Ability to change management key to value creation - AVCJ Forum

David He, managing director and head of operations in PAG, told in AVCJ Forum in Hong Kong that changing business dynamics mean there is greater demand from GPs for operational capabilities than a few years ago. "Now you actually have to focus on operational improvement. Cost reduction was not a topic eight years ago, but today it's a focus for a lot of companies, whether it's in China or outside of China," he said.

The continued dominance of minority growth investments in the region complicates the value-add process: it is hard for PE investors to change up the management team if the founder and majority shareholder is still involved in the business.

"Having an alignment and common interest is the most critical part in minority situation. The other thing is that you can't have a mindset of ‘We know better, we step in and we want to transform the company,'" He added. "You really have to focus on one or two things that really matter, and then you can help and bring in expertise as a minority shareholder, and create traction for change."

Even where an investor has control, the prevailing business culture of a particular market might mean it takes time to change the management team, bring in the required professional expertise and restructure the business. Jun Tsusaka, managing partner at Japan-focused NSSK, which spun out from TPG Capital last year, said his firm has figured out a formula for smooth transitions based on an inter-generational team and inter-discipline team.

"What I mean by inter-generational is that you need to match up with your counterparts. If I negotiate with the CEO or owner of a business, we're both in our 50s, we can see eye-to-eye, and have the same network of friends. Then we can get the deals done," Tsusaka said. "Once we have a handshake, it's the guy in is 40s who executes the deal. You can't bring in a 60-year-old to be in charge of the change."

Hiring professionals to lead this kind of change is extremely difficult in Asia. In certain cases, private equity investors keep the founders involved even when they are not obliged to do so. This allows the company to continue mining the founder's deep industry network and respect among employees.

On the other hand, Derek Sulger, managing partner at control-oriented China investor Lunar Capital, stressed that he would not buy a company that is highly dependent on its founder's relationships with customers. Rather, Lunar targets consumer brands that transcend the importance of management. "If a company sells systems to mobile networks, or they sell components to various producers. Then yes, the relationships are extremely important. Then you don't want to replace them," Sulger said.

As a traditional buyout market, Australia sees plenty of management turnover when PE investors enter. However, GPs must carefully measure the gap between the capabilities of existing management and the goals they want to achieve, instead of simply enforcing solutions on management teams.

The exception is crisis situations, where investors are likely to play a more active role as relatively few CEOs have the capability to stabilize businesses, said Simon Pillar, managing director at Pacific Equity Partners.

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