PE investors must think more deeply about value-add - AVCJ Forum

Nick Nash, group president of consumer internet platform Garena, a company he invested in while at General Atlantic and then left private equity to join, said he often asked entrepreneurs whether they really value the contribution of directors PE firms place on their boards. "If we are brutally honest, less than 50% are people the companies would actually want on their boards," he observed. "It's very important that the person on the board who represents the capital is truly adding value to the company."

Aik Meng Eng, CEO of TE Asia Healthcare Partners, an early-stage and growth investor, added that the last thing competent management teams want is investors who spend board meetings firing off countless questions and telling them why they are doing a bad job. In this sense, investors are best served nominating an operations executive who understands the industry or geography and can forge a constructive relationship with management.

"If you have a good CEO he likes to be left alone," Eng explained. "If the company gets into trouble you want the CEO to reach out to the shareholders or the board. You need board members who are engaged and can be trusted."

Approaches vary according to GP strategy. As a pure buyout investor, Australia-based Pacific Equity Partners (PEP) has replaced the CEO in 60% of the companies it has backed and changed the CFO or other senior executives in 90% of cases. Geoff Hutchison, a managing director with PEP, observed that this is symptomatic of the kind of companies the GP targets: industry leaders that are underperforming and often require new management to reinvigorate the bottom line.

For minority growth investors, the onus is on the GP to convince entrepreneurs that they can make a positive contribution. This is particularly apparent among sector specialist firms. Highlight Capital, a China-focused healthcare investor, is staffed by executives who have industry experience and can take responsibility for every aspect of investment execution and post-deal management.

"They specialize in different areas, build relationships in their industries and bring resources to the portfolio companies," said Steven Wang, managing and founding partner at Highlight. "That is the best way for us."

Nash sees this as part of a broader shift in the nature of private equity firms' operational involvement. "In the last 10 years firms have build in house operational capabilities and by and large they have been helpful. But this is no longer a differentiator. Everyone has their own version of KKR Capstone. It has got to the point where entrepreneurs are no longer buying into it," he said.

GPs therefore have to be very particular about how they can contribute domain expertise. Garena, for example, holds investor days twice a year. The one requirement made of shareholders is that they present a 45-minute lesson on a topic that can be of value to the company. "It is one of the richest uses of time," Nash said.

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• Topics
• Expansion
• Buyouts
• Southeast Asia
• Operating partners
• Asia
• buyout
• Growth capital
• Pacific Equity Partners
• General Atlantic