Markets quake but Creador dances on its Southeast Asia and India legs

01.09.20 / Author: Ka Kay Lum

Malaysia-based Creador’s true potential lies in its ability to go where no Southeast Asian private equity firm has gone without burning its fingers. As it awaits another investee IPO, Creador reveals its contrarian strategy

Nine years. Four funds. 30+ investments. 13 exits.

No wonder Brahmal Vasudevan, the founder and CEO of Malaysia-based private equity firm Creador, doesn’t shy away from discussing his firm’s track record (or the overall mediocre performance of his regional peers).

Vasudevan seems unfazed even about newer and larger PEs in the region, like Singapore-based Ikhlas Capital. Founded in 2018 by ex-banker Nazir Razak—younger brother of Malaysia’s former prime minister, Najib Razak Ikhlas is now looking to raise US$500 million for its debut fund.

“I don’t think competition is heating up at all, I think returns as I’ve mentioned many times—in Southeast Asia are extremely poor, for most [PE] firms. Generally, there’s a great degree of disappointment with [investment] returns in Southeast Asia. Very few firms have crossed the bar and that bar being US PE returns or even S&P 500 ,” Vasudevan tells
The Ken.

Unlike its competition, Creador straddles two regions Southeast Asia and India. It invests in both, unlike other homegrown PEs in Southeast Asia. That’s not its only USP, either.

Also unusual is its home base Malaysia, rather than financial hub Singapore. “In private equity, the deals are in countries like Malaysia, Indonesia, Philippines. There’s no reason to be based in Singapore. The bankers are local anyway. And selfishly, I wanted to be here [because it’s home]. I also wanted to show the world that we can actually build a leading private equity business right here from Malaysia,” says Vasudevan.

Additionally, Creador has an uncommon operational team. Called Creador+, it assists Creador’s portfolio companies.

But most interestingly, perhaps, Creador actively invests in listed companies. And that strategy has worked out particularly well for the firm.

To date, it has over US$1.5 billion under its management, and half of its exits have come from the Indian market, with the rest from Malaysia and
Indonesia.

The firm’s Indian roots are intertwined with Vasudevan’s own start in the PE world. Before founding Creador in 2011, he was a managing director at India’s ChrysCapital for 11 years—an experience that would prove valuable while helming his own venture.

With momentum on its side, Creador has no plans of slowing down. In fact, it’s trying to help one of its biggest investments—Malaysian home improvement retailer Mr. D.I.Y. Group Bhd—to launch a US$500 million IPO on the local stock exchange, Bursa Malaysia. The last time Bursa Malaysia saw an IPO of this scale was in 2017, when petrochemical company Lotte Chemical Titan Holding Bhd raised US$849 million from its listing.

But it won’t be easy as public markets haven’t been kind to PE-backed companies. For instance, when local poultry producer Leong Hup International—backed by Hong Kong PE firm Affinity Equity Partners tried to list on Bursa Malaysia in May 2019, it was met with a rude shock. It hoped to raise US$600 from the IPO, but low investor demand halved its offer size.

Also, Malaysia-based fast food operator QSR Brands (M) Holdings Bhd which PE firm CVC Capital Partners and Malaysian pension fund Employees Provident Fund (EPF) invest in has repeatedly postponed its US$500 million IPO, citing weak markets.

Surely, the Malaysian public market shouldn’t invoke confidence in Creador? Except the PE firm is so confident of Mr. D.I.Y. Group’s growth, it’s only selling 2.8% of its 18% stake in the IPO.

That said, it’s an important IPO for Creador, not just because of its size, but because of what it does for Creador’s market cred.

Malaysia-India-Malaysia

“In the world of PE, it’s about returns. But to generate good returns, you have to first improve the value of the company. And it could be done through an IPO,” says a former employee of Creador, who requested anonymity because they don’t want to be seen commenting on the firm publicly.

Mr. D.I.Y. is that opportunity for Creador. It’s also one of Creador’s largest investments in Southeast Asia about US$120 million.

“Our team found that in the retail sector, Mr. D.I.Y. has built a rather impressive business. It turned out that the company was thinking of raising money…I decided to invest in them in 30 minutes,” recalls Vasudevan.

According to a source familiar with the company’s IPO proceedings, Mr. D.I.Y. was supposed to go public in April but that got postponed due to Covid-19. It now looks to list at a valuation of at least RM10 billion (US$240 million).

