Deal sourcing: Priority access

Lock & Lock, a Korean pioneer in the field of four-sided locking food containers, had received multiple approaches from financial and strategic investors since its IPO in 2010. Each one was rebuffed. Affinity Equity Partners made a breakthrough in February of last year, leveraging local relationships to get direct access to the founder, Jun-il Kim. 

Over the ensuing six months, the private equity firm convinced Kim – who had initially only contemplated a minority stake sale – to hand over control. Affinity acquired a 58% stake in the business at a valuation of KRW880 billion ($810 million), with Kim agreeing to reinvest and remain involved as non-executive chairman for a certain period of time. 

Was this deal proprietary? Some industry participants would claim that no control investment involving a listed company could ever qualify for this status. First, a public entity’s financials are there for all to see, which means it is almost permanently in play – offer enough money and the asset is yours. Second, a board’s duty to shareholders might oblige it to explore competing offers. 

But the Lock & Lock situation illustrates that deals are not necessarily so clear-cut: take a wary founding shareholder and a transaction that doesn’t involve a de-listing, and suddenly the relationship element becomes more important. Even where there is a formal sale process, GPs with preexisting knowledge of a target business, or ties to founders and management, can make it work to their advantage. If they can quickly move to exclusivity with a reasonable valuation in mind, does anything else matter?

Definitions as to what constitutes proprietary are worth noting given: a) the perception that so many PE firms claim proprietary deal flow; and b) the perception that no large-cap deals in Asia are proprietary. It is difficult to draw conclusions without detailed knowledge of every situation, but no more than a handful of the approximately 90 deals of $500 million or more announced in the past 18 months – for which AVCJ Research has records – appear to qualify.

The nature of proprietary deal flow in a middle-market context – where there is certainly more of it, largely because deals are often not large enough to justify intermediation – was discussed at last week’s AVCJ Forum. Jason Shin of Korea’s VIG Partners and William Shen of China-focused CRE Alliance agreed that they would consider a situation proprietary if there is no competition on price to reach the exclusive due diligence phase. “If two or three players are simultaneously approaching the seller and offering terms, that is not proprietary, it’s a confidential limited auction,” Shin noted.

However, conditions vary dramatically between different markets. In Japan and Korea, founder-entrepreneurs can be sensitive about any suggestion they are looking to sell, a dynamic that lends itself to proprietary deal sourcing or limited auctions. (Although it is worth noting that, in Japan for example, proprietary situations are becoming less frequent and limited auctions are becoming more competitive as intermediaries burrow their way into the mounting pile of founders willing to sell).

Contrast that with India where nearly everything is intermediated. It means PE firms must find other ways to get an edge and Atul Kapur, CIO at Everstone Group, claimed that scarcity of capital is a differentiator. Relatively few GPs in India have a track record of completing mid-market buyouts, so there is less competition from the outset. Even allowing for that, nothing beats getting involved early – a point endorsed by all participants in the discussion. 

“In our world, doing a deal is not a science, it’s an art,” said Shirish Saraf, founder and vice chairman of Samena Capital, which operates in Asia and the Middle East. “Most of our deals have been cooked for two or three years and so you become the preferred partner, even if not in a legal sense. Human interaction – that is where most value is created.” 

No matter how many people claim access to proprietary investments, what ultimately counts is the ability to execute a transaction on attractive terms – leveraging skills, relationships, or resources – that is beyond the reach of others. Whether competing parties are actually or nominally in the running as well is a secondary consideration.

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• Topics
• GPs
• Investments
• North Asia
• South Asia
• Buyouts
• South Korea
• Japan
• India
• Affinity Equity Partners
• VIG Partners
• Samena Capital
• CRE Alliance
• Everstone Capital