Dry powder

Baring Private Equity Asia closed its fifth fund at $2.46 billion in early 2011. CEO Jean Eric Salata tells AVCJ why the firm has taken its time investing the capital and where he now sees value emerging in the market

Q: How has your approach to the market changed during the initial years of Fund V?

A: We started investing the fund about one year ago. Our investment pace was slow, deliberately slow. This is because we have been through many investment cycles so we understand that there are periods where liquidity is strong and valuations are high and it's a good time to take money off the table. Then there are periods when it's hard to exit assets but a better time to invest. If you look at the mid cap segment of the PE market in Asia, one of the big sources of competition for us is IPOs. Over the last year the IPO market has not been functioning well and this creates an environment that is conducive to investment as valuations trend more towards what we want to see.

Q: Baring took advantage of the difficult IPO market by coming in as a cornerstone investor in China Yongda's IPO. Why participate in this fashion?

A: They launched an IPO but then had to pull it because of market conditions. We had been following the company and we liked the sector, so we stepped in and said we would help to underwrite the offering on terms that we thought would be attractive and would also get it sold to the market. And although Yongda is now a public company, we are engaged with them on the HR side and assisting with broader development of after-sales services. We will only become a cornerstone investor in situations where we think we will have the opportunity to add value. If you look at what happens when the market comes out of a more buoyant period, the initial change in valuations happen in the public market. The change in private market valuations takes longer to gestate. We don't think it's unusual that we would see better valuations in companies that are in the public markets or trying to access public markets as opposed to private businesses where the vendors are not sentiment-driven.

Q: Presumably the same applies to China take-privates?

A: There is certainly a general valuation decline in most of these US-listed Chinese companies and it has attracted our attention because it means there might be value there or there might not. Generally speaking, take-privates are difficult to close because there are a lot of moving parts and it is subject to you getting enough access to information on the company, which can be challenging because of all the rules around disclosure. Another challenge is how much you need to pay to get everyone to sell. Just look at Dell in the US - even there they are having difficulty getting a deal done because the rules are set up in a way that there is a clear process. So it's an attractive market because a valuation discount has been applied to these companies, but to dig in and close transactions is not that easy.

Q: How have you responded to the greater emphasis on operational value-add?

A: The way to consistently make money going forward is helping companies become more efficient and valuable. That has been a big area of focus for us in building up operational capability in the firm. We advise funds with $5 billion of capital and we have about 100 people on our team across seven offices in the region. If you look at the size of our funds versus the resources we have, we have increased the size of the team more than the size of the fund. The number of investment professionals per dollar of capital is much higher than before.

Q: What has been the impact of this on investment?

A: Courts Asia, a retailer that recently listed in Singapore, was one of the first companies where we deliberately invested in an underperforming business with the thesis that we could improve its operations. In 2007 we took the view that the business was operating below potential and required some changes to the way it was managed. We augmented the management team and brought about change in the business, making it more efficient and in the process more valuable. Profit over the last five years has grown from close to break even at the time of investment to more than S$39 million ($31.6 million) last year. The other area in which we have developed our capabilities has been around sectors, particularly education. Nord Anglia Education is one of the biggest investments we have ever made. We acquired the business in 2008 and it has since tripled in size.

Q: Why education?

A: If you look at it as an investment it has some fundamentally attractive characteristics. It tends to be pre-paid, negative working capital where the customer gives you the money up front for the year. It is a business that is relatively sticky in terms of recurring revenue; once people enroll they usually don't leave until graduation. It's also not that easy to penetrate. You can't just decide to set up a school; you need reputation, curriculums and quality credentials that allow you to operate in the top tier. Many of the schools we come across aren't necessarily being run to their full potential from a financial or educational point of view. They are owned by families or institutions or some sort of original founder and have never been professionally run. Nord Anglia brings benefits that come from a more scale business, such as central resources. You can't do that if you have a stand-alone school.

Q: Nord Anglia also used a high-yield bond for a dividend recap. What does this say about exit options?

A: We've done a couple of high-yield bonds for Nord Anglia. The first one, which took place a year ago and raised $350 million, was the first-ever high-yield bond issued by a financial sponsor in Asia that was used for dividend recap purposes. In the last 12-18 months we have also exited Yingde Gases and Airtac International, both companies we previously listed and then sold down, and there was the IPO for Courts, which we have yet to exit but is now liquid and performing well. Going back to just after we raised the fund in 2011 we had a big trade sale of Hsu Fu Chi to Nestle for $1.7 billion. And we are currently working on a secondary exit to another fund. The breadth of different exits has enabled us to get money back to investors at a good rate of return during a period when it hasn't been easy to do this.