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Growing trend of activist investments


Partners at Dymon Asia Private EquityFrom (L-R): Keith Tan, Gerald Chiu and Tan Chow Yin

Partners at Dymon Asia Private EquityFrom (L-R): Keith Tan, Gerald Chiu and Tan Chow Yin

FOR those who have been watching Showtime’s “Billions” on Netflix, images of billionaire hedge fund king Bobby “Axe” Axelrod come to mind when discussing private equity and hedge fund.

Axe epitomises the alpha male fund manager. There’s the presumed wealth, the expensive but plain henleys in the workplace, and the pay cheque with many zeros. He turns heads and knows how to work a room.

In real life, the world of investing, particularly private equity isn’t quite as romanticised.

Private equity fund managers work really hard. Now surprisingly, despite the erratic market and lower growth environment over the last few years, investments into private equity have been growing.

Private equity investments – via traditional funds, co-investments and direct deals hit an old time record of US$681bil in 2016, 9% higher than the previous high set in 2015.

Volatile stock market returns and the lure of long-term double-digit returns are seeing investors increasingly trending toward private equity investments.

Activist investor: Chow Yin joined Dymon Asia Private Equity as a partner and investment committee member since June last year. Prior to joining the private equity world, he was a management consultant with Boston Consultant Group.
Activist investor: Chow Yin joined Dymon Asia Private Equity as a partner and investment committee member since June last year. Prior to joining the private equity world, he was a management consultant with Boston Consultant Group.

What is private equity?

It’s not an asset class of its own, but a manner of investment that is characterised by long-term holding periods and active advancement of assets which results in above average returns. Call it “activist investments”.

Given this activist approach, the standards for private equity managers tend to be higher. Not surprisingly, private equity managers in general are also better compensated compared with public asset managers.

There’s a new private equity player in town, Singapore-based Dymon Asia Private Equity (DAPE) which focuses on small- and medium-sized companies (SMEs) in South East Asia.

Dape is backed by Singapore state-owned Temasek Holdings Pte.

Dape is part of Singaporean-based Dymon Asia Capital (Singapore), which manages several alternative investment funds with aggregate assets under management of about US$5.5bil.

Formed in 2012, DAPE started with a S$300mil (RM1bil) fund. It believes that companies in this space have tremendous opportunities for growth. DAPE is majority owned by its three partners – Keith Tan, Gerald Chiu and Tan Chow Yin.

The minority stake is owned by Dymon Asia Capital. Back in 2014, Singapore’s state owned Temasek Holdings became a minority stakeholder in Dymon Asia Capital when it commited to US$500mil for the joint venture.

Temasek also invested S$100mil in DAPE.

In an interview with BizWealth, Chow Yin shares his thoughts on his company’s strategy and how it make its investment decisions.

Most people may remember him from his tenure as senior partner in Navis Capital.

Chow Yin joined DAPE as a partner and investment committee member since June last year.

Prior to joining the private equity world, he was a management consultant with Boston Consultant Group. He graduated with masters degrees from M.I.T and Imperial College and is also a CFA charterholder.

Below are excerpts on an interview with Chow Yin:

What is Dymon Asia Private Equity’s investment strategy?

We are currently managing the Dymon Asia Private Equity (S.E. Asia) Fund, with about RM930mil of commitments. It is our first private equity fund focusing on South-East Asian companies in the lower mid-market, or SME space. Our objective is to seek out growing companies and align with their ambitious entrepreneurs or management teams, to bring improvements to their current performance.

Ours is an intense, value-driven strategy.

We don’t just look at historical performance or expected valuation of a company, but ask ourselves if our participation can inflect their existing trajectory – get them to take advantage of our experience and people.

What are the company’s long-term goals?

We are still a relatively young firm. Our performance objective is simple – that is to achieve vintage and sector leading returns for our investors. With the current fund, we are on-track to do so.

In the long-term, it would be too narrow to measure success by only unitary objectives. We want to build a top-notch team, make a positive contribution to the companies we invest in, and be the consummate partner for our entrepreneurs and management teams.

This may sound like a cliche but we want people we had interacted with, to look back and say “the Dymon guys made a positive difference to my business and life”.

Can you elaborate on your past successes that have led you to this firm? 

My partners and I have spent the predominant part of our careers investing and managing businesses. I started my private equity career in late 2005 with a fund that was managing about US$500mil. By the time I left in 2015, they had grown to manage about US$4bil. Such growth is only possible by generating returns for investors. As one of the senior partners in the firm, it was a gratifying time for me.

After I left, the chairman wrote me a warm, generous reference.

Running our own fund has made me leaner and hungrier... and I think that’s a good thing.

My partners, Keith and Gerald, likewise, had great track records. Keith started Dymon Asia Capital with Danny Yong back in 2008. Keith and Gerald then founded the private equity business in 2012.

As entrepreneurs, building a business, we know and understand well the challenges and tribulations faced by business owners and leaders.

What is Dymon’s track record for the companies that it is now invested in? What is the return on invested capital?

We have made seven investments to-date and are closing on one other investment. By the second quarter of this year, we should have added another investment, or maybe two.

So far, we have exited one investment and are currently in discussions on exiting a couple more.

The returns are very strong, and most importantly, we are very pleased that it is a realised return. Even at this early stage, we can happily report that our investors have already received a large portion of their money back.

It’s been hard work and the results are vindicating our approach. Yet, there are areas we feel we can do better.

What does Dymon offer beyond capital?

Of the seven companies we invested in, five were already in a net cash position when we invested. It was not just capital they were after. Many organisations will say that people are their most important asset.

