GPs focus on operational value-add in slowing China - AVCJ Forum

"If you look at China today, people are feeling the pain under a macroeconomic slowdown. But actually we think the pain associated with economic restructuring right now is better for China and better for us over the long run," said David Liu, global partner and co-head of Asia private equity for KKR, spoke in AVCJ China Forum in Beijing.

Kyle Shaw, founder and managing director at Greater China and Southeast Asia-focused buyout firm Shaw Kwei & Partners, said the soft market has prompted owners of existing portfolio companies to sell out to PE backers, allowing GPs to take full control. Meanwhile, GPs have to put more capital to work, restructuring businesses as well as investing in expansion.

"It has been very busy over the last six months, and I expect that the rest of the year would continue these types of investments for Shaw Kwei. It's probably the busiest year compared to the last five to six."

However, valuations in the private markets remain high. "The business is turning retail, meaning for a lot of deals they just bypass private equity professionals and go straight to the private wealth," said Stephanie Hui, head of merchant banking division in Asia Pacific (ex-Japan) for Goldman Sachs. "Unless the entrepreneur really believes that it needs a strong institutional shareholder to hold them, it's tough to get the valuation down."

Having said that, the slowdown means that for PE investors it is "easier to have a conversation with entrepreneurs now," according to Sean Lu, managing director at The Carlyle Group. Companies are looking for value-oriented capital from financial investors.

As such, GPs have to spend time on proprietary deal sourcing by leveraging deep industry knowledge. Understanding business fundamentals has become more important and PE investors need to be disciplined in picking the right number of deals so they can really focus on operational improvement, according to KKR's Liu.

"What we've seen in KKR's 40-year history is that the best returns have always been generated through down-cycle funds when everything looks very depressed," said Liu. "Our job isn't trying to figure out where the GDP is going to be, but rather to find a few good companies at the right valuations that we want to invest in each year in China, and we have been able to do that year after year throughout different cycles."

Alignment of interest with entrepreneurs is key when seeking to influence operations, whether as a buyout or growth capital investor. "People always say that ‘if you own the company in China, then you own it.' But I think the difficulty isn't the number of shares you own, it's whether you can sell it or change management," said Goldman's Hui.

Furthermore, foreign investors cannot simply implement the Western-style in Chinese companies; changing the CEO or the entire management team is not necessarily the right answer.

"From our perspective, we really need to have confidence in the CEOs and entrepreneurs of the companies that we invest in China. We want to be friendly, value-added partners to the management team. We don't often think about instituting new CEOs in China - we can work with CEOs to bring additional management talent and implement operational improvements," Liu said.

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• Topics
• Greater China
• GPs
• Performance
• China
• KKR
• Shaw Kwei & Partners
• Goldman Sachs
• The Carlyle Group
• AVCJ Private Equity & Venture Forum