Q&A: ICG's Christopher Heine

Q: How has the nature of ICG's investment evolved in Asia?

A: When we first came to Asia, investing from ICG's balance sheet, we were investing in mezzanine for buyout sponsors, taking equity alongside the mezzanine through a warrant or a direct co-investment. When we raised our second fund in 2008 we had to change strategy due to the global financial crisis. In 2009-2010 private equity sponsors were not doing new deals but looking at their existing portfolios and deciding which companies they would continue to support and which they would let go. We started to do capital restructurings, primarily for sponsors that wanted to hold on to businesses and needed some form of capital injection, and sponsor-less deals, because some of our larger sponsor clients had raised larger funds and were moving away from companies with enterprise valuations of $200-300 million. We also found that quite often stakeholders in those businesses did not want to sell control to a leveraged buyout house. What they wanted was a source of capital to grow the business or help buy it from other shareholders or some form of shareholder consolidation.

Q: Where does the recent investment in Korea-based Time Education fit into this?

A: Tstone, the sponsor, needed to provide its financiers with an exit and they wanted stability in the capital structure to give them time to implement business improvement plans. Given the size of the transaction, we had the ability to underwrite the entire capital structure. We don't intend to hold the senior part of our investment for very long, maybe 12 months, but it gives the sponsor, and the management team, financial certainty. The second, junior part of our investment was a mezzanine tranche and a new share issue, which is all growth capital. In a typical sponsor-less deal we want to provide a company with capital to fulfill an established business plan on an accelerated basis. In another investment - Ventura Motors in Australia - the business had been in the family for 60 years and it was going to stay there, but they needed a capital solution to acquire their number one competitor and there was a limit on how much money the banks would lend them for the acquisition.

Q: Do you provide mezzanine for companies scaling up ahead of an IPO?

A: You see that in Greater China but in the rest of Asia it is rare. That is driven by our investor needs. We want to give the investors absolute and relative returns - money multiple plus IRR - and that is a differentiator from some of the other liquidity in the market. Pre-IPO financing generally does not give us the money multiple we need, which is 1.7-1.9x. Similarly, we are not shooting for 40% IRRs, but high teens. The combination of the debt being out for some time is a good thing for us, even though it lowers the IRR, because we can achieve our money multiple targets. Being non-amortizing capital, it also allows the stakeholders to re-invest their cash back into the business and further increase earnings. At the same time, we take exposure to the equity as a partner in the business, which is another differentiator.

Q: What are the most active markets for mezzanine for buyout sponsors?

At the moment I would say Southeast Asia; it is quite interesting how the deal flow has picked up. Australia has slowed down quite a lot, primarily because of the commodity cycle and the high valuations being achieved in the IPO markets making it difficult for sponsors to meet the valuation expectations of vendors. Korea has been reasonably active and then Japan up until recently has been very active.

Q: Why do you address the Japan market through a joint venture fund with Nomura?

A: The reason we did that fund was because there has been a mezzanine market there for many years, but it is completely Japanese. The insurance companies, pension funds and banks have been investing in the asset class for a long time. We could see the market opportunity but the target yields of 10% gross IRR and a 1.3x money multiple didn't satisfy the requirements for our Asia fund investors. The key was finding a local partner. Nomura is a strong local partner, with a large investment bank and nationwide brokerage network, while ICG brings fund management expertise to the business. The other element is the Japanese LPs. Everyone is talking about them because of the Government Pension Investment Fund (GPIF) perhaps going into alternatives, but it is going to take time. For us, raising the money for the Japanese mezzanine fund from local LPs has been an education.

Q: What is ICG's approach to enforcement of investor rights?

A: We invest in jurisdictions that have the rule of law, the ability to take security and the ability to accelerate and enforce: Japan, South Korea, Greater China (mainly Hong Kong and Taiwan), Singapore, Australia and New Zealand. We can look at Malaysia and Indonesia but the geographic concentration is lower. However, we are not an aggressive partner and we rarely enforce and accelerate. If a company has as short-term problem we prefer to sit down with all the stakeholders and negotiate a fair outcome. This may mean we convert our mezzanine to equity, put in super senior, put in some more equity or put in more mezzanine funding. We can normally put in extra money when others cannot or are unwilling to and that is why we have those rights built into the documentation. We lead, manage and arrange all our deals. We also control at least 51% of the mezzanine we underwrite so we are always in control of the syndicate. When we go to a jurisdiction like China where there may be a less-demonstrated ability to accelerate and enforce then we start looking much more at equity and equity returns.

Q: What are your views on valuations in China?

A: Valuations in general are very high, particularly in China, and leverage multiples are rising as liquidity chases yield. Due to these concerns, we are looking primarily at four industry sectors - healthcare, education, business services, and food and beverage - that are generally resilient to economic downturn. There has still been a huge amount of activity in healthcare and education in China, and it is probably too hot for what we do, but there are situations like Time Education where there is a demand to be satisfied in the short term.

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• Topics
• Mezzanine
• Expansion
• Buyouts
• Intermediate Capital Asia Pacific
• Asia
• Mezzanine
• buyout
• Growth capital