Article

Private Equity's new Asian recipe

To succeed in Asia's tumultuous environment, today's new activist funds have created a repeatable...

著者：Chul-Joon Park, Survir Varma and Chris Bierly

First published on 1月 01, 2007
min read


Before being purchased by private-equity investors, Singapore Yellow Pages was giving out a whole lot of wrong numbers. Despite an 87% market share, SYP had seen revenues slide to just S$62 million ($36.5 million) in 2003 from S$104 million in 1999, with profit margins shrinking apace. Advertisers were defecting in droves. So, too, were SYP's sales reps, with an annual turnover rate topping 50%. Getting those numbers right in a hurry was therefore the top priority of CVC Asia Pacific and CCMP Capital Asia (formerly JP Morgan Partners Asia), the two firms leading the private-equity consortium that bought the telephone directory publisher from SingTel, Singapore's telecommunications company, in June 2003. Emblematic of a new breed of activist PE firms, the new owners set about creating a book of their own—an operational one that included a way to quickly develop a detailed blueprint of what was to be done, in what order, and by whom. This plan fleshed out the group's investment thesis based on a rigorous, fact-based assessment right after the deal closed of how the business made money and where it had the best opportunities to increase its value. Identifying near- and long-term goals, the partners then established a timeline, milestones and resources so that Singapore Yellow Pages would soon once again be produced in black ink. The chief recommendation was a major overhaul of advertising sales. The new owners and SYP management thus set concrete revenue and profit growth targets for each of a dozen clusters of high-priority customers. They revamped the sales-prospecting process and raised performance standards and compensation for sales reps, replacing the overlapping, uncoordinated efforts of telephone customer-service agents and individual account managers with a process in which sales teams set priorities by determining advertisers' current and potential value to the company. The performance measures also provided a regular report card on whether the SYP turnaround was on track. They made transparent for the first time how much revenue per customer every dollar invested in the sales effort yielded. The clear metrics helped convey a powerful signal to other potential investors that the new sales force reinvigoration strategy was working. The result: A little more than a year after making the acquisition, the private-equity partners floated an initial public offering of SYP shares, reaping S$213 million ($128 million), locking in a gain of 2.6 times their initial investment while still retaining shares worth another S$50 million. Today, though its share price has since fallen, SYP remains a favorite of investors for its high 8% dividend yield, which is expected to rise to 9% in 2007, and because of its 25% annual growth in its new Internet Yellow Pages business. Updating the Success Formula How CVC Asia Pacific and CCMP Capital Asia turned around Singapore Yellow Pages illustrates the development of a new playbook for private-equity transactions in Asia. Not so long ago, buyout deals could follow a much more leisurely plotline. After months of digging to ferret out the target company's true value, the papers would be signed and the toasts drunk. The target's management would slip back into business as usual, and the new owners would wait until market conditions ripened for a sale. For more than a decade, this model was a money machine, outperforming the market indexes. That approach no longer works. Fed by a seemingly bottomless well of investors' money, the number and size of private-equity firms have mushroomed. Between 2001 and 2005, more than 425 U.S.-based firms had amassed nearly $300 billion from limited partners, with multibillion-dollar rounds of new funding becoming routine. And with turnaround skills honed in the West, private-equity investors began sweeping underperforming Asian corporations into their portfolios and retooling the management at these firms to boost shareholder value. Last year, PE investors accounted for about 11% of all merger and acquisition activity in Asia, deploying more than $100 billion across the region. With so much capital to invest, buyout firms find themselves pitted against each other in high-stakes auctions that drive up acquisition prices, and they are pursuing larger deals in wholly new regions in Asia. Last December, for example, the Carlyle Group invested $399 million for a 25% stake in China Pacific Life Insurance, the country's third-largest life insurance company. This came just two months after Carlyle began negotiating a stake in Xugong Group Construction. The latter would be one of the first buyouts of a state-owned company by a foreign PE firm, as well as the nation's largest deal of the year in the heavy manufacturing sector. In effect, private-equity firms are assembling portfolios that make them among the world's most diverse conglomerates. They are confronting not only new geographies but also new challenges. With interest rates low and abundant credit available for borrowers, the debt markets have been exceptionally benign in recent years. But even with the wind at their backs, buyout firms worldwide generated returns exceeding three times their original investment—a common benchmark for success—on just over one-third of all deals. Some 40% failed to return their acquisition cost. Amid the scramble in Asia, private-equity funds will no longer be able