Sorby, Debora
(2008)
Portfolio Management Challenges of Global Private Equity Firms Operating in the UK and the Emerging Economies: China and India.
[Dissertation (University of Nottingham only)]
(Unpublished)
Abstract
In the early 1990s, the emphasis on driving value from UK private equity investments was very much focused on deal making. Many UK private equity firms merely monitored their portfolio and adopted the hands-off approach to their investees.
The UK private equity market has matured over the past decade meaning increased competition, access to increasingly more investment funding and awareness of the availability of private equity. This has meant that in order to generate the returns private equity firms have historically been used to they have had to consider how value can be added across the whole lifecycle of the investment. They have had to supplement their acknowledged deal skills and become more actively involved in their investee companies by using the hands-on approach to portfolio management.
Also because the UK private equity market is considered a mature market , some of the larger, well established private equity firms started looking at other markets outside the UK, in particular the emerging economies of China and India to generate the returns they were used to.
This study addresses the reasons why private equity firms have decided to expand into China and India. It explores how deals are sourced, investments, divestments and how the portfolio is managed given the challenges faced in each country.
For an in-depth view of how a private equity firm evolved from being a UK centric firm, very much focusing on deals and a hands-off approach to their investee companies and then how it emerged into the business it is today, this project uses 3i plc as a case study. 3i plc illustrates clearly how changing the portfolio management approach takes time but the change in approach was vital if they were to become the global player they are today.
The study is presented based on a combination of personal experience of the author being a portfolio manager within 3i plc, extensive desk based research, interviews and questionnaires with global private equity firms. Throughout the study a qualitative approach was adopted mainly because of the fact that 3i plc was used extensively throughout.
Using research gathered from 3i plc and other primary and secondary sources of research, the following findings became apparent;
To be a foreign private equity firm operating in either China and/or India the following points are vital:
Taking a hands-off approach to managing the portfolio in a global market is completely unfeasible, all the markets require active participation.
Need to be a global player to have the scale and resource of time and experienced people.
The importance of the private equity firms global network.
Recruiting a local team rather than an imported team seems a key part of a successful private equity firm. Local people have the relationships, business networks and knowledge.
The private equity firm has to adopt a different culture and approach when executing deals and when managing the portfolio.
Accept for a few years that the private equity firm will be a net investor i.e. little or no realisations.
A more diverse mix of sectors to spread the risk profile.
Continuing on from the above findings, this study also identifies six main challenges the foreign private equity firms encounter when managing the portfolio in China and India;
i Relationships. The Chinese and the Indian business environment is driven by relationships and developing strong relationships can help win deals and once invested could help improve returns.
ii Management team. Often the private sector companies are run by inexperienced individuals. If the management team do not perform it may not be that easy to replace the team due to relationships issues and the acute lack of professional management available in the market.
iii Resourcing issues for the private equity firm; to build a team and resourcing for managing the investee businesses. The team needs to understand the business environment and have a well established network but it is not always easy to recruit the people with the necessary skills. Also resourcing can become an issue when managing the investees as they require a significant amount of time from the private equity firm and this could be taking time away from sourcing new deals. There has to be a balance.
iv Pre-deal agreements. These are crucial especially as the private equity firm holds a minority stake in their investee businesses.
v Rules and regulations on investments and divestments. These can hinder a private equity firm in respect of time and extra deal costs. In particular, they can be quite restrictive for foreign private equity firms.
vi Exit route. In China, the majority of exits are via an IPO, rather than the traditional MBOs seen in the UK, Europe or USA. India is more flexible and more exit options are opening up.
Private equity firms are keen to invest in China and India even though it still is a challenging environment to operate in. The opportunities are there and there are a significant number of companies that would benefit from private equity investment and the expertise they can bring. Private equity firms will not only be investing money into these businesses but also a significant amount of time. If these companies are correctly managed they could generate substantial returns. Portfolio management has never been more important.
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