Q&A: OCBC's Daniel Kwan

Q: What was OCBC's track record in PE ahead of the new fund?

A: We have been making private equity investments for more than 10 years and through our team - the Mezzanine Capital Unit (MCU) - that we built up within the bank. We have made 77 investments of which 59 have been realized, delivering an IRR or more than 15%. Over the past six years, the IRR has been over 20%. We wanted to create a more efficient investment platform and raise capital from institutions as well as from individual investors. The Southeast Asia and China stories are very interesting and we have a lot of investors who want to get exposure to these markets. OCBC Bank itself invested S$200 million ($140 million) in our fund. We also have a significant number of high net worth individuals regional banks, two Japanese financial institutions, insurance companies and a sovereign wealth fund. The LP base is highly diversified.

Q: There is a focus on small and medium-sized enterprises (SMEs) - companies that have for a long time struggled to get traditional financing. Why launch the fund now?

A: There are internal and external reasons. First of all, we needed to build our track record and this can't happen overnight. We also believe there are several advantages for a fund investing in SMEs at this point. We a market leader in the SME space and the Singaporean and Malaysian governments are both supporting the sector. In China and Indonesia, a large proportion of PE deals are in the mid-market segment. Some companies in Indonesia have reached a certain business size but are still tightly-controlled by the founders. In our view, their behavior is very much like that of an SME. From our experiences in our home markets of Singapore and Malaysia, we understand what these business owners are thinking and what motivates them. That's why we believe we have the capabilities to tap into the SME sector.

From our experiences in our home markets of Singapore and Malaysia, we understand what these business owners are thinking and what motivates them

Q: Several PE firms and regional banks also have SME-focused mezzanine funds. How are you differentiated?

A: What differentiates us from others is our longer track record. We also have teams on the ground - there are 22 MCU employees in total across Singapore, Malaysia, Indonesia, and China. Another key consideration is that we will only invest through the fund, not cherry-pick better deals for its own balance sheet. Just as importantly, we are able to leverage OCBC Bank's strengths. There are many funds out there but they are often standalone funds. When we invest into companies, one part of our value-add is banking support. A lot of deals only address the investee's need for equity or mezzanine financing and so they have to look elsewhere for debt funding. Through our banking relationships we can offer complete financing solutions.

Q: TTo what extent do these banking relationships help generate deal flow?

A: We recently acquired Wing Hang Bank in Greater China, but even before that OCBC Bank already had a significant presence on the ground in China. MCU, being a unit within OCBC Bank, has a very close working relationship with the bank's customer relationship units. It's always a two-way traffic. On one hand, we can bring a lot of clients to the bank. And on the other hand, the banking units can refer deals to us and their clients want to invest in our fund as well.

Q: What strategies are you looking at in each market?

A: We operate as three clusters: China, Indonesia, and Singapore and Malaysia combined. We don't allocate a specific amount to each cluster but it's a pretty even split. We have already made one investment in Singapore, and we're looking to complete 15-20 deals in total across the four key markets. By the end of this year, we hope to have another 3-4 deals, deploying about $100 million. Our sector focuses are in line with the growth areas in the countries in which we're operating - these include utilities, telecom, and education. That said, our investment strategies are tailor-made to each country. For example, a lot of deals we have done in Singapore and Malaysia have been structured as debt with an equity kicker. In China, there are more direct equity investments. Regardless of how we structure deals, we must ensure there are multiple exit options. If a trade sale or IPO doesn't happen, we will look at the secondary exit possibilities. Sometimes we also consider a debt-to-equity swap with the shareholders.

Q: What role does Lion Global Asset Management play in the fund?

A: Public markets are a very important part of our investment strategy. We think Lion Global and the MCU complement each other well: We make private investments, and they can give an opinion on what is the best listing venue for our portfolio companies. They have also brought a lot of institutional investors - their customers - to invest in our fund.

Q: OCBC launched a $100 million PE fund under the Shanghai Qualified Foreign Limited Partner (QFLP) program. Will this link with the new fund?

A: We've already made investments through the QFLP fund. The Lion-OCBC Capital Asia Fund I will be able to use the QFLP quota to gain exposure to investments onshore in renminbi.

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• Topics
• Southeast Asia
• Mezzanine
• Fundraising
• Greater China
• Expansion
• Southeast Asia
• China
• Mezzanine
• Fundraising
• Growth capital
• OCBC