to rely on the magic of leverage to deliver outsized gains. To succeed in Asia's tumultuous environment, today's new activist funds have created a repeatable process for spotting, staging, leading, measuring and profiting from breakthrough operational improvements. Our experience shows that deal makers who in the first year actively plan and launch initiatives this way outperform the industry average by a better than two-and-a-half-to-one margin, measured on cash returns. Their new formula for success involves four ingredients: Fleshing out the investment thesis. This is a necessary prologue to creating the actual operational plan. Private-equity investors already do a better job than most acquirers in developing a clear understanding of how a potential target makes money and why they'd want to own it. But activist investors don't mistake an investment thesis for a detailed strategy. A thesis simply posits why there is an opportunity for a buyer to extract value from an acquisition. It doesn't identify operational priorities or draw a roadmap to accomplish them. And inevitably, as with any plan hammered out with incomplete information in an arm's-length deal negotiation, the investment thesis is bound to get some things wrong. That's why, once in control, the activist owners quickly engage with management and put meat on the bare bones of the investment thesis. Working intensively over several months, they identify the most attractive opportunities, gather data and information to test their viability, and develop strategic objectives and financial targets. Sometimes this activity has to occur in several areas at once. Consider how Newbridge Capital, a partnership between Texas Pacific Group and Blum Capital Partners, rapidly transformed Korea First Bank from a bankrupt industrial creditor into a world-class financial institution. Activist private-equity funds typically establish a program office to develop step-by-step plans to boost their acquisitions to full potential. But in South Korea's fast-paced business environment, step-by-step is sometimes impossible. In the case of Korea First, Newbridge launched simultaneous initiatives to accelerate the bank's transformation. While frontline managers streamlined branch operations, the new owners assigned a high-level executive team supported by outside technical experts to spearhead a change-management program to consolidate loan processing, credit collection and trade finance into two new customer service centers. Meanwhile, dedicated project teams orchestrated the upgrade of Korea First's information technology organization, adding telemarketing and customer call-center capacities. By executing these changes in parallel, Newbridge was able to make Korea First's new facilities operational within five months. In other areas, though, Korea First had to move with deliberation. As in many Asian business cultures, Korea's labor and management have a loyalty compact supported by strong employment laws. The turmoil of Korea First's bankruptcy and sale left the bank with a demoralized frontline workforce and an imperative to retain employees in the transition. Recognizing this, management tapped key human resource staffers as allies in the change campaign, making them more available to branch-office workers. Management broadcast the bank's commitment to retain employees who were made redundant by downsizing, helping to train those workers for new positions in customer service and sales. In all, branch closings and work-process changes ended up claiming 800 jobs, but these were more than offset by newly created positions that displaced workers could apply for. The candor and support-reinforced by cash incentives for working more efficiently-helped Korea First shift its business quickly to the consumer side and improve its efficiency, cutting loan-approval time by 75%. Drawing up the blueprint for action. Blueprinting is not about generating a laundry list of nice-to-haves that typically fill strategic planning binders and end up on a bookshelf. Instead, the team fine-tunes what's in and what's out as it learns more. Sometimes this involves a literal blueprint, as was the case with Korea First. When Newbridge assumed control of the bank from government receivership in 2000, it was saddled with a costly institutional branch network, built with dedicated space for back-office processes. The answer to the turnaround was architecture: The firm needed to establish retail branches with simpler layouts in high-traffic consumer locations. Rather than rebuilding branches from scratch, Newbridge worked with management to redesign the existing infrastructure. It consolidated corporate business into a handful of large-scale branches, closed some branches, and then stripped the remaining ones of their back-office functions, focusing them instead on reaching out to consumers through customer sales. The simplification resulted in $50 million of bottom-line improvements within a year and allowed Korea First to shrink its branch network by 31 offices. By 2005, five years after Newbridge's acquisition, the bank's new infrastructure was best in class: Not only was it a leader in online banking, but it had overhauled its technology platform; centralized back-office processing, customer service and risk management; reinforced financial controls; and focused the organization on profitability rather than volume. With one of the industry's lowest ratios of nonperforming loans, its balance sheet was the nation's strongest. The payoff: In January 2005, the British banking group Standard Chartered bought Korea First for $3.25 