What will all these mean for the private equity industry? “The private equity industry will change. It will be dominated more by emerging markets. That’s true in our firm, that’s true across the various activities we are seeing,” said Shastry.
Not Just Buyouts
Beyond the obvious increase in deal-making possibilities for firms like TPG, the modus operandi of industry players is evolving too. “First, it used to be that private equity was clearly delineated between what is growth, what is a buy-out and never the twain shall meet,” said Shastry. “It turns out that there is such a thing as a ‘growth buy-out’, as we can gain leverage, service debt, yet at the same time, grow very fast and not be dependent on leverage.”
Furthermore, rather than making a one-off investment and waiting for the right opportunity to cash-in their investments, private equity firms are able to find target companies in emerging markets that are growing so rapidly that several more rounds of cash were needed as capital for growth, in what Shastry calls “life-cycle investing”.
Meanwhile, even as worldwide attention has been very much on China and India, the private equity industry is gaining traction in Southeast Asia too. According to a study done jointly by Bain & Company and the Singapore Venture Capital & Private Equity Association, the number of deals financed by private equity in Southeast Asia rose from 40 in 2000, to 60 in 2007.
The value of the deals, in the same period, surged six-fold to US$12.3 billion in 2007, before tapering off to US$8.3 billion in 2008 – when the financial crisis hit in the second half of the year. The value further dropped to US$6.3 billion in 2009 – still a significant near eight-fold increase from US$0.8 billion in 2001. The message: private equity is here to stay in Southeast Asia.
TPG has certainly been active in this space. The Texas-based firm, founded in 1992 as the Texas Pacific Group, made its name with the buyout of Continental Airlines. It now has a war chest of around US$48 billion, invested across many different industries. TPG has invested in companies like Singapore’s largest private healthcare group, Parkway Holdings, semiconductor tester United Test and Assembly Center, as well as Indonesia’s Bank Tabungan Persiunan Nasional Tbk (BTPN).
Between 2005 and 2009, TPG has put in US$1.1 billion, or 30% of its Asia total, in Southeast Asian investments. “Our returns have been good, but we try not to talk about it too much, as we’d rather not have too much competition showing up here,” he quipped.
Not Just Capital
TPG knows that it cannot just bring money to the table. After all, private equity firms are not the only deep pockets around. Like any major investor, TPG secures board representation in the companies in its portfolio. Shastry himself has been, at various times, a board member of companies like Parkway and BTPN.
However, the engagement has to be deeper. “You can do a little bit of changing by sitting in the board of directors, but ultimately, you have to get your hands dirty and get more involved in operations,” he said. Within TPG, there is a so-called operations group whose team members are seconded to the portfolio companies for months or even years, so that they can help improve the management of those companies.
When Chinese personal computer maker Lenovo bought over IBM’s personal computer business in 2005, TPG joined in with a 10% stake. However, what Lenovo really wanted from TPG was not the money, since it could have easily stumped it up on its own. Rather, TPG was brought in to help share its expertise in managing the structural changes, cross-cultural gaps involved in the reorganisation, and integration of the acquired parts of IBM with Lenovo.
“It is not entirely about capital,” said Shastry. “It is about expertise, and being able to play a role in helping them achieve their objectives.”