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The great escape: Exit strategies in Asia

Private equity firms in Asia are shunning Initial Public Offerings in favour of trade sales and strategic exits.

Nicholas Bloy, managing partner at Navis Capital Partners, which operates primarily in South East Asia, said: “Our biggest focus is how to get our money out.”

He told SuperReturn Asia 2017 that in South East Asia the public markets were a very implausible way of exiting private equity investments, especially for controlling positions.

“We have explored IPOs but we have never done one,” he said.

He explained that if you were exiting a company in which you had, for example, a 75% ownership stake through an IPO you would only be able to sell down around 15% of your stake, you would then be locked up for six to 18 months before you could sell more.

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But he said the market realised that as a private equity owner you were going to want to reduce your stake to zero.

“That represents a massive overhang of equity that is going to be sold to the public market, and so the public markets do not support it,” he said.

Instead Bloy favours exiting through a strategic sale, for which there is high demand.

South East Asia has been of permanent strategic interest to corporates around the world,” he said.

“But the trick is that corporates won’t buy any company in an industry in which they are interested, they will only buy what we would call a leadership company that has strong management, strong leadership, and, if it is an industrial manufacturing company, a low-cost position.”

He added that in order to go down this route the business must not only perform well financially, have a competitive advantage and a strong competitive position, but it must also be “squeaky clean” with strong governance processes.

Alternatives to IPOs

Kyle Shaw, founder and managing partner at ShawKwei & Partners, which is active in China, pointed out that although IPOs totalled USD25bn in Shanghai and Shenzhen in the first eight months of 2017, size should not be confused with opportunity.

“In China, you have a political overlay where sometimes the markets are simply closed,” he said.

“Back in 2015 the IPO market was closed for about 18 months, following a previous period when it had been closed for nine months.”

As a result, he said ShawKwei did not have an exit strategy that relied on an IPO.

It also tended not to do deals with other private equity firms, but instead favoured trade sales, which he described as being a “much more financially rewarding option”.

“If you want to do a trade sale in China the key is having control,” he said.

“If you want to be able to control the exit, you have to be able to control the strategy to build a world-class company that has global relevance, best-in-class practices at the manufacturing site, and a well-balanced management team".

He added that you should also focus on creating the back story and finding the opportune time to bring the company to market and sell it to a trade buyer.

Renuka Ramanth, founder and managing director at Multiples Alternative Asset Management in India, said: “From a private equity perspective India is still a much younger market compared to others in South East Asia.”

She said India was primarily a growth market and many of the investments were minority positions.

“There is the opportunity to shake hands with another private equity firm as a way of exiting,” she said.

Ramanth added that venture capital firms would often hand over companies to private equity firms, with smaller private equity firms handing them over to larger private equity firms as a way of exiting.

Reducing role of capital markets

She said one change that was happening in India was a reduction in the reliance on capital markets for exit.

She explained that 15 years ago, around 90% of exits were through capital markets.

“It was both aspirational for Indian entrepreneurs to list their company and there was really no other route that was possible,” she said.

But Ramanth added that today more than 50% of assets were sold strategically.

“The market is really maturing in terms of exit alternatives,” she said.

Going forward, Shaw expects to see growing interest from US companies in acquiring assets in China.

But he warned that when they looked to China they were going to look for businesses that seemed similar to US ones, so issues such as environmental concerns, social concerns and proper behaviour with employees were going to come to the forefront.

“I think the businesses they are going to want to buy are going to have to be scrubbed clean for them to feel comfortable with them,” he said.

Bloy also expects demand to remain strong for acquiring businesses in South East Asia.

“We are optimistic that demand from industry buyers will continue to be there and will probably increase,” he said.

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