HPEF strikes incentive deal with LPs over Asia fund

The private equity firm, which spun out from HSBC in 2010, was seeking around $1 billion for its seventh fund, but announced in September 2015 that fundraising had been suspended. At the time Fund VI had about three years to run and eight portfolio companies, six of which are control investments.

By the start of 2016, the investment team had shrunk to 11, including five partners led by CEO Marcus Thompson. Thompson and two executives in China are all that remain of this line-up. Last June, Vincent Low, a General Electric veteran who was most recently head of Actis’ value creation team in Southeast Asia, joined as senior partner and head of portfolio management. Thompson then took an incentive proposal to the LPs.

“Getting the incentive scheme approved is a vote of confidence in our plans and the team we have put in place to deliver,” said Thompson. “The LPs were initially skeptical because they wanted to try and get the existing team members to stay on, but my view was that we needed more hands-on operational expertise and people who were fired up by the opportunity to manage the portfolio.”

Fund VI, which closed in 2008 at $1.47 billion, is tracking below par. It has generated a 1.6x return on realized investments. The incentive scheme, which required approval from 90% of the LP base, will see the team participate in the fund’s upside above an agreed target. Thompson and Low will also make personal investments in the fund.

“If we do a good job with respect to this portfolio the desire is there to raise a new fund,” Thompson added. During the negotiations with LPs, two new hires were made in Singapore.

Five of the eight portfolio companies are in Southeast Asia: Malaysian snack producer Mamee Double Decker, Canadian International School Singapore, ILA English Language School in Vietnam, and oil and gas industry service providers Kreuz Holdings and Miclyn Express Offshore. HPEF also has Korean civil engineering business Unison eTech, Chinese car luxury dealership Zhong Zhi Yuan Automobile Group, and pan-regional serviced office provider The Executive Center (TEC).

CVC Capital Partners acquired a majority stake in TEC in 2014, leaving HPEF with a minority position, but accounting irregularities subsequently emerged and the business needed to be recapitalized. HPEF partially bought back CVC’s position at the same price – HPEF now holds 70%, CVC has 20% and management has the rest – and put in $40 million. The business is said to be performing strongly.

“The firm had an unfortunate time through 2015 with the buyback of TEC from CVC, the portfolio’s substantial weighting in oil and gas, and exposure to China’s consumer sector and a depreciating Malaysian currency,” Low said. “When the fundraising was suspended people were very wrongly reading between the lines, saying the portfolio would be wound down.”

He admits to being uncertain about joining HPEF when first approached, but came to conclude that “it was a perfect storm, but one created more by macro events than internal issues.”

The 10-year term for Fund VI ends in December 2018, but there is a provision for a two-year extension with advisory board approval, and another two years with consent from 50% of the LP base. This should give HPEF time to optimize asset value and secure liquidity events. Miclyn and Kreuz account for almost 30% of the fund and the bulk of its problems – the fund would stand at more than 1.2x without them – and are likely to be among the later exits.

The firm invested $184 million in Miclyn, which provides service vessels to oil and gas exploration and production companies in Southeast East, Australia and the Middle East, in 2011. Three years later it took the company private in partnership with CHAMP Private Equity. This was followed by the privatization of Kreuz, a specialist in repairing offshore pipelines, at a valuation of $357 million.

Both companies have struggled as a result of the commodities downturn. The shareholders and management are focused on making them operationally lean and well capitalized in order to weather the current storm and benefit from an anticipated revival of investment activity in the industry.

“The team is now built for active engagement with portfolio companies, and with the aim of raising a new fund,” Low added. “Is a new fund a given? Today, the answer is no. A lot depends on where we get in terms of providing proof of active engagement.”

Headland was renamed HPEF last year following a complaint from a US-based investment firm with a near identical name.

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• Topics
• Greater China
• Southeast Asia
• North Asia
• GPs
• LPs
• Asia
• Headland Capital Partners
• HPEF Capital Partners