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Ex-GIC, Stanford guys find sweet spot in Asian private equity
MARKETS evolve, but opportunities don't disappear. They're just different from cycle to cycle.
Take China for example.
When fund of funds manager Axiom Asia Private Capital began investing in Asian private equity funds in 2006, China was still a market starved of capital.
Managing partner Edmond Ng recalled to The Business Times: "Most of the banks preferred to lend money to state-owned enterprises, so the private enterprises if they needed growth capital, had to turn to a private equity investor - there were a lot of growth capital opportunities."
In its first fund, Axiom backed a ladies' shoes retailer that was opening more than a thousand physical stores per year. It reaped the kind of returns you rarely see in brick-and-mortar retailers today.
Then China became rich, said Mr Ng. "So returns from China went from growth to innovation. Business model innovation is what's driving returns in China right now."
Without missing a beat, Axiom found exposure to top e-commerce startups like Alibaba, JD.com and Vipshop. Its most recent success was with Pinduoduo, which went public last year.
Pinduoduo, unlike its peers which were fighting in China's big cities, was the first to target lower-income consumers in third and fourth-tier cities, and is now the fastest growing e-commerce app in China's history.
Tap into new consumers, open up new markets
"Which shows that the opportunity in China today is still as large as it was before, as long as you are able to use tech and innovation to tap into new consumers and open up new markets," said Axiom Asia managing partner Marc Lau.
"In 2006, you wouldn't have found a deal like that," said managing partner Alex Lee. "And moving forward, as the economy continues to mature, we can also see the buyout market developing. In the US and Europe, when people talk about private equity, it's predominantly buyout and much less growth. We are also starting to see that shift (in China)."
Today, Axiom Asia manages US$5.2 billion in assets, and is known to back the most hungry, motivated managers in the region.
Asia is the hunting ground for more than 3,000 private equity fund managers. Axiom Asia tracks 800 of the most promising ones, and gives investors access to its top 20 to 25 picks by way of a fund of funds approach.
It closed its fifth fund of funds at the end of last year, with US$1.4 billion raised. About a third of Fund V has been deployed.
Axiom's Fund IV, with a 2015 vintage, gave limited partners a net internal rate of return (IRR) of 17.33 per cent after fees as at end-June last year, according to Bloomberg.
The opportunities that Axiom invests in vary from fund to fund. But the team has always preferred to back country experts instead of regional managers. It also prefers industries with a domestic focus, like consumer, healthcare and technology.
Axiom is led by four managing partners. Mr Ng, Mr Lau and Chris Loh are ex-GIC managers who met while working for the private equity arm of Singapore's sovereign wealth fund in the early 2000s.
They figured they needed some diversity, so they pulled in Mr Lee, whom Mr Ng and Mr Lau had known from their days at Stanford University.
Mr Lau said: "Edmond and Chris were based in the US before for GIC, but when we started this business we decided to do it in Asia because we think the runway for this region is very long."
Asia is probably the most varied private equity market in the world too, comprising economies from Japan to India that are in very different stages of development, he said.
Indeed, the Asian private equity market is more crowded now than it was 13 years ago. But Axiom focuses on mid-market private equity funds, and is unfazed by the crowd.
"Most of the money is migrating into the larger (companies) and the inefficiency still remains in the lower end of the market," said Mr Lau.
Valuations for mid-market companies - typically less than US$250 million in size - remain reasonable, the partners said.
Mr Lee said: "We have deals being done on the mid-cap buyout side at six to 10 times Ebitda, whereas some of the large cap deals are getting done closer to 20 times."
Mr Lee acknowledged that valuations are high in the late-stage tech sector. "But most of our VCs (venture capital managers) are in the early stages, series A, series B. Where it's quite scary is in series D, E, F."
In any case, the adjustment in global private equity valuations is already happening, Mr Ng said: "We're talking about 'winter is coming'. But the Chinese VCs will tell you that winter has already arrived, in 2018. Valuations started to adjust in China in early 2018."
Crisis concerns don't spook Axiom.
Its fund of funds approach is meant to produce steadier and less volatile returns than direct funds.
Axiom's target for Fund V is to commit a third of capital each year over a three-year period. Each of the underlying managers Axiom invests in then commits their capital over their own three-year period.
Mr Loh said: "They invest over time, it's not just one cheque at one go. Effectively, our capital is deployed over a period of five to seven years, so we are not overly exposed to high-valuation vintage years."
Mr Lau added: "The principle that has worked for long-term investors, particularly in private equity, is to invest over the cycle."
Don't try to time the market, he said. "I think what's more important is you invest in companies that are growing. I think Asia has a very good set of companies to do that because the economies are growing, the consumers are getting richer.
"If you have a company that grows, (helped by) natural growth from the economy, a good business model, a good brand, ultimately that's where they're going to deliver the return from."
Axiom, which is 30-employees strong, also prides itself on its strong reference network inside the Asian private equity ecosystem.
This gives Axiom an advantage in picking managers, and in securing access to the most coveted funds as well. Axiom's clients tend to be North American and European pension funds, endowments and family offices.
There's an art to understanding the human dynamics of different general partners, Mr Lau said. "It's not just a science based on the numbers and track record. It's really a relationship business.
"We spend a lot of our time on the ground in each country meeting the managers (and portfolio company chiefs), building these relationships over the years. We're seeing what they said and what they ended up doing, and seeing if those matched . . .
"That's what we spend most of our time doing actually - looking for managers who are the experts in their markets."
This also makes Axiom one of the more interesting homegrown firms in finance, Mr Loh believes. "Our staff get a very wide variety of learning opportunities about companies in different stages of development."