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"Our game plan is to make this a much bigger play, since the opportunity is very large. We’ll do some third-party fund-raising later. That’s the Credit Suisse model: seed, leverage the network and then raise third-party capital" Harjit Bhatia, Credit Suisse |
The move by many investment banks into private equity investment in Asia, although profitable, has also raised vexing issues about conflicts of interest. Critics have accused banks of competing with their own clients and of using the promise of pre-IPO investment to secure lucrative mandates from clients. Credit Suisse is one firm that has earned plaudits in the past for the way it has muscled its way onto key IPO syndicate positions with no meaningful private equity presence in the region.
This is why the firm’s decision to expand its Asian private equity business now seems puzzling at first glance. In April, the firm announced that it had hired the entire six-man private equity team of Ritchie Capital Management (HK), headed by Harjit Bhatia, a 35-year industry veteran of Asia and formerly president and CEO of GE Corporate Financial Services in Asia Pacific.
According to Bhatia, Credit Suisse has been considering expansion into Asia for some time: the firm already has a sizeable private equity practice in the US and Europe with some $25 billion under management. The timing of the move now is more opportunistic, says Bhatia.
"They were debating a slow build-up through hiring when they came across this opportunity," he says, referring to Ritchie Capital Management. "We were looking for a new sponsor for our private equity focus who shared our vision of where the opportunities here lie."
The opportunities, he says, are in growth capital investment in mid-cap companies operating in high-growth sectors in key Asian markets. Those parameters translate into companies that are already profitable and have revenues in the region of $150 million to $200 million and annual growth rates of more than 20%, says Bhatia. Key target markets are greater China, India, Korea and Japan, although the firm will consider other markets opportunistically. Two staff will be based in Mumbai with the rest in Hong Kong. Favoured sectors include energy, healthcare, media content and education.
Credit Suisse Private Equity Asia (CSPEA) will typically invest between $15 million and $50 million for a significant minority investment, says Bhatia, which could be from 7.5% to 25%, depending on the amount invested and the valuation. Bhatia calculates that the right investments within his target sectors can generate internal rates of return of up to 30%, or 2.5 to three times capital invested.
It will be Credit Suisse itself that enjoys such returns initially, if they are earned. CSPEA is being seeded with proprietary capital initially, although there are ambitious plans to expand into managing third-party money in due course.
"Our game plan is to make this a much bigger play," says Bhatia, "since the opportunity is very large. We’ll do some third-party fund-raising later. That’s the Credit Suisse model: seed, leverage the network and then raise third-party capital."
Pipe pipeline
The prospect of exploiting Credit Suisse’s extensive network in Asia raises the issue of conflicts that has tripped up several of the firm’s competitors recently. A full-service investment bank and wealth management business in the region will certainly throw up many potential investment opportunities – Bhatia already expresses excitement about the Credit Suisse deal pipeline. The corollary of course is that the investment bank stands to gain from lucrative mandates as companies in which CSPEA has invested either seek a listing or as CSPEA divests from existing listed companies. The key question is: to what extent will CSPEA be used, if at all, as a tool to assist in winning banking mandates?
In response, Credit Suisse points out that CSPEA is operated under the firm’s asset management division and not the investment bank. They also make the point that the firm is not competing in the large buyout space, where some of the more egregious conflicts have arisen.
Avoidance of competition with an increasingly crowded buyout market in Asia makes sense. Given CSPEA’s investment focus, the firm is more likely to compete with stock markets themselves, especially if equity valuations remain high. Companies that might otherwise seek growth capital from a private equity firm might be lured instead to an early listing.
Bhatia concedes that this is an issue since Asian companies tend to list earlier in their life cycle but points out that many companies that list early still need additional capital to fund the next phase of growth. Given paltry volumes in smaller listed companies, raising meaningful sums of equity capital traditionally becomes problematic. Such companies are increasingly turning to private equity firms for long-term capital in Pipe (private investment in public equity) deals. Bhatia sees this as another source of deals for his firm and is unconcerned about a lack of deal flow.
"Markets in Asia have moved so much," he says. "I’ll be concerned about valuations as a portfolio manager but as an investor I’m not worried about any shortage of investment opportunities. That’s the least of my concerns."