The business has over 750 stores across Malaysia, Thailand, the Philippines, Indonesia, Brunei, Singapore and soon, India. But it will be listing its operations only in Malaysia and Brunei. Elsewhere, the business is still in ‘growth mode’ and is still loss-making, hence it isn’t wise to include them in the IPO, Vasudevan had said. Mr. D.I.Y. declined to comment for this story.

The IPO, a partial exit for Creador, would mean it gets to have its cake and eat it too. While the IPO would strengthen Creador’s track record, it’ll continue to hold 15% in Mr. D.I.Y. post-listing.

Things didn’t always look so promising for the PE firm.

Back when Vasudevan set it up with Anand Narayan and Cyril Noerhadi who oversee India and Indonesia, respectively—it struggled to raise its first fund. Most companies were not as receptive as they are now. Creador targeted to raise US$350 million but got US$130 million during its final close in early 2013.

But Vasudevan had returned to his home country, Malaysia, with a purpose.

He’d cut his teeth in private equity after he and ChrysCapital founder Ashish Dhawan met at Harvard Business School in 1995. Four years later, Dhawan invited Vasudevan to come on board as a managing director.

Sanjiv Kaul, a partner at ChrysCapital, said colleagues at the firm knew Vasudevan would one day return to Malaysia—to perhaps open a Kuala Lumpur office for ChrysCapital. “But Dhawan was clear that the fund would only focus on India. So, when [Dhawan] quit for a life of philanthropy, it was logical that [Vasudevan] would move back to Malaysia,” adds Kaul.

Leveraging the network that he built during his ChrysCapital days, India remains a key market for Vasudevan and Creador, which takes up about 30% of every fund allocation. But it doesn’t mean Creador isn’t competing with ChrysCapital for deals. “We compete in a mature, friendly manner,” says Kaul, without further elaboration.

As a “massive country with a huge number of highly-driven entrepreneurs”, India seemed to be a solid long-term bet, says Vasudevan. “There’s a lot of learnings that we can bring to India, like Mr. D.I.Y. will roll out in India soon. Having that linkage is actually quite unique. Nobody else has it,” he adds.

For Creador, that’s fortunately true. Even Navis Capital—one of Southeast Asia’s biggest and oldest PE firms, with over US$5 billion under its management struggled with its Indian investments and stopped investing in India in 2012.

Unlike ChrysCapital, though, which invests mostly in information technology, banking and pharmaceutical sectors, Creador has taken more of a generalist approach in India, notes Kaul. “That comes from [Vasudevan’s] personal style of leadership. He is very quick at sensing opportunities when someone brings them up to him. His is the old-world style of investing non-flashy, relaxed, flexi, without being intrusive,” he adds.

It’s been almost a decade since Creador started investing in both India and Southeast Asia. And much like any other PE firm, its fund size has grown considerably in this time…

One, two, three, four

… From US$130 million to US$565 million.

Vasudevan believes that a fund size of between US$500 million and US$600 million is “where most of the opportunities are”.

“Once you get too big, the nature of deals become very different. And then you write big checks where the market isn’t ready for it, you end up paying for higher valuations, and large companies grow slower,” he says, adding that Creador’s sweet spot for investments is between US$20 million and US$50 million.

To help its portfolio companies grow, Creador set up Creador+ in 2014, its unique operations platform for post-investment value creation. The PE firm had realised that many companies don’t have the resources to hire senior managers to help grow their businesses in Southeast Asia.

“Most private equity firms just give money, and then they walk away. But if we can work with companies to drive value, they’ll be able to create better [business] plans,” he says. Out of its total team size of 55, half of Creador’s 40 investment professionals are deployed to Creador+, led by Kevin Loh a former partner at Boston Consulting Group.

“Many PE firms would usually install an external CEO to ‘drive growth’. But doing so means you’re betting on the person and not on the company. Creador+ is more like a growth partner that provides assistance to the companies,” says the former Creador employee quoted above.

For instance, since 2017, Creador has helped grow Malaysian baking product supplier Bake With Yen’s business from 15 outlets to 40+ across the country. Its revenue has also tripled—from RM100 million (US$24 million) to over RM400 million (US$96 million).

Creador is currently investing out of its fourth fund that was closed in July 2019. About 60% of the fund has been drawn and the PE firm will only think about raising its fifth fund in 2021. According to Vasudevan, although some of the firm’s portfolio companies have been affected by the pandemic, they’ve “recovered well”.

He’s relieved that Creador has not invested in the worst-hit industries such as airlines, cinema chains, and hospitality. At times where markets have slowed, Vasudevan says Creador is “prepared to take a longer term view”. “We are looking at a few investments which may have got affected [by Covid-19], but we’re still giving them [a fair] value for where they’re growing,” he says.

