Private Equity: Keeping the Faith in Emerging Markets

The recent financial crisis has understandably left a sour taste in among many investors. Some have lost their appetites with earlier bets on complex financial products or high-risk investments in general. Others have retreated to the traditionally safe havens, avoiding all that is perceived as risky.

At a recent dinner, some bankers were rejoicing that their clients were showing renewed interest in emerging markets. However, they suspected this as merely a ‘flavour of the month’ phenomenon, a resurgence to be enjoyed while it lasts.
Not to Ashish Shastry, who was also at the dinner. “This is a secular trend, not a cyclical trend,” said the managing director and head of Southeast Asia at TPG Capital, one of the more prominent private equity firms in the business.
Before 2000, there was a close correlation between emerging markets and the developed world. “When the US sneezes, Asia would catch a cold. (But) that was a long time ago,” said Shastry. Since then, there has been a decoupling, as emerging markets chalk up growth rates three times that of the developed world. For China and India, the two developing Asian giants, the difference can be up to a factor of five to eight.
Shastry, an economics graduate from Princeton University who has been with TPG since 1998, was speaking as one of the presenters at the Private Equity/Venture Capital Symposium organised by the Singapore Management University’s BNP Paribas Hedge Fund Centre.
Consumption Story
Shastry argued that Asia’s emerging markets are one huge consumption growth story. At the same time, companies in the region are also increasingly developers of technologies and vanguard of trends.
For example, Tata Motors, part of India’s largest conglomerate, garnered attention by offering its home-grown Nano car at around US$2,000 apiece, even as a Rolls Royce vehicle found its youngest owner in the world, a 28-year-old, in China. Meanwhile, Indians, collectively, represent one of the largest groups of gold buyers in the world.
It is as much about mass and volume as it is about the diversity. Within emerging markets, said Shastry, some 500 million people will be elevated into middle class status over the next five years, helping to contribute what will be 60% of global consumption.
Furthermore, emerging markets have deep pools of labour, and capital – in an on-going bid for better returns – are easily drawn to cheap labour. Shastry cited the example of Grohe, the famous German maker of premium bathroom fixtures, which TPG has co-invested in.
When the 80-year-old Dusseldorf-based company was looking at expanding its manufacturing facilities, it was first drawn to consider lower cost European countries like Portugal and Slovenia, where wages were two-thirds lower that in Germany. But it discovered that Chinese wages were, in turn, two-thirds lower than those in the two European countries. In the end, Grohe settled upon the Thai province of Rayong, where it found not only low labour cots but also high-quality output, said Shastry.
Also, many emerging markets are playing increasingly important roles in the global context. Many of these countries, like Brazil, have massive natural resources, and the on-going global demand for energy and minerals means that emerging markets are taking a growing share of global exports from developed economies, especially Europe, he said. 
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.”
By partnering with local firms, TPG is not merely looking to combine financial muscle or to share the risks. In a way, it is more about getting close to where the action will be, and to gain better access to those with the local domain knowledge and expertise. “This business is local, local, local,” said Shastry.
Beyond China and India
For many investment decision makers looking at emerging markets, there is a nagging worry; a perception that these are politically unstable, and thus riskier countries. “What we are finding out is that a lot of our brethren are very sophisticated in understanding local politics and regulations, that is going to be a very good trend, understanding these risks, and help us make better decision in investing,” said Shastry.
To this end, TPG has made some decisive moves. Around two years ago, the firm relocated most of its Hong Kong-based staff to Beijing. “We can’t continue doing private equity deals in Asia if we don’t increase our staffing. Ultimately, this business is about being local. In ten years, the meetings of the investment committee of our China fund can be held in Mandarin,” he said.
While the buzz today on “emerging markets” basically revolves around the two giants of China and India, Shastry believes that it is time for serious players to go beyond the orbit of these two markets. “The real great emerging markets are Turkey, Brazil, Indonesia and Vietnam, and Eastern Europe. These will be the great emerging market stories of the next decade.”
If, as a private equity investor, you are still talking about China and India today, “you are about 15 years too late,” said Shastry. He added: “Always simplify and talk about the two big countries – but please don’t stop there.”
About the Author
[email protected] is an online resource that offers regularly updated business insights, information and research from a variety of sources, including interviews with industry leaders and Singapore Management University faculty. The resource can be accessed at article was re-edited for clarity and conciseness.

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