billion, a nearly fourfold return on the private-equity fund's cash investment. Measuring what matters. All private-equity firms obsessively watch measures of financial performance like cash flow, working capital and return on equity. Activist buyout firms, however, track measurements that help them monitor progress toward operational goals before it shows up in the financial results. Experienced activists don't get blinded by data blizzards. Instead, they focus on a few key measures—an operational "dashboard"—that can be understood throughout the organization. A program office overseen by the company's senior executives watches the data dials, synchronizes initiatives and intervenes quickly when the blueprint's targets are missed. Getting the metrics right was the cornerstone of Singapore Yellow Pages' post-acquisition turnaround. It started with a global benchmark and internal assessment of its demoralized sales force, which was the key to generating new growth through what the company developed as a "value proposition" sales approach. This was based on meeting customers' actual needs as expressed during interviews and personal visits. Further, customers were segmented by business potential, giving specific direction to sales efforts. Meantime, new training, higher compensation and special incentives for outstanding performance against specific targets provided even greater focus. The company gave salespeople challenging goals, including revenue targets of nearly $1 million each. But these same salespeople could now make three times their prior pay packages from the new variable rewards. And, they now had a say in who was hired and promoted. Creating a happy ending. By understanding how their portfolio company makes money at each stage of the business cycle and engineering performance improvements, activist firms create a brighter future for the company and position themselves for a more profitable exit. Indeed, activist owners defy a common rap against private-equity investors: that they're focused only on stripping value out of their holdings and priming them for sale. Instead, activist owners cultivate new opportunities for the next set of owners to harvest. As part of the blueprinting process, the activists look for ways to jump-start future growth. They don't hesitate to invest in research and development projects, new product lines, new technology, acquisitions or expansions into new markets-even if they may bear fruit only years after the sale. A veteran of more than a score of management buyouts since the late 1990s, a top European private-equity firm we'll call Capital Group Investors has learned a thing or two about the rewards of foresight. The firm and its co-investor partners had their exit strategy in mind when they purchased a company we'll call Trade Winds, an Asian marketer of consumer soft goods, in late 2001. Long buried as a division of a conglomerate that manufactured everything from tires to sporting goods, Trade Winds had generated good cash flow, but its profit margins were eroding and its market share was shrinking by the time of the buyout. Guided by a sharp management team, the new owners soon came to learn that restoring luster to Trade Winds' faded product lines of casual wear and recreational gear required rebuilding the company's marketing muscle. They fixed on a three-phase strategy: raising the company's profile for the quality and value of its basic goods; becoming more responsive to retailers through improved delivery, flexibility, distribution and inventory management; and making selective acquisitions to increase revenues. By spring 2004, the company's sales and profits were on the rise, and it had completed the integration of two modest-sized acquisitions. With the equity markets in an upswing, the private-equity owners decided to relaunch Trade Winds as a public company. But the ultimate success of the initial public offering didn't hinge simply on the changes the private-equity firms and their managers had accomplished. Just as important to prospective investors were the ongoing longer-range projects to reconfigure the company's supply chain and build a new distribution infrastructure. When complete, these will give the company new efficiencies it can capitalize on for years to come. In the end the longer-term vision of the private-equity owners paid off in a record IPO that netted A$1.25 billion ($920 million) and was 2.3 times oversubscribed. Capital Group and its partners earned more than five times their initial A$235 million ($122 million) cash investment, resulting in a 107% internal rate of return. The success of deals like Singapore Yellow Pages, Korea First and Trade Winds shows how leading-edge private-equity firms have rewritten the rules of how they do business. They know that as they compete to attract ever-larger pools of capital, their investors will judge them not just by their ability to spot attractive targets but also by their proven track records for building value across their portfolios. That's why activist firms have gone from applying the discipline of adding value to companies on a case-by-case basis to turning it into a repeatable process. It's a process that refines the original investment thesis into a true operational blueprint that can turbocharge change and measure it. Today's leading private-equity pioneers are using this approach to rewrite the playbook on deal making. Mr. Park directs Bain's Asian Private Equity practice. Messrs. Varma and Bierly are leaders of Bain's Southeast Asian and North American PE practices, respectively. Published by Far Eastern Economic Review.

