Making PE forays in S-E Asia


  • Investment
  • Saturday, 09 Nov 2019

Bloy: At the end of the day, you can say it’s good to double be value of the company, but if it takes you 10 years to do it, the internal rate of return isn’t very good actually.

Navis Capital Partners was founded in 1998 to make private equity (PE) investments in buyouts, recapitalisation and financial restructuring in Asia, particularly in enterprises with a strong or developing presence in South-East Asia, Australia and Hong Kong. Since its founding, Navis has made over 80 controlling investments, with 50 exits so far.

Two thirds of these exits have been in South-East Asia, where the company has achieved returns of 3.1x money multiples and an internal rate of return of 22%.

All Navis’ companies are leaders or near leaders in their fields. Industries in which Navis has invested include food processing, fast food, industrial products, fast moving consumer goods, outdoor advertising, auto rentals, consultancy and professional services, among others.

The firm is opinionated on how growth is generated and thus only buys majority stakes. Once it buys the stake, Navis contributes both capital and management expertise to its portfolio companies with the objective of directing strategic, operational and financial improvements.

Below are excerpts of an interview with Navis’ Capital co-founder and managing partner Nicholas Bloy:

What is the appeal of investing in South-East Asia (SEA) vs Europe and the United States?

With GDP growing at 5% to 6% per annum, the SEA economy is dynamic. Europe, by contrast, seems sclerotic, and the US is nearing the end of a long cycle of recovery and expansion, which has been underpinned by record-low interest rates and tax cuts. Currently, average GDP per capita is just US$4,000 across the 650 million people in this region of 10 economies. But millions of households are starting to earn higher incomes and moving into the middle class, which means increasing demand for consumer products and services. The population is young, productive and growing (unlike in China).

Also, the SEA market is immature and there’s room to boost efficiency. Both conditions are helpful to value creation. A post-investment focus on strategy, human capital, technology and ESG factors can lead to outsized gains in market share, profitability and asset efficiency.

Navis acquired Malaysian durian exporter Hernan Corp and plans to invest up to RM400mil in expansion.Navis acquired Malaysian durian exporter Hernan Corp and plans to invest up to RM400mil in expansion.

Well-run and well-capitalised companies have a long runway for compounding growth in SEA, making them incredibly valuable and attractive over the long term.

Are you fund raising now?

We are in the middle of fund raising for Navis 8 at the moment – we are looking to raise about US$1.75bil, we are halfway through that. We started in April and will finish next April.

You have made two thirds of your investments in SEA. Are these investments in any particular country?

We like to be well diversified across countries. But I would say most of it have been in Singapore, Malaysia, Indonesia and Thailand, Australia, Hong Kong and more recently Vietnam.

Navis’ strategy

Navis only acquires majority stakes. Typically what is the size of that investment.

It used to be US$10mil, and now it’s nearing an average US$100mil. We do go down to US$30mil. Typically it is between US$50mil and US$150mil.

And Navis absolutely must have control of the portfolio companies it buys?

Yes. There are two reasons. One is when we are in control, we make things happen. We have the opportunity to launch new products, buy a competitor, replace management etc. So we have control over our destiny.

If we are minority shareholders, we are just taking a passive ride on the capability of an entrepreneur and his management team. And because Navis has a management consulting background out of the Boston Consulting Group, we are quite opinionated about what we think is the way to create value. So we don’t want to be hoping that someone will agree with us. A lot of money was lost during the Asian Financial Crisis when the PE industry didn’t have majority control because of integrity issues. Back then, the minority PE shareholders thought they had a good agreement with the majority shareholders about governance, and how they would exit. It didn’t work out like that.

So we put out that there is a bigger risk being a passive minority and relying on the integrity and capability of the entrepreneur or the family to look after you all the way through the investment cycle. We never want to put ourselves in that position – we see our entrepreneurs and families as partners with whom we are in a constant active dialogue

Typically how does Navis exit?

We have had 50 exits, and none of these through IPOs. We exit to trade buyers. We find the public equity markets in SEA to be mediocre in terms of liquidity for SMEs. In fact, we have taken private many public companies that were stuck. However, we have never IPO-ed any business.

When Navis is exiting a business, we are typically owning 70% to 80% of the business, and if we IPO the business, we probably can only sell half of it then, but we still have to get to zero.

If we were just 10% shareholder, it would not matter and we could exit that 10% to the public markets. But when it’s the other way around and Navis is going from 90% to zero, there will be little institutional support.

There will be an overhang of shares as the analysts wait for us to sell our shares down. The markets here are just not deep and liquid enough to support monetisation of a super majority controlling stake, which is typically what we have.

Navis acquired Malaysian durian exporter Hernan Corp and plans to invest up to RM400mil in expansion.Navis acquired Malaysian durian exporter Hernan Corp and plans to invest up to RM400mil in expansion.

