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"Many of the bigger funds wouldn’t get out of bed if they can’t put $30 million to $50 million to work, but we’re happy putting $5 million to $25 million to work" Suresh Withana, Harmony Capital Partners |
Harmony Capital Partners is about to join an increasing number of hedge funds moving from the financial district to historic Telok Ayer Street in the heart of Singapore’s conservation area. It’s Singapore’s Mayfair or Greenwich, and the moves indicate just how strongly established the hedge fund community is becoming in Singapore’s financial industry. There are estimated to be 80 hedge funds on the island.
Suresh Withana moved to Singapore from London to launch the fund in 2005, with partner John Nicholls, an Asian turnaround management specialist with more than 30 years’ experience. Withana had been a principal at Mizuho International’s global special situations group, overseeing the Asia Pacific region based in London. The firm is also in the process of opening an office in Hong Kong.
Harmony is a pan-Asian special situations fund investing in distressed, stressed or deep-value companies, both public and private, in the small-cap to mid-cap sector. "Many of the bigger funds wouldn’t get out of bed if they can’t put $30 million to $50 million to work, but we decided to operate in the small and middle market space where competition is less and opportunities greater. We’re happy putting $5 million to $25 million to work per situation," says Withana. "The smaller companies have limited access to capital, and they are the first to get hit if there is any change in the financing environment – be that as a result of a rising interest rate environment, increased public market volatility, Sars, bird flu or other one-off shocks. They tend to be more leveraged to the economic cycle and they also find it more challenging to raise capital when there are market corrections."
According to Harmony’s in-house research, at present there are some 10,000 publicly listed companies alone that populate the universe for their mandate in Asia. "You could probably apply a factor of two times this number for the total private [unlisted] companies in Asia. Harmony, however, is building a concentrated portfolio of investments which is unlikely to exceed 30 situations at any one time.
Despite the significant opportunities available within the strategy, competition from foreign hedge funds is also kept at bay because of the local knowledge required. "The legal systems here in Asia are very different to those in the US and Europe, and often less robust," says Withana. "It’s not just about whether you get the valuation of a company right but also about understanding the legal processes, or you could end up with zero." An obvious case is that of US hedge funds Gramercy Advisors and Oaktree Capital Management, which have been in a court battle over invalidated bonds sold by Indonesian company Indah Kiat Pulp & Paper.
Harmony is a hybrid of private equity and hedge fund trading strategies, and the fund invests in all parts of the capital structure of a company. In a private equity type situation, a company (public or private) is highlighted as being in need of balance sheet restructuring, or as having less ability to gain access to capital, perhaps if stock is trading at an all-time low, and Harmony uses this as an opportunity to approach the management to discuss capital raising. "We go to the company directly and then work out what can be done to increase the value, or what sort of stake we would be required to build up to be able to work with the board. Given that we are not looking only at typically distressed companies gives us the flexibility to approach companies early and potentially prior to serious problems developing," says Withana.
It is not activist investing, which Withana claims just does not work in Asia. "The business community in Asia does not appreciate having the western world tell them what to do, as I think has been demonstrated here already. It is much more conducive to work in concert with a board to improve returns to shareholders, or turn around the underlying business."
One example that Withana cites is Harmony’s acquisition of Harvey Beef, a beef producer and exporter in Western Australia. "The company went into bankruptcy protection in 2005 due to mismanagement and we acquired the business from the administrator in early 2006 for under four times cashflow," says Withana. Harmony has subsequently managed the business, via its appointed management team, and is now about to sell a stake to a strategic buyer at a significant premium. "While turning the business around has been a challenge, it is going to be an extremely profitable investment for Harmony in a relatively short period of time. We are even considering an IPO of the business at the end of 2007."
Harmony intends to raise a $500 million fund and so far has $200 million in commitments. "Our first full year of performance, which concluded in December 2006, was positive and has definitely got us on the radar screens of even more investors globally," says Withana. With the dominance of long/short hedge funds in Asia, more esoteric strategies like Harmony’s are being sought by institutional investors as they seek to add Asia to their portfolio of alternative investments.