ITL #9 Private equity in Asia: demonstrating added value to ensure sustainability9 years, 10 months ago
Weak branding and unclear messaging are among the reputational risk factors affecting private equity firms in Asia. By Damien Ryan and Lauren Goble.
Asia continues to be among the most active markets globally for private equity. The past year has seen a flurry of successful fund launches from home grown funds, including Hony Capital and RRJ Capital, through to established global managers, such as KKR and The Carlyle Group. The Asian private equity industry today also has some of the finance industry's brightest stars with impeccable credentials. Yet long-term sustainability of the industry in Asia goes beyond the business of traditional private equity. It’s likely to be influenced by a more sophisticated approach to stakeholder communications, including how fund managers embrace thought leadership, brand positioning and community education.
For one, Asia is quickly becoming a crowded market for fund managers or general partners. A general partner, or GP in industry speak, is responsible for managing investments made by investors within a fund. They are compensated with a management fee (typically 2%) and a percentage of profits from investment exits, called carried interest. While the big names may find success raising capital, the majority are struggling. Part of the issue has been the inability to articulate a clear, concise and consistent story, so that fund managers can confidently address potential concerns from investors, the limited partners. Limited partners, or LPs as they are commonly known, are an investor in a private equity funds. An LP may be a sovereign wealth fund, pension fund, endowment, family office or a high net worth individual, for example.
LP concerns may cover risk management, performance, investment processes, long-term strategy and a unique value proposition. Many funds are also missing the opportunity to effectively use messaging via platforms including the press and industry conferences. A well-crafted mix of intelligent thought leadership to support the value of their strategy and clear articulation of the investment process, all play a role to shape reputations, which can help to attract and retain capital.
Another issue for GPs remains visibility in Asia among local corporations, which may be potential investment targets. For deal flow, this is about being correctly positioned with investment banks, lawyers, consultants, gate-keepers and companies, including many which are deeply entrenched in local markets. From Indonesia and China, to Vietnam and now Myanmar, Asia is opening up.
In many cases, there is a lack of understanding about private equity and how funds 'add value' to companies and communities. Building a reputation in these markets as a ‘partner' – which can drive value for management, employees and the local communities – is critical. Consistent communication about the alignment of interests with the management of portfolio companies shows that you are working towards the same goal. The risk is not that target companies may choose another private equity firm; the threat in Asia remains the attractiveness of alternative sources of funding.
The private equity industry in Asia is arguably suffering from weak branding and a lack of consistent and clear messaging around the value that the industry brings to Asian economies. Incidents such as the infamous Lone Star investment in Korea Exchange Bank (KEB) have done much to fuel negative sentiment in local markets across Asia, painting the industry as one that exploits growth economies for huge profits.
Lone Star, a U.S. private equity fund based in Dallas, acquired 51% of KEB for $1.2 billion in 2003. When Lone Star decided to exit its investments in the Korea market, capitalizing on money made following the Asian financial crisis, the fund was subject to criticism from Koreans who voiced discontent over foreign funds making huge profits from their domestic treasures.
So how can funds mitigate the risks of negative sentiment? Effective stakeholder engagement is crucial, particularly in markets where there are obvious sensitivities.
Abraaj Capital Group, a Middle East based private equity manager with US$ 7.5 billion under management, articulates the importance of this better than most. Its website states, “As the largest private equity firm in the region, we believe fundamentally that Abraaj has a responsibility and duty to engage all of its forces and strengths behind the creation of vibrant economies, primarily through (intellectual, social and financial) capital flows, investments and by accelerating cultural and developmental linkages across the growth markets in which we operate.”
Private equity firms can use a range of tools, including education, relationship building and briefings with local market press – such as Straits Times in Singapore, Chosun llbo in Korea, Caixin in China, Mint in Indonesia and The Star in Malaysia – to communicate the value that they bring to local economies. This can be done by discussing the investment process, both in monetary and human capital terms, and how this leads to job creation, education of employees and international best practices implemented in local, nascent companies. This can be a powerful way for funds to show, through their actions, that private equity can be a force for positive change and development.
The perception of secrecy
Private equity funds in Asia should also learn from peers in the U.S. and Europe, which continue to face scrutiny over the industry’s role and motives. ‘Private’ equity has come to stand for a secretive industry which seeks to reap enormous profit at the expense of communities and companies. This is, of course, unfair. However, those lobbying against PE have proven far savvier at messaging than the slick minds in sharp suits working inside the industry.
Too often, the industry was either silent in defense or fragmented when communicating, diluting the impact of influence.
Private equity in Asia continues to create enormous value for stakeholders by not just injecting capital into companies, but by delivering innovative practices and much-needed sector expertise. Communities benefit through the creation of local champions which offer employment, healthy competition and tax revenues. Strong companies strengthen economies.
This is a story that is waiting to be told to a broader audience. GPs will also find the story is appreciated by potential investors and employees. To shy away from open engagement will do the industry’s development in Asia few favors.
Damien Ryan is the Managing Director and Lauren Goble is Account Director of Ryan Financial Communications, which advises firms operating in Asia on corporate positioning, thought leadership and reputational management.mail the author
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