PIPE dreams

But no matter how unique Creador’s approach is towards its investments, at the end of the day, it’s about how much cash it can return to its limited partners (LPs).

Creador’s investments in public equities or PIPEs a habit that Vasudevan developed at ChrysCapital—have generated a slew of exits for the firm. Sometimes, the best company happens to be public, so why stop at private companies, he Asks.

“They’re growing and often they need capital. So we are putting new money into the business, and our Creador+ team would work with them to look at ways to grow faster,” he says.

That’s what Creador did with Malaysian payment solutions provider GHL Systems Bhd. In November 2013, it invested US$19.7 million for a 28.3% stake in the listed company. In less than four years, it sold its stake to another PE firm, Actis, and generated 2.8X returns.

But GHL continues to be an industry leader in payments. So, what did Creador do? It paid a 70% premium in April to buy a 12% stake in the company.

“Sometimes when you’re raising newer funds, there’s a little bit of pressure to show realisation. We thought [GHL] was a decent investment that we’ve been actively involved in and has done very well for us. So we exited it. In hindsight, maybe we should have stayed on,” says Vasudevan.

A former limited partner of Creador’s earlier funds partially disagrees. Acknowledging Vasudevan as a market-driver in Southeast Asia, they say, “His ability to make markets can also magnify the effect of his bad judgement calls.” The former LP requested anonymity as they’re not authorised to comment publicly on a specific firm or fund.

But the former employee quoted above insists that each investment decision is collectively decided by the investment committee—comprising the senior management team in Creador. So, the decision-making buck doesn’t stop at Vasudevan.

According to Vasudevan, Creador has already generated 1.6X returns to investors of its first fund that was closed in 2013. For its second fund, the returns are at 0.8X. Based on financial data platform Preqin’s recent report on Southeast Asia’s private markets, for a 2013 vintage fund, 1.6X would be above the median of 1.51X return generated by other private funds in the region.

This strategy explains why Creador has been able to raise a new fund each bigger than the last—every two-three years. About 95% of contributions for Creador’s latest fund came from returning LPs. The former LP quoted above confirmed to The Ken that they have received returns from the PE firm, but due to an organisational change, they decided not to commit capital to Creador’s newer funds.

Historically, says Vasudevan, Creador’s deals in India have “done better” compared to Malaysia. This is because, again, some of the Indian investments are in public companies or companies that are about to go public.

Four of Creador’s 13 exits in Malaysia have been PIPEs. This is because the private companies require more time to build up their businesses, says Vasudevan.

Besides, not all of Creador’s Malaysian investments have turned out well. In 2015, the PE firm failed to turnaround the ailing Masterskill Education Group. Creador lost the US$11 million it had invested in Masterskill, Vasudevan confirmed.

Luxury fashion brand Bonia Group is also said to be struggling. Its share price has slumped to RM0.55 (US$0.13) from RM5 (US$1.2) in April 2014, when Creador took a stake in the company. Still, Vasudevan is hopeful that Creador’s stake in the US$25.2-million company will be worth more in the future. According to an analyst report by equity research firm CGS-CIMB—despite a 68% year-on-year drop in revenue for the quarter ended 30 June 2020—Bonia’s yearly net profit of RM14.3 million (US$3.4 million) exceeded CGS-CIMB’s full-year forecast by 117%.

For now, though, Creador is waiting it out for a few good IPOs. And it’s not just Mr. D.I.Y.

Malaysian credit bureau agency CTOS in which Creador holds an 80% stake—is evaluating an IPO exit next year. It has been approached by Nasdaq and the New York Stock Exchange. “…we have a preference for Malaysia… there’s nothing like this here. It’d make us really proud if we could take this company public on Bursa Malaysia,” says Vasudevan. Bloomberg reported CTOS is looking to raise up to US$150 million through an IPO.

All eyes will be on Creador in the coming 12 months. But Vasudevan is looking beyond that timeline. He wants Creador to grow like US-based TA Associates, a PE pioneer set up in 1968. TA Associates has managed a smooth transition over generations of professionals and yet continues to be one of the top private equity firms in the world, he says.

“So I think that is our aspiration: to build Creador to be one of the top private equity names in this corridor between South Asia and Southeast Asia. And that this company can operate without me. We will have the right people, processes, etc that will outlast myself. And then in the next 50 years, it will still be one of the top firms in this region,” adds Vasudevan.

50 years is a long way to go, but Creador’s early-mover advantage, and its truly unique aspects, certainly put it in an enviable spot.

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