Deal focus: EQT leverages corporate compliance

The global testing, inspection and certification (TIC) market - ensuring everyone from sneaker manufacturers to nuclear power plant operators to rail service providers meets quality and safety standards - is dominated by a handful of companies. Three of them, Intertek, Bureau Veritas and SGS, together employ more than 180,000 people and generated revenue of around $13 billion in 2014.

Bureau Veritas describes TIC as a "vast and fragmented market" worth in excess of EUR200 billion ($223 billion). Of this, roughly 40% is available to outsourced providers. There may well also be plenty of untapped demand, with corporations and institutional investors placing greater emphasis on sustainability and environmental, social and governance (ESG) issues.

While these headline numbers contributed to the thesis behind EQT Partners' investment in Hong Kong-based Elevate, the firm was equally focused on how it expected the TIC business model to evolve. With around 350 people, Elevate is a fraction of Intertek, Bureau Veritas and SGS' size, but TIC auditing is just one part of its offering.

"The improvement consulting side of the business is significant," says Tai Wak Chung, managing director at EQT. "If you look at the traditional method of auditing, an inspector works through a list of issues that require verification. It is a check-list approach but it doesn't solve any problems. Elevate sends in consultants to help resolve issues."

Under this "audit-plus" approach, Elevate might find that high staff turnover is a drag on factory productivity. Research, much of it survey-based, is used to establish the root causes of employee dissatisfaction - apart from money, these may involve unclean working environments, poor on-site amenities, or inadequate training and development programs - and a customized turnaround plan is drawn up. There is also the option of having consultants come in to assist with execution.

Elevate's founders, who continue to run the business, wanted a partner to support expansion and EQT prevailed in a competitive process. It now holds a majority stake. The size of the investment was not disclosed, but it came from the EUR1.1 billion ($1.48 billion) EQT Mid Market fund, which writes equity checks of $40-100 million in Asia.

From its base in Hong Kong, Elevate has ready access to production facilities scattered across China and Southeast Asia. Most of the clients are multinationals in the US, and EQT will help with customer-sourcing in Europe through its existing industrial network. There are also plans to broaden Elevate's sector coverage. While apparel, consumer electronics and retail have been the traditional focus points, the TIC market globally is pivoting towards pharmaceuticals, automobiles and food and beverage.

Chung adds that product development is another area in which the company can progress. "One is a due diligence product, and as a private equity firm we can certainly help with that," he says. "Then there is data and analytics, which is becoming very important in benchmarking across factories and geographies. Clients want to do quantitative assessment on a large scale."

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