Q&A: Hera Capital's Thierry Panafieu

Q: Hera's fund raising model seems closer to deal-by-deal than to the traditional blind pool structure. Would you classify your approach that way?

A: Rather than deal-by-deal, I would say vintage by vintage, or portfolio by portfolio. Our investors do not get to pick the deals in which they invest. They invest in a structure that is then deployed across four, five, six companies. If they don't like the companies that we're showing them, then we say let's talk again in six months about a commitment a year from now. So we keep the dialogue going.

Q: What is it about this structure that is more appealing than the alternatives?

A: The GP was the all-powerful actor in private equity 20 years ago, but these days there's a much fairer repartition of power between GPs and LPs. And we find that LPs want to understand what they invest in. Because we deploy the capital so quickly, by the time we receive a commitment we have already pre-identified the companies in which we're going to invest. So when investors commit to Hera, they typically have a fairly solid view of where their money is going. And this is something they find incredibly attractive.

Q: What sort of investments do you target and how do you identify them?

A: We focus on Southeast Asia, and effectively on three sectors - consumer retail, media, and technology. The region here offers compelling trends for investments, but we also realize that companies are usually not ready to receive private equity money, for multiple reasons. So we have a methodology which we have labeled the "investor readiness scorecard." This allows us to properly assess the status of the companies in which we invest, so that we know where we can improve these companies after investment.

Q: How did the scorecard come into being?

A: It's actually a mixture of my experience and my co-founding partner's experience. His early experience was in the automotive industry, where operational execution is key to everything. He developed an operational scorecard to make sure the companies his corporation bought would execute properly. When I was working in private funds, we also developed ways to help portfolio companies. When we joined forces, we decided to take a much more hands-on approach and this led to the development of the scorecard.

Q: And how does the scorecard work?

A: We look at a company on seven pillars, ranging from the business vision to the management to the operations to financial discipline. Each pillar has about 50-60 criteria. These are very open questions, so it's very subjective in a way. That's why it takes a long time to do the scorecard analysis. You have to answer about 300 open questions, and each question takes a good half-hour to answer, if you have good systems in place. So when you've been through this, you have a fairly detailed view of the company, of where it stands and of what needs to be fixed, to be best in class.

Q: What is it about Hera that appeals to investee companies?

A: There are very few high-touch funds of our size. Most funds start at $20 million; we stop at $10 million. If you want high-touch funds with cross-border expertise and a real methodology to add value to the companies, that want to invest $10 million, you just won't find any others.

Q: Your fundraising happens quite often. How many LPs re-up from previous rounds?

A: Pretty much 100%. We have a semi-closed group of about 20 investors who obviously like what we do, and who basically come into every single fund - not necessarily with the same amounts, but they do tend to follow us from fund to fund.

Q: What are the limitations in your approach?

A: There are big pluses about what we do, but also some minuses. When you raise a fairly closed-end fund, you don't have a lot of reserves for follow-on investments in your companies. So that is a limitation. It is quite possible that we'll decide to raise a bigger fund, probably toward the end of this year or next year. But this is not decided yet.

Q: If you did decide to raise a bigger fund, would you still be able to take potential deals to the investors on the level of detail that you do now?

A: I think if you really want to be disruptive in private equity you can. So you can easily see ways where you raise a bigger amount of money, but you could still have, for instance, a yearly screening of deals, where you communicate on the future deals you're going to do, and possibly even give some power to the investors to form a view of what you're going to do. I think we'll still be able to be highly differentiated while raising a larger amount of money.

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