Before being purchased by private-equity investors, Singapore Yellow Pages was giving out a whole lot of wrong numbers. Despite an 87% market share, SYP had seen revenues slide to just S$62 million ($36.5 million) in 2003 from S$104 million in 1999, with profit margins shrinking apace. Advertisers were defecting in droves. So, too, were SYP's sales reps, with an annual turnover rate topping 50%.

Getting those numbers right in a hurry was therefore the top priority of CVC Asia Pacific and CCMP Capital Asia (formerly JP Morgan Partners Asia), the two firms leading the private-equity consortium that bought the telephone directory publisher from SingTel, Singapore's telecommunications company, in June 2003. Emblematic of a new breed of activist PE firms, the new owners set about creating a book of their own—an operational one that included a way to quickly develop a detailed blueprint of what was to be done, in what order, and by whom.

This plan fleshed out the group's investment thesis based on a rigorous, fact-based assessment right after the deal closed of how the business made money and where it had the best opportunities to increase its value. Identifying near- and long-term goals, the partners then established a timeline, milestones and resources so that Singapore Yellow Pages would soon once again be produced in black ink.

The chief recommendation was a major overhaul of advertising sales. The new owners and SYP management thus set concrete revenue and profit growth targets for each of a dozen clusters of high-priority customers. They revamped the sales-prospecting process and raised performance standards and compensation for sales reps, replacing the overlapping, uncoordinated efforts of telephone customer-service agents and individual account managers with a process in which sales teams set priorities by determining advertisers' current and potential value to the company. The performance measures also provided a regular report card on whether the SYP turnaround was on track. They made transparent for the first time how much revenue per customer every dollar invested in the sales effort yielded. The clear metrics helped convey a powerful signal to other potential investors that the new sales force reinvigoration strategy was working.

The result: A little more than a year after making the acquisition, the private-equity partners floated an initial public offering of SYP shares, reaping S$213 million ($128 million), locking in a gain of 2.6 times their initial investment while still retaining shares worth another S$50 million. Today, though its share price has since fallen, SYP remains a favorite of investors for its high 8% dividend yield, which is expected to rise to 9% in 2007, and because of its 25% annual growth in its new Internet Yellow Pages business.

Updating the Success Formula

How CVC Asia Pacific and CCMP Capital Asia turned around Singapore Yellow Pages illustrates the development of a new playbook for private-equity transactions in Asia. Not so long ago, buyout deals could follow a much more leisurely plotline. After months of digging to ferret out the target company's true value, the papers would be signed and the toasts drunk. The target's management would slip back into business as usual, and the new owners would wait until market conditions ripened for a sale. For more than a decade, this model was a money machine, outperforming the market indexes.

That approach no longer works. Fed by a seemingly bottomless well of investors' money, the number and size of private-equity firms have mushroomed. Between 2001 and 2005, more than 425 U.S.-based firms had amassed nearly $300 billion from limited partners, with multibillion-dollar rounds of new funding becoming routine. And with turnaround skills honed in the West, private-equity investors began sweeping underperforming Asian corporations into their portfolios and retooling the management at these firms to boost shareholder value. Last year, PE investors accounted for about 11% of all merger and acquisition activity in Asia, deploying more than $100 billion across the region.

With so much capital to invest, buyout firms find themselves pitted against each other in high-stakes auctions that drive up acquisition prices, and they are pursuing larger deals in wholly new regions in Asia. Last December, for example, the Carlyle Group invested $399 million for a 25% stake in China Pacific Life Insurance, the country's third-largest life insurance company. This came just two months after Carlyle began negotiating a stake in Xugong Group Construction. The latter would be one of the first buyouts of a state-owned company by a foreign PE firm, as well as the nation's largest deal of the year in the heavy manufacturing sector. In effect, private-equity firms are assembling portfolios that make them among the world's most diverse conglomerates.

They are confronting not only new geographies but also new challenges. With interest rates low and abundant credit available for borrowers, the debt markets have been exceptionally benign in recent years. But even with the wind at their backs, buyout firms worldwide generated returns exceeding three times their original investment—a common benchmark for success—on just over one-third of all deals. Some 40% failed to return their acquisition cost. Amid the scramble in Asia, private-equity funds will no longer be able to rely on the magic of leverage to deliver outsized gains.

