Hong Kong unrest hampers sale of PE-owned work space provider
The private equity owners of The Executive Centre (TEC), an office provider that relies on Hong Kong for 30% of its EBITDA, have suspended a sale process in response to ongoing protests in the territory.
The process began in May with the expectation of a valuation of more than $750 million and final bids were due in late September. The business continues to perform strongly but a decision has been made to postpone the deal until conditions stabilize, according to a statement from TEC and its two PE backers, HPEF Capital Partners and CVC Capital Partners.
The protests – which were triggered by now-withdrawn extradition legislation but have grown to encompass a variety of grievances with the Hong Kong and Beijing governments – are now into their third month. They have caused a slump in business sentiment and economic activity. In addition to this derailed sale process, private equity exits have also been stymied by a slump in IPOs.
TEC has 130 premises in 32 cites across 14 countries in Asia Pacific and the Middle East. Ten of them are in Hong Kong. The company said that Hong Kong revenue is up 27% year to date. In July and August, the two months since the protests began, business grew 27% and 40%, respectively.
Flexible workspaces – an umbrella term that refers to office accommodation that is rented on a short-term basis, not co-working spaces specifically – are proliferating in Asia. The flexible workspace footprint grew by 45% between 2015 and 2018, compared to 29% in the US, according to JLL. LEK Consulting estimates the market is still only half the size of the US by value, at $3-4 billion, while it accounts for just 1-1.5% of total office stock. In the US, it is 1.5-2%.
Co-working spaces are benefiting from this trend and the likes of WeWork have attracted considerable amounts of private funding. However, Paul Salnikow, founder and CEO of TEC, claims his company is distinct because it is fast growing and profitable – EBITDA is on track to reach $46 million this year –, while others in the co-working segment “primarily focus on topline growth.”
HPEF, formerly known as Headland Capital Partners, backed TEC in 2009. CVC acquired a majority stake in the business in 2014 at a valuation of approximately $220 million, 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.
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