Southeast Asia is filled with mediocre performance: Brahmal Vasudevan, Creador
21.08.18 / Author: Ka Kay Lum
Kuala Lumpur-headquartered private equity firm Creador says it won’t be easy for newcomers to participate in the deal landscape across Southeast Asia.
In an interaction with DEALSTREETASIA, founder and CEO Brahmal Vasudevan said the results for most private equity firms in the region had been ‘quite poor’, and he attributed this to people not having the relevant experience to make investment choices, and also that many fund managers were investing in weaker companies. The Creador chief executive further said it was ‘very, very tough to raise money for Southeast Asia funds’, even as he pointed out that this did not apply to Asia-focused funds.
“The big guys who want to write $100 million checks – there are very few opportunities in Southeast Asia. They don’t really focus on SEA much, their main focus would be China, South Korea and Japan. The challenge in this industry is raising money and finding good deals. The market is filled with mediocre performance which means it’s harder for people to raise money in Southeast Asia.
“We have to be smarter, be more patient, and work harder with our portfolios to drive results – those are the things that differentiate us,” said Vasudevan, who spent 11 years at India-based PE firm ChrysCapital before founding Creador in 2011.
This portal first reported that Creador had in July hit the first close for its fourth vehicle, which is targeting to raise $500 million, and expects to make a final close in October. Vasudevan declined to comment on the fund.
Fund IV’s predecessor, Creador III, reached its hard cap at $415 million last year and is now almost fully deployed, said Vasudevan. The private equity firm’s first fund had raised $130 million in 2013. It was followed by a $331-million second fund that was backed by Hamilton Lane, Siguler Guff, and Quilvest, as well as a Malaysian pension fund and a US-based endowment fund.
Creador focuses on long-term investments in growth-oriented companies in South and Southeast Asia and has made 31 investments across Malaysia, Indonesia, the Philippines, Vietnam and India. It currently boasts an AUM of $1.4 billion.
Is Creador looking to raise a country-specific fund – and in this case, a Malaysia-focused fund?
No, not true. I don’t really understand why people do it because it doesn’t really make sense – it’s very hard to manage. When you have two funds, you have conflicts. What are you going to put in A fund and what are you going to put in B fund.
So, our view is that our one fund does all the five markets that we cover – Malaysia, Indonesia, the Philippines, India and Vietnam. We only invest out of one vehicle so that people cannot opt out or something, you take it as it is. If you’ve got a big fund, why do you need a country-specific fund?
A Malaysia fund would only be for investors who want to invest in Malaysia alone. But there are not enough high-quality, high-growth Malaysian companies. Having said that, we have invested over RM1 billion ($240 million) so far and we will probably invest another RM1 billion ($240 million) if we can find the opportunity.
The investment landscape in the region, including Malaysia, has been getting competitive in the recent years. What is your take?
If you look at PE in Malaysia, we’re very active and engaged where our Creador Plus team goes in to really drive the business forward. Investing out of Singapore, you have the PE giants who cover Malaysia as one of the many countries they invested in.
But these firms want to do control [investment]. I don’t think it’s competitive [in Malaysia] but the issue is there aren’t high-quality companies that are growing rapidly and need private equity capital. That’s the bigger issue.
So, for Creador, you don’t seek control?
We do. But our preference and view is that in most of the markets we operate, we are looking for great industry, best company. And we find that the best players don’t want to sell their companies because they’re owned by families or entrepreneurs. And they want to keep building [the company] – what they want is a minority partner so that’s where we like to come in. We’d rather find a great industry and great company and own 10 per cent of the company than trying to gain control over the fifth best company.
About 85 per cent of our deals are minority (stakes). We have done about four control deals. So there are CTOS and Bake with Yen, where we bought about a 55 per cent stake and the rest is owned by the family. We’re now really growing the business by 30 per cent to 40 per cent. In Indonesia, we own cereal company Simba, so there are some exceptional cases where usually the family is retiring and we think that it is a good opportunity to come in [as majority owner]. But most times, I would rather back a great entrepreneur, it’s so much better.
Why do you think Malaysia lack high-quality businesses?
