Q&A: United Overseas Bank's Wee Yap Yeo

Q: Why is the fund being launched now?

A: We had been planning this for a couple of years. For this business, it is easier to operate as a fund than as a unit within a bank. By coincidence, Orix was also looking for exposure in this area in Southeast Asia. It was a good match for UOB's strengths. The relationship between UOB and Orix goes back to the early 1970s.

Q: What sort of companies are you targeting?

A: If the company is sizeable it can just tap the capital markets, so we are looking at small to mid-size companies. They can get bank financing but perhaps not enough to cover all of their financing needs. There is a gap and we can help fill it. They might not actually need capital for that long. A businessman may need money to build a factory and get it into production, but once the revenue ramps up and he is generating cash flow then the credit metrics are okay. He needs some kind of solution for 1-3 years and he doesn't want too much equity dilution.

Q: Mezzanine financing can cover everything from equity investment to private lending. What will the fund focus on?

A: Solutions are tailor-made to the situations we come across. One angle is growth capital. A company wants to buy assets, grow for three years and then go for an IPO. That's pretty standard. We typically like to do a debt component first and then we get warrants that allow us to convert part of the debt into equity. We are also looking at some form of advisory business. For example, there is a company that wants to go for an IPO in two years' time, it has some senior debt and wanted to replace one of the banks. It went to my corporate banking colleagues and they liked the company but the gearing was quite high, so they asked us if we could come in and replace the senior debt. However, it was an issue of convincing a guy paying a 4-5% coupon on senior debt to pay us 20-25%. We did convince him. We said, "You're going for an IPO and we can help you restructure the company in a way that the net profit increases by 50%. We will then take part of the value we have created for you." In another situation, we are looking at a company right now - a listed business of decent size - that has borrowed money from the financial markets with very strict covenants. It is a capital intensive business and they need to buy assets to grow, but the more they buy the closer they get to the covenant limits. We lend them the money so they can grow, minimize the dilution and further down the road they raise a rights issue and take us out. We also do M&A financing, corporate restructurings. It is very varied.

Q: Do you find that as companies get comfortable with the concept of mezzanine financing their requirements become more complex?

A: Many mid-size companies are not that sophisticated. You are dealing with a businessman who is 50 years old and has been running the company for 30 years. He needs $50 million, goes to the bank and it agrees to give him $30 million so he has to cover the remaining $20 million on his own. We try to find a way to help him achieve his goals while achieving our desired returns with our required protections.

Q: What sort of returns do you need?

A: We are running at about a 20% IRR. We get an upfront fee from investments, then an interest coupon and an equity right. Returns come in most quarters so there is a very low j-curve effect. We also plan on recycling capital during the investment period. An investment may last two years and then the proceeds go back into the fund.

Q: How did the macroeconomic volatility in Indonesia - the biggest market in Southeast Asia - impact the mezzanine space?

A: There is a macro event but what is the impact on individual companies? For example, coal isn't particularly attractive right now. There are plenty of low quality, high cost producers that can't survive and they are looking for capital to strengthen the balance sheet. For us, it is not a very good investment opportunity - we can try to fix financial issues, we can't fix market issues. Then there are industries that aren't so affected. For example, the consumer-retail space is still growing, real estate still looks okay. You also find companies that are looking to expand beyond Indonesia, to Malaysia, Thailand or China. In addition to providing capital, we can go through our databases and figure out who could be a good business partner in the target market, or who could be a potential customer or a lower-cost supplier.

Q: In what other ways does the banking connection help?

A: We save a lot on deal origination resources. With China, it's one system and one language, but Southeast Asia is extremely fragmented. Indonesia is the largest market but then you have Thailand, Malaysia, Singapore, Philippines, Myanmar - and each country is a market on its own. If you do a deal in Thailand, how are you going to conduct your due diligence? We can draw on the bank's resources. If we are doing a deal in Indonesia we can map out the whole family for three generations. We know what businesses the guy has, his areas of focus, where he sits in the family hierarchy.

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• Topics
• Mezzanine
• Southeast Asia
• Fundraising
• Fundraising
• Mezzanine
• Southeast Asia
• UOB Venture Management
• ORIX Capital