Secondaries, succession best source of control deals in Asia - Partners Group

Partners Group raised EUR1.5 billion ($2 billion) for its largest-ever private equity direct investment program earlier this year and has so far completed two deals in Asia: China-based garment label maker Trimco International and Indian IT services provider CSS Corp, both of which were previously controlled by PE firms. Another China buyout - which would see the founder exit - is at an advanced stage.

Cyrus Driver, managing director and head of India at Partners Group, noted that although Trimco and CSS were majority-owned by private equity, management teams were invested in each business and influenced the transactions. "In many of these situations you can only get really comfortable with an asset if you feel you are aligned with management and you are comfortable partnering them," he said. "For Trimco and CSS, we convinced management that they required support to build out globally."

Driver added that negotiations with management are not unlike those in which a founder-entrepreneur is considering an exit. Price is a consideration, but so too is the buyer's ability to help develop the business.

Private equity-invested companies appeal to Partners Group because they often fit well with its investment remit. The firm's typical target is a strong business - it doesn't do turnarounds - often with an established regional footprint. A lot of emphasis is also placed on corporate governance and it is generally the case that companies with previous PE involvement reach higher standards in this area.

Partners Group currently sees China and India as the emerging markets in Asia with the greatest potential for control transactions. There are two reasons for this, one China-specific and the other more broad-based.

"What makes China unique is that 30 years ago everyone was a first-generation entrepreneur. Most businesses started after 1978 and the founders are reaching the end of their innings," Driver said. "In other countries, opportunities could come at any point: the founder is aging and there isn't a successor in place, or the family is too fragmented and they would rather monetize their holding than try to run the business. In China you see a wave of such issues coming in the near future."

The second reason is tied to the proliferation of fundraising and growth transactions in emerging markets - with China and India notable examples - starting in the mid-2000s. Partners Group contends that major contributors to institutional investors' disappointment with the returns coming out of emerging markets have been manager inexperience and the nature of the transactions pursued.

The focus on growth and pre-IPO financing rounds meant GPs did not invest in the sector knowledge and operational capabilities required to make portfolio companies more valuable, better governed and suitably equipped to take advantage of opportunities such as expansion of address industry upheaval.

Private equity firms in these markets are under increasing pressure to return capital to investors but they are sitting on portfolio companies that can't be exited because the IPO environment is more constrained or anticipated growth has not been achieved. This represents an opportunity for control-oriented PE firms that can provide an exit for minority investors and help companies realize their true potential.

At the same time, the asset class is now better understood in these markets, which means entrepreneurs have a clearer idea of what a private equity partner should be able to do. This combination of familiarity and an appreciation that professional assistance might be required to take a business to the next level makes entrepreneurs more open to giving up control to a third-party investor.

"A small numbers of managers are able to add value and grow a business internationally. Many more claim to be able to do so," Driver said. "Therefore there will be instances in which entrepreneurs are disappointed by the claims made by private equity because they haven't lived up to those claims. Over time, the market will mature and reputations will become more differentiated and solidified."

Partners Group has 15 investment professionals in Asia dedicated to direct deals - most of them control situations although minority growth transactions are still considered. This team is supported by about 20 value creation professionals. Most of them are located in Asia but they work on transactions globally, based on industry expertise.

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• Topics
• Buyouts
• Greater China
• South Asia
• buyout
• China
• Asia
• India
• Operating partners
• Partners Group