To succeed in Asia's tumultuous environment, today's new activist funds have created a repeatable process for spotting, staging, leading, measuring and profiting from breakthrough operational improvements. Our experience shows that deal makers who in the first year actively plan and launch initiatives this way outperform the industry average by a better than two-and-a-half-to-one margin, measured on cash returns. Their new formula for success involves four ingredients:

Fleshing out the investment thesis. This is a necessary prologue to creating the actual operational plan. Private-equity investors already do a better job than most acquirers in developing a clear understanding of how a potential target makes money and why they'd want to own it. But activist investors don't mistake an investment thesis for a detailed strategy. A thesis simply posits why there is an opportunity for a buyer to extract value from an acquisition. It doesn't identify operational priorities or draw a roadmap to accomplish them. And inevitably, as with any plan hammered out with incomplete information in an arm's-length deal negotiation, the investment thesis is bound to get some things wrong. That's why, once in control, the activist owners quickly engage with management and put meat on the bare bones of the investment thesis. Working intensively over several months, they identify the most attractive opportunities, gather data and information to test their viability, and develop strategic objectives and financial targets.

Sometimes this activity has to occur in several areas at once. Consider how Newbridge Capital, a partnership between Texas Pacific Group and Blum Capital Partners, rapidly transformed Korea First Bank from a bankrupt industrial creditor into a world-class financial institution. Activist private-equity funds typically establish a program office to develop step-by-step plans to boost their acquisitions to full potential. But in South Korea's fast-paced business environment, step-by-step is sometimes impossible. In the case of Korea First, Newbridge launched simultaneous initiatives to accelerate the bank's transformation. While frontline managers streamlined branch operations, the new owners assigned a high-level executive team supported by outside technical experts to spearhead a change-management program to consolidate loan processing, credit collection and trade finance into two new customer service centers. Meanwhile, dedicated project teams orchestrated the upgrade of Korea First's information technology organization, adding telemarketing and customer call-center capacities. By executing these changes in parallel, Newbridge was able to make Korea First's new facilities operational within five months.

In other areas, though, Korea First had to move with deliberation. As in many Asian business cultures, Korea's labor and management have a loyalty compact supported by strong employment laws. The turmoil of Korea First's bankruptcy and sale left the bank with a demoralized frontline workforce and an imperative to retain employees in the transition. Recognizing this, management tapped key human resource staffers as allies in the change campaign, making them more available to branch-office workers. Management broadcast the bank's commitment to retain employees who were made redundant by downsizing, helping to train those workers for new positions in customer service and sales. In all, branch closings and work-process changes ended up claiming 800 jobs, but these were more than offset by newly created positions that displaced workers could apply for. The candor and support-reinforced by cash incentives for working more efficiently-helped Korea First shift its business quickly to the consumer side and improve its efficiency, cutting loan-approval time by 75%.

Drawing up the blueprint for action. Blueprinting is not about generating a laundry list of nice-to-haves that typically fill strategic planning binders and end up on a bookshelf. Instead, the team fine-tunes what's in and what's out as it learns more. Sometimes this involves a literal blueprint, as was the case with Korea First. When Newbridge assumed control of the bank from government receivership in 2000, it was saddled with a costly institutional branch network, built with dedicated space for back-office processes. The answer to the turnaround was architecture: The firm needed to establish retail branches with simpler layouts in high-traffic consumer locations. Rather than rebuilding branches from scratch, Newbridge worked with management to redesign the existing infrastructure. It consolidated corporate business into a handful of large-scale branches, closed some branches, and then stripped the remaining ones of their back-office functions, focusing them instead on reaching out to consumers through customer sales. The simplification resulted in $50 million of bottom-line improvements within a year and allowed Korea First to shrink its branch network by 31 offices.

By 2005, five years after Newbridge's acquisition, the bank's new infrastructure was best in class: Not only was it a leader in online banking, but it had overhauled its technology platform; centralized back-office processing, customer service and risk management; reinforced financial controls; and focused the organization on profitability rather than volume. With one of the industry's lowest ratios of nonperforming loans, its balance sheet was the nation's strongest. The payoff: In January 2005, the British banking group Standard Chartered bought Korea First for $3.25 billion, a nearly fourfold return on the private-equity fund's cash investment.

