The common thread running through discussions at the HKVCA’s Asia Private Equity conference in Hong Kong was the need for GPs to make meaningful and measurable operational improvements to portfolio companies, a strategy better known by the buzz phrase “adding value”.
At the conference there was some healthy scepticism about adding value.
“I’ve lost count of the number of GPs around the world who talk about value added and we know how much bs that really is,” said David Fitzgerald, chief investment officer for private equity at Emirates Investment Authority, at the conference.
I’ve lost count of the number of GPs around the world who talk about value added and we know how much bs that really is
“Value added actually equals sitting on the board and talking to the management team, maybe spending time with the finance director. That’s fundamentally not really value added.”
Fitzgerald then challenged the panel to provide real examples of GPs adding value.
Conrad Tsang, managing director of Baring Private Equity Asia, pointed out that adding value is both company specific and country specific. In Europe and the US, adding value tends to be cost control and restructuring of a floundering company.
“It’s a surgical type of value add and quite easy to see,” Tsang said. “The result is easily measured when you’ve got a loss-making company that becomes profitable.”
In Asia, adding value is more subtle because companies that private equity firms acquire tend to be reasonably healthy, he said.
These relatively healthy companies need strategy, human resources, M&A expertise and access to capital markets.
As an example, Tsang mentioned an investment in a China-based movie and TV production company that he introduced to executives in Hollywood to provide contacts, give a taste of how the US does things and explore potential partnerships. He also brought in someone from Disney to help develop the business.