- 66% of respondents say private-equity firms in Asia are behind their counterparts in the West in value creation
- 84% believe demonstration of previous operational experience to LPs is essential or important to fund-raising
- Manufacturing, industrial products and retail cited as the most challenging sectors
- China cited as the most challenging country for operational work, followed by India
- 94% of GPs say their past operational work lived up to expectations
- 64% of GPs say they do not have metrics in place to measure the success of their operational-improvement programs
NEW YORK, Aug. 12, 2014 (GLOBE NEWSWIRE) -- AlixPartners, the global business advisory firm, today announced the findings of a survey of private-equity professionals and accompanying study that assesses the state of private-equity value creation in Asia, as measured by operational improvements for portfolio companies. The report, entitled "Building Better Businesses; A Survey Report on Private Equity Value Creation in Asia," is based on in-depth interviews with nearly 100 regional and international private-equity general partners (GPs) across Asia. The study highlights that as Asia's free-market economies mature, GPs need to change the way they work with their portfolio companies, and that doing more hands-on work to increase portfolio companies' operational earnings, as measured by EBITDA (earnings before interest, taxes, depreciation, and amortization), is potentially becoming a key differentiator.
Higher Requirements Driven by Market Forces
Market forces in Asia, such as slowing economic growth and industry consolidation, were ranked first by GPs as the main reason operational value creation has come to the forefront, followed closely by poor operational management currently at portfolio companies, difficulties private equity has been encountering in exiting deals and the desire of private-equity firms to build a reputation for their own long-term development. Although pressure from limited partners (LPs), the investors in private-equity funds, was ranked last by respondents as a driver for operational change, its importance should not be underestimated, according to the study. GPs surveyed said that LPs are increasingly equating operational expertise with the ability to deliver sustainable returns. In fact, 84% of GPs said the ability to demonstrate previous operational experience to LPs is essential or important to fund-raising.
In many parts of Asia, companies in industries that grew for years on the back of strong domestic growth may now have to look hard at optimizing business strategies, according to the study. Additionally, it notes that public markets in much of the region have been challenged, which has not only limited exits via initial public offerings but has also tended to lower the value of mark-to-market assets held by private equity. The study finds that this appears to be especially true for companies in the manufacturing sector, with both consumer products (cited by 54% of respondents) and industrial products (cited by 50%) seen as the sectors requiring an operational focus the most, as well as the retail industry (cited by 50% of respondents).
Asia Lags the West in Value Creation
In comparison with their counterparts in the West, private-equity firms in Asia are behind when it comes to value creation at their portfolio companies, according to 66% of respondents. This, says the study, is likely due to Asia's patchwork of cultures, languages, infrastructure and regulations, which create very unique challenges for private-equity firms carrying out operational work in the region.
According to AlixPartners' survey, GPs ranked finding talented operation experts first as their biggest challenge in creating operational value today in Asia, followed closely by the cost and time involved with operational matters. The study notes that many parts of Asia appear to have a shortage of experienced operational professionals, likely due to the relatively short history of a private sector in some countries, and to state-owned or -controlled sectors in others.
Additionally, the study points out that implementation of operational value-creation strategies is particularly challenging in Asia. According to 86% of GPs, the reason for this is that minority ownership stakes, which are common in Asia, tend to limit the ability of a private-equity firm to drive true operational change. As a result, says the study, GPs need to build a close working relationship with players such as the company founder and existing top management; in fact, the majority of GPs surveyed (61%) cite this strategy as the most effective way of carrying out operational improvements at such portfolio companies.
Challenges Vary Widely by Country
Turning to countries, China was cited as the most challenging Asian country for accomplishing operational improvements, according to 53% of survey respondents who were required to rank the top five Asian countries, followed closely by India (cited by 45%) and countries in Southeast Asia.
