PE investors see value in forward planning on operational improvement

"I definitely want to be involved in the early stage of the due diligence," said Nick Gronow, senior managing director for corporate finance and restructuring at FTI Consulting. "I want to help drive the information flow, asking the questions and being involved in the meeting with management so I can understand the situation from the start. The later you come into it, the more that plan is going to have to evolve on the ground as you're dealing with it."

While value-add strategies cannot be implemented until a deal has closed, an environment of lower consumer-end growth and more opportunity for majority-stake investments has presented GPs with an imperative to solidify go-forward plans as early as possible.

"In buyout deals, we don't actually use due diligence reports to generate corporate strategy," said Jason Liu, managing director of CGP Tech Fund, a vehicle that focuses on China and cross-border mid-cap control deals. "Instead, we design corporate strategy during due diligence because if you don't know what to do after the investment, why do you make the investment?"

Decision making about management is a particularly critical aspect of this process, especially when assessing personality fit and respect for cultural differences between companies and countries. Competence problems for early-stage companies, however, are most likely to be an issue in the bookkeeping end of a business.

"In most cases, we end up appointing the CFO, which is not only something we welcome but also something the portfolio company appreciates," said Hamilton Tang, managing partner at SMC Capital China. "Typically, in the start-up phase, that's the least valued member of the senior management team, so it gives us comfort to have someone who we've vetted to be in that position."

Management transitions are a sensitive topic in China due to the prominence of founder-CEOs, difficulty in sourcing niche technology talent and scenarios where incentive packages can be challenged by unofficial kickbacks. Effective management incentive strategies in this context include the balancing of long and short-term key performance indicators as well as the prioritizing of leaders who embrace ownership over monetary compensation.

"We tend to like people who negotiate more on equity upside than salary compensation because we want people to be more hungry and try to align with our investment," said Ryan Law, managing director at Morgan Stanley Private Equity Asia. "If we want to change the management at the diligence stage, we have to evaluate the candidates as well. We‘ve got to find the right person to look at the company with us, maybe initially as a consultant, and at the end, they have to step in to do the execution for us."

Industry focus on practical value-add techniques has intensified in recent months with growing expectations that a global economic downturn could complicate performance metrics and exit channels for portfolio companies. Response strategies in this climate were a recurring topic at the HKVCA summit, with GPs highlighting the need to identify resilient sectors as China's growth slows.

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• Topics
• Greater China
• GPs
• Advisory
• professional services
• Morgan Stanley Private Equity Asia
• SMC Capital China
• HKVCA