Q&A: Unitas Capital's John Lewis

Q: How conscious are you of the Unitas Capital brand?

A: We continually try to build up our reputation and the strength of our brand through the investments we make and the clarity of our strategy, as well as the way we interact with management partners and LPs. If we are create a distinct value proposition that attracts potential portfolio companies, resulting in good deals and good returns, the value proposition will be clear to LPs. So what we say to the two groups is very similar.

Q: In terms of what LPs require of Unitas, how important are environment, health and safety (EHS) issues?

A: Universally, increased attention is being paid to compliance and people are particularly sensitive about emerging markets because these issues get plenty of coverage. Take for example the issues surrounding Chinese companies listed in the US. We are very careful and have strict compliance procedures in place at all our companies. We haven't seen a huge change in terms of LPs asking for lots of documentation but I wouldn't be surprised if that trend developed.

Q: To what extent is EHS a priority when exiting investments to multinationals?

A: Strategic investors have made China a top priority and they are looking for acquisitions for market entry or expansion. However, they do get nervous about systems and compliance, and the risk of ending up in a very messy situation. One thing we can do is ensure the portfolio company is very clean. When Unitas and Affinity Equity Partners sold Beijing Leader & Harvest Electric Technologies to Schneider last year, a number of strategic investors were interested. One reason it appealed to them was the company had good systems and a leadership team that could interact with multinationals. Affinity and ourselves did a lot of work, introducing new senior management and establishing better financial systems and controls.

Q: What kind of post-close conditions do strategic investors seek to impose?

A: It varies. There are European-style transactions where there is no recourse for the buyer and it's similar to buying a public company. On the other hand, you have US-style acquisitions where there are more covenants and undertakings on the part of the seller and more recourse for the buyer. Depending on competitive dynamics in the deal and other factors, a private equity seller might accept some recourse but it would typically be very limited. And in no event would the buyer be able to recover more than the sellers' proceeds. There have been situations in the US, for example, where a huge environmental liability emerged and the buyer has gone after the seller for more than they paid.

Q: What about the brand and reputation in a fundraising context? Your current vehicle closed in 2008, so presumably you are thinking about returning to the market...

A: We haven't finalized timing for our next fund. We still have capital left in our current fund and our focus is on investment, but, yes, we will enter the market in the not too distant future. We feel our particular niche - being a leading Asian franchise in the industrial and consumer-retail spaces, combining local Asian knowledge with global business and deal experience - is recognized by existing and prospective LPs. We have a long track record in Asia and a powerful value creation model that is unique in the middle market. Several of our operators are former CEOs who have run businesses and done deals, and on each investment they share responsibility with so-called deal partners. They also share carried interest across the fund.

Q: You have made two investments this year - Korean outdoor clothing maker NEPA and Chinese restaurant chain Babela's. What are your operating partners doing with these companies?

A: With NEPA, the focus in particular is helping them expand overseas. Korea is the second-largest outdoor apparel market in the world and the company has developed lines with great design and performance characteristics. We think its products will have appeal in foreign markets, starting with China. Eugene Suh, who leads our consumer and retail business, and Jay Lee, who was formerly CEO of Buy The Way and before that was at Yum Brands and PepsiCo, are in charge of that investment. With Babela's, there is a good brand and platform but a whole range of operational improvements are required, ranging from procurement to restaurant design to what's on the menu. Gene and Jay are also working on that alongside Jim Tsao, who also comes from an operating background and leads our overall efforts in China.

Q: Where do you see the most investment potential right now?

A: Public market valuations have come down in China but you still don't see a lot of entrepreneurs willing to sell controlling stakes to PE investors. However, we are seeing more deal flow in emerging privately-owned consumer and retail businesses and cross-border industrial. We own four companies that were originally based outside of Asia but have a big presence in the region. Our focus is on globalizing them and helping them expand in Asia.

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