So when you buy something, what is your target timing of exiting?

Privately, my target is 4½ to five years. But in the wider domain, we are going to be saying to all our staff and partners that we expect rapid results and must do it in three to 3½ years – because that puts everyone into a pace of urgency, but invariably something somewhere will go wrong that takes time to fix. When we didn’t do that, (focus on rapid results), we would say five years, and it would always end up being 6½ to seven years.

That is too long. At the end of the day, you can say it’s good to double the value of the company, but if it takes you 10 years to do it, the internal rate of return isn’t very good actually. You have to do it quickly.

Sectors in focus now

What sectors excite Navis now?

We are very focused on SEA. Its in a very interesting point in its evolution. Coming together as a large group of people – 650 million people, almost a US$3 trillion economy, so GDP per capita is averagely around US$4,000. That is the kind of threshold where this is an emerging class that can start to afford slightly different, slightly more aspirational, more branded goods and services. That is a very interesting time in a country’s evolution.

Let me give you an example: The first investment we made for Navis 8, it was in private education in Vietnam. We now have 17 campuses, 15,000 students and this platform is designed for the emerging middle class families of Vietnam. So its not an international school which caters to the expat’s children with an international curiculum. These are Vietnamese children learning the Vietnamese curiculum but with a strong emphasis on English. Hence they come out a little bit more bilingual.

They will therefore pass very successfully into the Vietnamese university system and ultimately get a good job with a multinational in Vietnam. While the whole of SEA highly values education, this is even more so in Vietnam, where they spend a high percentage of household income on education.

The real point here is that there is pent up demand for this. Households are getting wealthier at a fast rate in Vietnam. So obviously as growth investors we love that. We are going to build more campuses and we will fill them wuickly with students transferring from the public sector. The demand is there. waiting to be satisfied.

Of red flags and character

When looking at companies to invest, what is a red flag for you?

If the family or entrepreneur wants to sell out fully, meaning they want to exit 100%. That is a red flag. We did that a couple of times in the early 2000s. And we lost money doing it. So we decided, there’s a lesson there. This is because they know something you don’t necessarily know. They are intimately more knowledgeable about the company.

However when a company wants to sell a majority stake, isn’t that a red flag as well?

It may or it may not be. You have to understand the reasons. If the entrepreneur is in his 60s or 70s and has kids who don’t want to be running the business. then they have a strong logic. This led Navis to create the partnership model with entrepreneurs. Which is ideally where we buy 51%, and the entrepreneur keeps 49%.

Together we are going to grow and professionalize the entrepreneur’s company in ways that he will not be able to do on his own. Then together we are going to sell 100% to a trade buyer. So if you can convince the entrepreneur that the 49% he is keeping is going to be worth a lot more than the initial 51% we are buying, then you have got a match made in heaven.

That is what we excel at. So that is how we do it when we work together with an entrepreneur or family business. It has to be like that.

How important is the character of management for your investee companies?

Most of the cases, we are investing with the family or entrepreneur. In all those cases, we are not going to rely on the entrepreneur or family all the way through until the exit unless they are very good. Because you can’t sell a business to a trade buyer if the founder CEO is still the founder CEO when we are coming to the exit.

The trade buyer will say “Hold on he’s exiting, and he’s selling everything now, so who’s going to run it?” So we already have to have a plan for management transition when we acquire the company.

We will be able to show to a multinational buyer that we have a professional management team that is not particularly reliant on the family or original founder of the business.

Having said that, no competitively build business has ever been build by a bad management team. So it tends to go without saying that a really high quality business already has something about it in terms of the quality of the entrepreneur and his family involvement.

How do you gauge what to buy, and in what country?

It all depends on where the country is in terms of its GDP per capita.

There is an extraordinary range of GDP per capita across SEA’s economies – from about US$1,500 across Myanmar, Cambodia and Laos and about US$3,000 to US$4,000 across Vietnam, the Philippines and Indonesia to US$6,500 in Thailand, US$10,000 in Malaysia and US$50,000 in Singapore.

For example, in Vietnam there is currently tremendous pent-up demand for inexpensive private education and general healthcare, as millions of households are just now reaching the threshold where these services are affordable.

By contrast, most households in Malaysia are well beyond this threshold, so there is not much more growth anticipated and plenty of capacity to cater to existing demand.

On the flip side, Malaysia has reached a level of affluence where specific healthcare needs are increasing rapidly in areas such as diabetes and cardiovascular disease, and there is a growing need for specialised, as opposed to general, hospitals.

But back to Vietnam – if I build a diabetes hospital there, nobody would come. Because nobody’s consuming so much sugar and getting diabetes. So that probably wouldn’t be an opportunity for another 20 years There are more than 10 different types of durians in the market but Musang King remains to be a popular choice.There are more than 10 different types of durians in the market but Musang King remains to be a popular choice.

