Fund focus: Baring restocks its dry powder

Baring Private Equity Asia (BPEA) has closed three flagship pan-regional funds in the past five years, stepping up in size from USD 4.5bn to USD 6.5bn, and now USD 11.2bn. Over roughly the same period, EQT has scaled its global, yet arguably Europe-centric, private equity vehicles from EUR 10.91bn (USD 11.1bn) to USD 15.6bn, and a third is currently in the market seeking EUR 20bn.

The two firms agreed to merge earlier this year, which means BPEA has a logical partner for the cross-border deals – typically helping Europe or US-based businesses realise Asian expansion – that have to some extent become its trademark. That aside, Jean Eric Salata, CEO of BPEA, expects the firm to maintain its current course, potentially raising ever larger funds.

“Fund sizes will continue to grow as the market grows. Had you asked me 10 years ago what size fund I expected to see in Asia, I probably wouldn’t have said the size we are seeing today, likewise globally,” he observed. “I see no reason why Asian funds shouldn’t be the same size as US or European funds – there is no logic for there being any difference.”

Salata is nothing if not consistent, having given a near identical reply to the same question after Fund VII closed on USD 6.5bn in late 2019. There is one key difference: he did not repeat the assertion from two-and-a-half years ago that the fund felt undersized and that he wished he’d raised more.

At USD 11.2bn, the recently closed Fund VIII is the second-largest pan-regional vehicle ever raised for Asia. The fundraising process launched in the first quarter of 2021 with a target of USD 8.5bn. Buoyed by strong performance from Fund VII – according to BPEA, the gross IRR was 38% as of June – the firm “pretty much hit target out of the box,” Salata said.

A decision was taken to keep the process open longer to broaden the LP base, and of the 180 investors, 70 represent new relationships. They account for 25% of the corpus, with no specific bias in terms of geography or LP type. This diversification exercise was disrupted by the Russia-Ukraine war and subsequent sharp corrections in public markets, but BPEA still reached its hard cap.

Back to normal?

Approximately 15% of the fund has already been deployed across three deals: corporate services provider Tricor Group, which was acquired from Permira for USD 2.7bn, healthcare IT services specialist Hinduja Global Solutions (HGS), a USD 1.2bn corporate carve-out, and IT services player IGT Solutions, which was bought from AOIN Capital Partners for USD 810m.

All three were agreed prior to what Salata describes as “a reversion to the mean” brought about by the end of an era of consistently low interest rates and the arrival of tighter debt markets and rising costs of capital. Private market valuations are consequently beginning to adjust downwards.

BPEA’s mantra in these conditions is to concentrate on core sectors where there is comfort with long-term structural growth trends, double down on value creation, and exercise discipline in underwriting entry and exit multiples. “Over the past six months, we’ve lost out on deals because we haven’t been the highest bidder. That’s probably a good thing at this point,” said Salata.

Nevertheless, the firm is seeing ample investment opportunities in its designated sweet spot for a USD 11.2bn fund: businesses with enterprise valuations of USD 1bn-plus that require equity cheques of USD 500m. Take-privates are a logical source of deal flow, given the deterioration in public markets, but Salata also highlights corporate divestments and sponsor-to-sponsor transactions.

Deals that have been considered but ultimately didn’t transact include large asset sales in Japan and India. In recent vintages, Japan has accounted for about 15% of capital deployed. Fund VIII is expected to at least match this, and possibly reach as high as 25%. Key drivers include pressure on corporates to divest non-core assets and a greater appreciation for what private equity can achieve.

BPEA has completed two buyouts of size in Japan – Tryt, a staffing agency for aged care and healthcare workers, and Pioneer Corporation, a struggling domestic technology conglomerate – and claims both hold their own as case studies of strong stewardship.

Revitalisation work on Pioneer is already starting to bear fruit, with the sale of four non-core divisions enabling BPEA to make distributions exceeding the investment cost while retaining the core business units. However, Salata is equally pleased by Tryt, noting that professional management and investment in sales functions and automation have contributed to 2x increase in EBITDA.

China, however, is more challenging. Investments in the country made up 18% of the Fund VII corpus but regulatory uncertainty has so far stymied Fund VIII, despite official encouragement of foreign investment in certain areas, such as green energy and the digitalisation of traditional industries.

“We are taking a wait-and-see approach until we get more clarity on what is happening with the economy as a whole and government policy. While we are evaluating opportunities, the emphasis has shifted to other markets,” said Salata. “I think the situation will normalise in the medium term and we will be just as active as we were in the past, but in the short-term we will be less active.”

A broader church

In recent years, BPEA has demonstrated an appreciation of the need for greater structural flexibility in its investments, prompting diversification – to a small degree – into minority deals where the target is a start-up or a corporate partner. At the same time, the firm continues to see opportunities in the sub-USD 300m enterprise value space that are attractive yet unsuitable for the flagship fund.

“We are looking at having a separate fund or pool of capital that would invest in mid-size companies with the same strategy we have executed on in the past,” Salata explained. “The fact we have a certain type of fund size shouldn’t be the determining factor as to where we think the best returns are for our LPs. If we find interesting deals below the cut-off, I want to pursue them.”

The purported growth fund would follow the operational blueprint of its sister flagship vehicles, with a 70-30 split in favour of buyouts. That remaining 30% would be for minority positions in companies where control is not available, essentially soaking up much of the existing early-stage and corporate partnering allocations that are at odds with the big buyout thesis of a larger pan-regional fund.

Returning to the issue of fund size, Salata claims it is difficult to envisage an upper limit for Asia, provided LPs are willing to put enough capital to work in the region and exit channels for large companies amount to more than just IPOs.

“The formula we have is scalable: buying companies, taking an active owner approach, investing in sector resources, and driving change in businesses,” he said. “In some ways, it is more applicable to larger companies than smaller companies.”

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• Topics
• Fundraising
• Buyout
• GPs
• Asia
• Baring Private Equity Asia
• Fundraising