OCBC aiming for encore performance by gem of a PE fund

Singapore

A LITTLE-known, OCBC bank-backed private equity fund is on course to achieve its targeted internal rate of return (IRR) of 20 per cent - and the bank is aiming to start a second fund next year.

The Lion-OCBC Capital Asia Fund I (LOCAF I) is a S$550-million fund launched in 2015. Targeted at high-growth small and medium enterprises in Asia, it has made some 10 investments to-date and is expected to be fully deployed by end of this year.

Daniel Kwan, head of Mezzanine Capital Unit (MCU), OCBC's private equity investment arm, told The Business Times: "LOCAF I is on track to meet its targeted 20 per cent IRR by the end of its 10-year term."

In an exclusive interview, he said LOCAF I owes much of its success to two "iconic" investments, which he could not disclose. He would only say that both investees are well-known tech unicorns, private companies valued at over US$1 billion.

The first is a South-east Asia-based ridehailing startup, in which LOCAF I invested S$34.1 million as part of the startup's Series E funding round. The startup had been seeking a banking partner that could provide not just funding, but also financial solutions and advisory to facilitate its growth, Mr Kwan said.

"We are the first bank-backed fund to invest in the company. As a small fund, we bidded and received a unique allocation. The allocation was difficult to come by."

LOCAF I plans to sell its stake in the startup in the next year, an exit that could potentially give the investment a 35 per cent IRR. Mr Kwan said the startup's valuation has now "likely doubled" since the time of its Series E fundraising round in 2017.

BT understands that there are two ridehailing unicorns in South-east Asia: Grab and Go-Jek. Grab is reportedly valued at US$11 billion and Go-Jek US$5 billion. Both have raised Series E funding - Grab's US$350-million round was announced in 2015, while Go-Jek's US$1.5-billion round was unveiled this year.

Asked why the quick exit, Mr Kwan said: "We are very disciplined in our investment approach. Once an investment has achieved its investment target, we will exit. We like to preserve capital, and try our best to mitigate risk. We want to return capital to our investors as soon as we can."

The second "iconic" investment is in a Chinese tech hardware startup that enjoys high investor interest, said Mr Kwan. LOCAF I was able to put about S$90 million into the startup this year, when the startup was seeking an incumbent investor based in South-east Asia.

LOCAF I is created by OCBC (through MCU) and the bank's asset management subsidiary, Lion Global Investors. It marked the first time that OCBC had created a private equity fund with participation from third parties, including institutional investors and high net worth individuals. Of the S$550 million raised, OCBC contributed S$200 million.

Mr Kwan said the bank has been deliberately "quiet" about LOCAF's developments, but is now ready to report on its progress as it mulls a second, larger fund in 2019. LOCAF II's fund size has not been set, but the fund will be "totally independent of OCBC" and funded by only third parties, such as institutional investors in Thailand, Japan, China and South Korea.

Asked how an OCBC-backed private equity fund is unique, Mr Kwan said investees can also benefit from OCBC's product capabilities, such as commercial banking solutions, and extensive presence in its core markets of Singapore, Malaysia, Indonesia and Greater China.

"There is no conflict of interest between investing in and providing banking services to a company. The approval process for both are independent of each other. However, if the bank is both a banker and an investor of a company, it provides more touchpoints between the bank and the company. This gives the bank a better view of its investee."

Take Mega Fortris, a Malaysian manufacturer of high-quality, tamper-evident security seals, in which LOCAF I invested US$11.5 million in 2017. This enabled the company's shareholders to buy out a Malaysian government investment fund and regain full control of their business, Mr Kwan said.

Mega Fortris then moved all its banking business to OCBC. Beyond financing, the bank advised Mega Fortris on business restructuring (including streamlining billings to end-customers) and introduced new customers to the company.

Mr Kwan said: "Even though other private equity funds offered to invest at higher valuations, Mega Fortris chose to work with LOCAF I given its unique value proposition of being a bank-backed private equity fund."