led platform from a single sponsor-led platform, and most investors prefer that because there is an alignment of interest with the team.

Q: How involved will LVMH be in L Catterton?

A: LVMH will be an LP in the new funds; it has been an LP in Catterton's funds since 1998, sitting on the advisory committee. And with 40% of L Catterton, it will have an economically larger interest than 100% of L Capital. The merger came about because L Capital had the ambition of building an American platform and Catterton wanted to create an Asian platform. They both already had a presence in Europe. They are also similar in nature, with a focus on consumer and lifestyle assets. Coming together, you hit the ground running, you get complementary teams, and you have a truly global platform.

Q: What is the nature of LVMH's operational involvement in your investments?

A: We have our own experts at L Capital, many of whom came from LVMH - I previously spent 25 years in operations at Tata Group, Swatch Group, Nike and then LVMH. We have people with media buying, branding and marketing backgrounds who are 100% L Capital. Besides that, we have a host of people - LVMH and non-LVMH - who work as exclusive consultants to us. For example, we have the gentleman who built the Bulgari business in Asia Pacific, the former president of Rolex, and the former chairman of Morgan Stanley in India. These people serve as board members or advisors to our portfolio companies. Finally, we have regional heads at LVMH who we put in as board members at our companies. All these people are incentivized, either through direct compensation or through options or co-investment in the companies.

Q: Can you give an example of how this has worked in practice?

A: Charles & Keith is a Singapore-based company that primarily sold women's shoes in Southeast Asia with a small presence in the Middle East and India. They had global ambitions, but when we invested four years ago we told them not to go anywhere unless they were ready: they needed a sharper brand image, with high quality stores and merchandizing. We got them ready on all fronts. And we took them from a single category focus into bags and accessories. Now women's shoes account for less than 50% of the business. They have gone from 100-plus stores to more than 600, including 100 stores in China that deliver a 25% EBITDA margin. The company has also entered Japan and Korea and it is looking at Europe. This became possible because we put in talent to work on the product line, store design, and the China entry strategy. Our value-add is very granular.

Q: When you closed Fund II there was some hesitance about investing in India. Does this remain?

A: There have been no investments in India from Fund II because the country was running into policy paralysis and we don't have to be there for the sake of it. We've done some great deals in India from Fund I: PVR Cinemas was sold within three years at a 3.5x multiple, while Fabindia has been growing tremendously and we are now working on an exit. India is now looking a bit better on the policy front and the economy has improved, but it's like an elephant that when it starts to turn it takes five or six paces to get into line. We would make another investment in India if we found a very differentiated asset - one that can grow within the existing infrastructure and isn't dependent on new malls being built. That happens at a much slower pace in India than in China. Fabindia, for example, sells ethnic wear and doesn't need new luxury malls for growth.

Q: And what about China, given the slowing economy?

A: China accounts for about 50% of Fund II. The country has been overhyped and you had to be incredibly sharp to find high-quality assets. Today, we see companies with exposure to exports and infrastructure struggling, but consumption is still growing. While the luxury segment has been hit by the austerity drive, we focus on middle market consumers and our three companies in China are doing well. The investment environment has improved because the hype has gone and you get better valuations and then groups like ourselves that have shown good performance are now platforms that entrepreneurs want to work with. We recently agreed one investment - a control deal - for a menswear business at a valuation that would have been unheard of two years back. It has been four-and-a-half years in the making, building relationships and showcasing what we can do.

Q: You have also been more active in developed markets like Korea and Australia in Fund II. Was this because you wanted to do more control deals?

A: We have done more control deals as a matter of strategy. The second fund was larger than the first and we were more confident in our ability to convince entrepreneurs because our approach was well known. Going forward, we will still want to have a good mix of majority and minority deals. If we only did buyouts we would miss out on opportunities with founders who will not give up control at any price. In North America and Europe, an entrepreneur takes a company from point A to point B and is happy for someone else to take it to point C. Asian entrepreneurs are far more emotional about ownership.

Q: Now Fund II is close to full deployment, what are your expectations for Fund III?

A: Fund II is about 90% deployed and we will invest about $1 billion in total, plus another $500 million in co-investment. The next fund is likely to be slightly larger. We will keep broadly the same geographic and sector focus, although we might expand our scope a bit. We have never done a deal in Japan and it is looking like a growth market. It has always had some strong brands. In terms of sectors, we would like to do more in beauty.

Q: How are things looking in terms of exits?

A: We have deployed our capital very quickly - Fund I closed in 2010 and Fund II in 2014 - so exits are always a question. The average life of our assets in the first fund is still only about three years. We have made four exits, each of which has achieved between 2x and 3.3x multiple, while the IRRs range from 25% to more than 100%. A lot of funds have difficulty exiting minority positions, but we've managed it in India, China and Southeast Asia. Good quality assets are few and far between, so if you have the number one beauty player in North Asia or the leading cinema chain in India, there is interest from all kinds - strategic investors, other private equity firms, sovereign wealth funds.

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• Topics
• Investments
• GPs
• Greater China
• Australasia
• North Asia
• L Capital Asia
• China
• Australia
• South Korea