For one, the economic growth is slower at a general 4 per cent to 5 per cent. Another thing is that many entrepreneurs here have a somehow limited perspective. They want to build businesses more slowly and more cautiously. Unlike entrepreneurs who are eager to grow the company at a faster rate and don’t mind diluting it a little bit to bring in capital and health to push growth. It’s a different mindset. Lack of ambition and vision. All these take time to change. You have the GLCs in Malaysia and you have the smaller and micro entrepreneurs. What’s missing is the mid-end entrepreneurs.
Having said that, how does Malaysia fare compared to other markets?
The growth is the biggest concern. We have made Malaysia more successful by being an active manager of the companies that we funded to drive the businesses forward, like GHL Systems Bhd. For our investments [in Malaysia] we have done quite well but I look around and I don’t feel there are enough companies like this for us to work with.
What are the sectors that interest Creador?
We look primarily at consumer business – we do some B2B and we do very little manufacturing. I think we like businesses which have franchise value and we can be actively involved to push things forward like MR. D.I.Y. and CTOS. Tech investments, we don’t do for two reasons: one is early-stage tech has more venture risk and more failure, the check sizes are also too small, as our check size is probably on an average of $20 million.
Most tech investments only need about $1-$3 million so that’s too small for us. We’re not looking for high-risk, high reward investments. We are investing in business that are slightly more mature and are still growing with a proven model. The other thing about tech is high valuations. Once their model is proven, it’s very hard for us to pay this kind of multiples. I think in the investment business you have to understand what is your model and strength and play by them accordingly.
How has 2018 been for Creador and what else is in the pipeline?
The year has been pretty good, overall. We’ve been quite happy with our results and quite busy overall. We’re working on two investments for the rest of the year. Exits – maybe another two or three exits. We’ve to complete our BFI Finance exit – it’s already two-thirds exited by now.
Were your LPs pressuring you for exits?
No, because we’ve exited quite a bit. Our Fund I was 145 per cent exited; Fund II, 60 per cent; and Fund III, about 20 per cent. I’ve been doing this for over 20 years, so we’ve had this discipline of exits. There are good returns and exits for investors. And they like our strategy.
What about Vietnam? You have made your maiden investment with a capital injection of $43.8 million into mobile and consumer electronics retailer Mobile World (MWG).
We’re making a 10-15 years bet in Vietnam. So our model is that we meet lots of companies – for every 100 companies we meet we invest in one. We’re now studying the Vietnam market and to see what we will do next. We’re looking at consumer and financial services sector. In Vietnam, it’s still in its early days, so the challenge is back to looking for high-quality high growth companies with a reasonable price tag. That’s the battle of the time. But we’re not in a hurry, as global market is also quite rocky. So, we’re pacing ourselves and we’re very happy with the pace we’re at.
So which is your best performing market in the region?
Historically, it has been India but longer-term, perhaps our investments in Malaysia should be able to do quite well as it takes longer because these investments are private. So it takes 3-5 years to build the businesses up. Overall, it’s quite balanced, but historically, India has done a bit better for us.
Does that mean you will be focusing on India more?
I won’t say, more. We invested roughly about 30% of our capital in India so that will be what we would like to maintain.
Is Creador looking to enter any new market soon?
No, we have our hands full at the moment. We don’t want to be too broad either.
You’re targeting to raise $500 million for your latest vehicle – is that a good size? Considering other firms are raising larger vehicles than that.
In my last firm (ChrysCapital), we started at $64 million then we went up to $1.25 billion. Once you get too big, the nature of deals become very different. And then you write these big checks where the market is not ready for it, you end up paying higher valuations and generally, large companies grow more slowly.
So, these all affect the returns. Our view is that this size – $500-$600 million, is really where most of the opportunities are. Another thing is, most companies of this size are still going quite well so our returns would be returned. We’ve done $10 million all the way to $130 million, but the sweet spot is perhaps $20-$50 million. It’s called finding the optimal size, if it’s too small, the return and effort are painful.
What about investment failures? Has Creador had any of that?
Of course, we have failures – we don’t have many but our most well-known failure is Masterskill Education Group – but fortunately, it’s not a big check, about $11 million but we lost it all. Basically, the business has peaked and it was coming down after that. The education sector is going through a bad cycle in Malaysia at the moment. The sector is maturing and growth is limited.