You see potential in which other countries?

Well you can’t ignore Indonesia due to the very large population which is attractive for many industries where scale is important. Indonesia is at about US$4,000 GDP per capita currently. So again, it’s in an inflection point where an interesting form of consumerism is starting to accelerate.

For example, as people start to switch from basic chicken to KFC, that’s when you can start to build economic models that you can scale.

You have a natural hedge when investing for Navis?

I like to balance Navis’ sector exposure into two sides. One is the side we are talking about – which is emerging consumerism. That can cut across many areas – it includes education, healthcare, FMCG, retail. The other side is the industrial ecosystem of SEA, which exports to the rest of the world. It’s important to have that balance. On this industrial side, I want a globally oriented export business that is selling to the rest of the world, not a manufacturing business that is only selling to the domestic market. You see we report our earnings in US dollar. So even if I make a great return in ringgit, if the ringgit weakens, it’s going to undercut my US performance. But if I have a Malaysian-based export oriented business, it will flourish more when the currency is weaker, so that’s what I call a natural hedge against local currency weakness that will adversely impact the consumer side of Navis’ exposure

SEA is incredibly competitive in its manufacturing ecosystem. It was a bit overtaken certainly in scale by China, but now China is a much more expensive place to manufacture than in SEA. Malaysia’s manufacturing wages are about 30% lower than China.

In Vietnam, wages there are 40% lower than Malaysia. So although the rise of China put SEA’s manufacturing ecosystem into a bit of shade, the ecosystem in SEA never left.

Those electronics, mechanical and aerospace components, all kinds of complex and semi-complex manufacturing that requires precision, some automation, some highly productive labour – all these industrial sub-ecosystems still exist and flourish in SEA. And all the more now since the trade war.

People are starting to source back from SEA and in much bigger volumes. The sector will continue to grow and thrive.

Of durians

Navis made a very interesting acquisition lately. It acquired Malaysian durian exporter, Hernan Corp. In a statement, Navis said it plans to invest up to RM400mil in its expansion plan of Hernan Corp.

Can you tell us why you see potential in the durian sector?

Is it because of the big market in China?China and Chinese communities around the world have the same craving for durian that we all, or mostly all, share in South-East Asia.

The rate of growth of demand in China is outstripping the ability of the supply side to produce and given the lead time between planting and commercial fruiting of 6 to 7 years, this supply/demand balance is expected to persist for some time before durian prices normalize, which inevitably they will do as people rush in and plant.

What are your plans with the RM400mil and how long are you willing to wait for this investment?

Will it be a 3 to 3½ year wait period? The RM400mil is going to be partly used to build up Hernan into a very large downstream player – with facilities in both Malaysia and China to sell whole fruits, paste, purée and branded finished products both as an OEM producer and also for its own brands.

But we also want to own and partner with upstream plantations who value a large and financially stable downstream offtake partner. Unfortunately there are a lot of cowboy practices in the industry value chain, but if you are fully integrated, you don’t need to rely on too many middle men.

And the middle men you do work with over the long run, become long term strategic partners with the same professional and ethical standards that we have.

That’s the only way to develop the durian industry to maximise its potential – good agricultural practices, traceability, certification, good manufacturing practice, brands that stand for quality and so on.

Yes, this will take longer than three or four years, but the value will be commensurately higher to offset the extra time required. In each Navis Fund, we invest in maybe 18 companies – the majority we are trying to sell after three years – at about 2x to 3x what we paid, and often this takes maybe 4 or 5 years to actually achieve. But in a portfolio of many companies, we can afford to have a few companies where we take a longer term perspective – if Navis can make 5x to 8x return over say seven or eight years, we would be happy to wait.

Navis also appears to want to go upstream. It was mentioned that you are looking to acquire up to 10,000 acres of durian plantation in Pahang, in partnership with a local agriculture company. How much are you looking to put into this?

Of the RM400mil, I expect more than half to be invested upstream over time. But one has to be careful about who one works with, what type of land has been converted and so on, so we are not going to rush this.

You feel Malaysia has the competitive advantage and ability to grow durian on a large scale successfully?

There is great agri-talent in Malaysia, and globally-significant giants have emerged out of Malaysia in oil palm and rubber, for example. Of course there is a labour challenge now that needs to be addressed with technology. But at the end of the day, Malaysia has the Musang King cultivar and that is the premium varietal.

Sure, other countries may try and grow it, just like countries can grow grapes and make wine in regions outside of Burgundy or Bordeaux or Napa Valley, but the authenticity and integrity of these original producers means that they never have to compete on price – only on quality.

That is our ambition for Musang King durian from Pahang. Can anyone honestly say they prefer Monthong or D24?


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