Deal focus: TEC goes back to the office

Hong Kong office space provider The Executive Centre (TEC) claims to have doubled the size of its business – by revenue and profit – in the past five years with the spread of coworking fever. More interestingly, it has maintained this traction during the pandemic.

Paul Salnikow, TEC’s chairman and CEO, observes that across geographies, his company’s office space saw daily attendance rates fall to as low as 15% during the worst of the lockdowns. But within about three months, usage rebounded strongly. In Hong Kong, for example, attendance is currently at 90%. Pre-COVID-19, the average rate was 66%.

The idea that office space has increased in popularity after work-from-home became the new normal is decidedly counterintuitive, and to be clear, COVID-19 did have a negative effect on TEC. Profitability has been maintained pre- and post-pandemic, but EBITDA fell to about $40 million last year from $46 million in 2019.

Still, the event has sparked enthusiasm for the company’s forte: flexible office arrangements whereby companies are not locked into long-term lease commitments. Indeed, COVID-19 has not only increased daily attendance by individual staffers in TEC’s properties, it has also boosted occupancy contracts at the company level. These are usually renewed every 13 months.

“In an economic downcycle, cash is king. People are much more careful about what they spend their money on. They may spend it on investments or acquisitions, but they’re far less interested in spending it on partitions and carpeting,” Salnikow says. “Somebody who can provide them with that correctly priced is going to succeed.”

KKR had been tracking TEC for several years before deciding to invest, but resilience in the face of COVID-19 appears to have been one of the due diligence clinchers. KKR mobilized its credit and private equity units in Singapore (due to travel restrictions) to acquire the company for an undisclosed sum alongside Tiga Investments. This facilitated exits for HPEF Capital Partners and CVC Capital Partners.

Timing is a complicated factor. The office property market is in a cyclical downturn, which suggests an advantageous moment to buy well and scale efficiently as demand recovers. However, global expansion, the assumed long-term goal of TEC, may continue to be off the menu.

As Salnikow puts it: “How am I going to grow in London – a logical market – when I can’t even conveniently travel there? At this moment, it’s going to be very difficult for us to grow beyond our existing geographies in the next 2-3 years.”

TEC’s go-forward plan with KKR and Tiga is therefore to double down on the existing footprint, refurbish buildings where needed, and increase market share as competitors succumb to downmarket conditions. The question is, do TEC’s existing markets have enough inherent upside to turn non-expansion into a PE-style growth story?

There is reason for optimism on this point given TEC’s long-term views about the “Asian century.” The idea is to piggyback an implacable regionwide uplift by prioritizing geographic diversification. Mainland China represents 30% of revenue, versus 20% for Hong Kong, 20% for India (the fastest-growing market), and 11% for Japan. Singapore, Australia and the Middle East make up the rest.

At the same time, there is a strong focus on differentiation through premiumization. TEC compares itself to the business class section of an airplane; it’s more expensive but demand is always there, and you get what you pay for. In part, this means taking the offering beyond office space to include business support functions such as concierge services, professional translation, and company formation and accounting services.

Hesitancy in pushing for physical expansion is also rooted in the lessons of WeWork. The US-headquartered coworking space provider built out its footprint aggressively and achieved a valuation of $47 billion before weak governance and precarious financials caused investors to lose confidence in the company. SoftBank had to bail it out after a failed IPO.

TEC currently has about 150 locations across 32 cities in 14 countries, where the average market share of flexible office space versus traditional is only 4%. The company believes that taking this to 8% is a reasonable goal for demand-aligned growth close to home.

“[WeWork’s] expansion was driven by their own metrics of size and growth. They were measuring success by how large their footprint was, how many square meters under lease they have,” Salnikow adds. “They didn’t extend that measure of success to how much of that space was occupied with clients and how much of it was occupied at a revenue-per-occupied-workstation which was profitable.”

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• Topics
• Greater China
• Buyouts
• Trade sale
• Real estate
• Support services
• Hong Kong (China)
• Asia
• KKR
• CVC Capital Partners
• HPEF Capital Partners
• Tiga Investments