Respondents indicated that until now, few private-equity deals in China have been total buyouts, in keeping with the historical trend cited above. However, the study also notes that could change, as many company founders are now nearing retirement age and that many second-generation family members may not want to take over the family business. Therefore, says the study, managements are likely becoming more open to professional operations assistance, which, in turn, can also help provide an exit for the founder.
The study notes that India, unlike China, is a patchwork of semi-independent states and that culture, language and regulations can differ significantly in different parts of the country, which can present big hurdles for implementing operational change, not to mention scaling businesses, up or down.
Additionally, the Southeast Asia countries of Indonesia (selected by 32% of respondents), Vietnam (29%), Cambodia (29%), the Philippines (24%) and Laos (22%) were ranked in the middle in terms of the challenges of implementing operational changes, likely due, says the study, to a lack of trained management and employees, high employee turnover and funding inadequacies.
To Make Operational Value Creation Work Pay Off
Despite all the challenges in Asia, the study says the payoff of operational value-creation work is demonstrable and repeatable, and for GPs who have raised at least two funds, 94% say operational work has increased their portfolio company's value. In the past, operational improvements have mainly been generated by improving financial management according to 71% of respondents. Closely behind is cost-base management, cited by 67% of respondents. Respondents also cited improvements in the sales force (selected by 62%), the product and/or service quality (selected by 50%) and the supply chain (selected by 47%) which, says the study, supports the idea that industries in Asia Pacific can be made much more efficient.
The survey also finds that 64% of GPs say they do not have metrics in place that allow them to confidently measure success of their operational-improvement programs, despite 58% of respondents describing their programs as "mature." This contradiction, says the study, suggests that the definition of operational value creation is highly subjective and that therefore key performance indicators (KPIs) differ widely.
Recommendations for Private-equity Firms
Commenting on the private equity environment in Asia, Masahiko Fukasawa, managing director and at AlixPartners and co-head of Asia at the firm, said, "Private equity in Asia is entering a new phase in which creating value will need to be through operational excellence, which in turn, will build more-competitive businesses. A crop of private-equity firms is increasingly doing larger deals and coming across more buyout opportunities than a few years ago. These more-complex deals require greater operational expertise, which is challenging for private-equity firms to develop on their own."
The study suggests that a "one-size-fits-all" model is incompatible with the widely-varying strategies of private-equity firms and the diversity of the markets in Asia, and that there appears to be the need for customized approaches. The study's recommendations for private-equity firms in Asia aiming to build an operational model are threefold:
- Take a structured approach to identifying the most suitable operational model. In addition to investment strategy, this would likely include management fees available and the type of expertise required, whether in-house or external.
- Develop authoritative metrics to measure progress and success. Meaningful metrics can not only keep the strategy on track, they are also essential for reporting to LPs, regulators and other stakeholders.
- Keep in mind the importance of relationship-building with company founders, entrepreneurs and management teams, for whom a "one-step-at-a-time" investment strategy is often the best, and sometimes the only, way to achieve success for private equity.
About the Study
AlixPartners' "Building Better Businesses; A Survey Report on Private Equity Value Creation in Asia 2014" is the result of a survey conducted for AlixPartners in early 2014 by Private Equity International's Research & Analytics unit, to capture and analyze general partners' opinions and perspectives on issues surrounding operational value-added work at portfolio companies. Surveyed were 96 Asian-based and global private-equity general partners making investments across Asia. The respondents had assets under management ranging from $750 million to more than $5 billion.
AlixPartners is a leading global business-advisory firm of results-oriented professionals who specialize in creating value and restoring performance at every stage of the business lifecycle. We thrive on our ability to make a difference in high-impact situations and deliver sustainable, bottom-line results. The firm's expertise covers a wide range of businesses and industries whether they are healthy, challenged or distressed. Since 1981, we have taken a unique, small-team action-oriented approach to helping corporate boards and management, law firms, investment banks and investors respond to critical business issues. For more information, visit alixpartners.com.
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