For me, it is our only asset. We believe we bring empathy, expertise and experience into every company that we invest in.

We don’t seek control, we seek alignment.

When we invest in a company – more often than not, we will be able to help the company strengthen its leadership team, explore new markets, source for new suppliers, find acquisition targets, understand its competitive landscape thoroughly, secure better financing terms with banks.

Equally important would be the sense of partnership and togetherness – that you have a dedicated business partner, not a passive investor.

What are your investing criteria? What are some of the key things you focus on before agreeing to put money into a deal? What makes you love a company?

We try to identify companies that can yield a strong return on capital employed. There are various paths to get there – sometimes through growth, sometimes through improving margins and other times through cash generation.

We don’t just look at historical performance but ask ourselves if our participation can change the course that the business is on.

For companies to achieve differentiated returns, they need to have some distinctive intellectual property (IP), for us to “fall in love” with them. By IP, I don’t just mean trademarks or patent rights, but much more broadly defined.

It could be a proprietary supply chain, or a unique manufacturing process, or a strong understanding of how to navigate risks and build barriers within its industry.

Maybe we should call this PI for proprietary intelligence.

Once we like the companies, we also need to like our partners and for them to like us. People we partner with tend to have a longer term vision and see us as their trusted Sherpa.

Being in a good business, having a favourable environment, is like being on an escalator. I like entrepreneurs that walk, or even run up the escalator. They know they are in a good spot, yet they bring partners in to help them get to the top faster.

They don’t just wait for the escalator to move up, floor by floor. They are not the type to stand to the left.

When evaluating a company or entrepreneur to partner with, what are some of the factors that are deal breakers for you?

To continue with the escalator analogy – we try to avoid being on treadmills. It is no fun, sweating and not moving anywhere. Eventually, you will fall off.

Other than favourable industry and company factors, plus aligned entrepreneurs, I would say integrity is critical. We want to “win right”. We believe integrity is crucial in building a sustainable business. It is okay to fail having tried, but it is not okay to win without integrity.

What is the average time to close a deal?

Since we rarely bid for deals, the average time is about eight to 12 months to get to know our partners and close the deal.

We can move fast when required and have closed deals in a much shorter time.

What are the firm’s communication style and expectations after the deal closes?

We adopt a transparent style. There are no hidden agendas and no closed doors. The expectations after and before the deal close are the same – work together towards a set of pre-defined objectives, and adjust along the way.

What is special about Dymon compared with other private equity companies?

Our partners often tell us that we are unique in that we approach deals from the perspective of the owners first.

We will always try to figure out how others will benefit from our involvement, well before we even get to discussing terms and conditions.

For example, during the “courtship” process, we may have already introduced a potential customer to the target, or shared some new ideas on how to improve the margins of the business.

We also invite them to visit us, and our companies.

We don’t want to just provide capital, we want to help transform the business – making it more valuable over time.

What are some of the sectors that now interest you? 

South-East Asia is a young, consumer-driven economy. As such, consumer-related sectors interest us a great deal. That is not unique to us.

However, there are many ways to access these consumers, and it doesn’t have to be too direct. For example, with population in Singapore ageing, healthcare is an attractive sector.

While most other funds invest through hospitals or clinics, we chose to invest through a facility management company with about 85% of revenue coming from healthcare clients.

We are wary of industries that attract too much capital.

The oil and gas sector for example attracted a lot of money three to four years ago.

We tend to steer clear when others are rushing in.

Any specific types of deals you are seeing lately and are there any interesting trends you are seeing? (For example, the advent of flavoured tea shops – are they a new wave of consumption or just a fad?)

In general, regardless of the industries, I think there are several common trends. The increasing use of technology and data in successful companies have been discussed at length. We do that a lot ourselves when we get into new businesses.

There are two other interesting trends that are perhaps cross-cutting. Firstly, product integrity and supply-chain traceability is increasingly expected, not just demanded. Customers want to know where you are making your products, where are you sourcing the raw materials.

Secondly, customers want to be treated like individuals. They don’t want you to spam them with marketing collaterals or sell them mass-market products.

They want you to create products or solutions tailored to them.

In the past, it used to be difficult to break this compromise between customisation and standardisation. Today, many companies are now finding new ways to achieve customisation, yet reduce costs. For example, restaurants that allow you to order ahead save on waste.

At Select Group, our food courts are using self-ordering panels.

It saves time and labour, and because it is interactive, it is also fun for our customers to use and they end up ordering more.

Typically how does the exit strategy look like? 

An exit is a liquidity event for us, but could be a life-changing event for our partners. Hence, we always try to work out upfront, what is the best option for them. I think we have been quite successful articulating our strategy to them, even though we sometimes take minority positions, our partners are happy to let us drive the exit process.

We also think of exits in terms of what we jointly set out with our partners to do for the business, rather than think of a fixed time frame. For example, we could have set out to double sales, and grow into an additional geography.

If this takes a bit longer than originally expected, it’s reasonable for the exit to be delayed. If we make faster progress, the exit could come quicker.

As investors, my partners and I have ran many different exits with successful outcomes. There are critical best practices and you get better with every one that you do. What you get with us is a lot of successful experiences of what to do in different situations.

Intermediaries and bankers may have some of that, but they are not aligned with you as equity partners.

We are not incentivised to get a fee on an exit, we only do it if we feel it gives us and our partners the best outcome.

Alignment of interests is the most important starting position for a successful exit.

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Dymon , Asia , Chow Yin

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