Measuring what matters. All private-equity firms obsessively watch measures of financial performance like cash flow, working capital and return on equity. Activist buyout firms, however, track measurements that help them monitor progress toward operational goals before it shows up in the financial results. Experienced activists don't get blinded by data blizzards. Instead, they focus on a few key measures—an operational "dashboard"—that can be understood throughout the organization. A program office overseen by the company's senior executives watches the data dials, synchronizes initiatives and intervenes quickly when the blueprint's targets are missed.

Getting the metrics right was the cornerstone of Singapore Yellow Pages' post-acquisition turnaround. It started with a global benchmark and internal assessment of its demoralized sales force, which was the key to generating new growth through what the company developed as a "value proposition" sales approach. This was based on meeting customers' actual needs as expressed during interviews and personal visits. Further, customers were segmented by business potential, giving specific direction to sales efforts. Meantime, new training, higher compensation and special incentives for outstanding performance against specific targets provided even greater focus. The company gave salespeople challenging goals, including revenue targets of nearly $1 million each. But these same salespeople could now make three times their prior pay packages from the new variable rewards. And, they now had a say in who was hired and promoted.

Creating a happy ending. By understanding how their portfolio company makes money at each stage of the business cycle and engineering performance improvements, activist firms create a brighter future for the company and position themselves for a more profitable exit. Indeed, activist owners defy a common rap against private-equity investors: that they're focused only on stripping value out of their holdings and priming them for sale. Instead, activist owners cultivate new opportunities for the next set of owners to harvest. As part of the blueprinting process, the activists look for ways to jump-start future growth. They don't hesitate to invest in research and development projects, new product lines, new technology, acquisitions or expansions into new markets-even if they may bear fruit only years after the sale.

A veteran of more than a score of management buyouts since the late 1990s, a top European private-equity firm we'll call Capital Group Investors has learned a thing or two about the rewards of foresight. The firm and its co-investor partners had their exit strategy in mind when they purchased a company we'll call Trade Winds, an Asian marketer of consumer soft goods, in late 2001. Long buried as a division of a conglomerate that manufactured everything from tires to sporting goods, Trade Winds had generated good cash flow, but its profit margins were eroding and its market share was shrinking by the time of the buyout.

Guided by a sharp management team, the new owners soon came to learn that restoring luster to Trade Winds' faded product lines of casual wear and recreational gear required rebuilding the company's marketing muscle. They fixed on a three-phase strategy: raising the company's profile for the quality and value of its basic goods; becoming more responsive to retailers through improved delivery, flexibility, distribution and inventory management; and making selective acquisitions to increase revenues.

By spring 2004, the company's sales and profits were on the rise, and it had completed the integration of two modest-sized acquisitions. With the equity markets in an upswing, the private-equity owners decided to relaunch Trade Winds as a public company. But the ultimate success of the initial public offering didn't hinge simply on the changes the private-equity firms and their managers had accomplished. Just as important to prospective investors were the ongoing longer-range projects to reconfigure the company's supply chain and build a new distribution infrastructure. When complete, these will give the company new efficiencies it can capitalize on for years to come. In the end the longer-term vision of the private-equity owners paid off in a record IPO that netted A$1.25 billion ($920 million) and was 2.3 times oversubscribed. Capital Group and its partners earned more than five times their initial A$235 million ($122 million) cash investment, resulting in a 107% internal rate of return.

The success of deals like Singapore Yellow Pages, Korea First and Trade Winds shows how leading-edge private-equity firms have rewritten the rules of how they do business. They know that as they compete to attract ever-larger pools of capital, their investors will judge them not just by their ability to spot attractive targets but also by their proven track records for building value across their portfolios. That's why activist firms have gone from applying the discipline of adding value to companies on a case-by-case basis to turning it into a repeatable process. It's a process that refines the original investment thesis into a true operational blueprint that can turbocharge change and measure it. Today's leading private-equity pioneers are using this approach to rewrite the playbook on deal making.

Mr. Park directs Bain's Asian Private Equity practice. Messrs. Varma and Bierly are leaders of Bain's Southeast Asian and North American PE practices, respectively.

Published by Far Eastern Economic Review.