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"Scale, Sophistication and Global Relevance" -- Asia's Private Equity Market

2018-08-23

"The scale of deals we're seeing [in Asia] is something we've never seen before," says Alison Mass of the Goldman Sachs Investment Banking Division. While Mass has been traveling to Asia for more than twenty years to meet with private equity clients, her most recent business trip with colleague Brian DeCenzo felt different in terms of the industry's maturation and international sophistication. In this episode, Mass and DeCenzo explain why global private equity firms are raising multi-billion dollar funds in Asia, the impact of increased Chinese buyers in global auctions, how Asian companies are embracing innovation and more.

This podcast was recorded on July 31, 2018.

The information contained in this recording was obtained from publicly available sources and has not been independently verified by Goldman Sachs. Neither Goldman Sachs nor any of its affiliates makes any representation or warranty, as to the accuracy or completeness of the information contained in this recording and any liability as a result of this recording is expressly disclaimed. The recording should not be relied upon to evaluate any potential transaction. Goldman Sachs is not giving investment advice by means of this recording, and this recording does not establish a client relationship with Goldman Sachs.

Copyright 2018 Goldman Sachs & Co. LLC. All rights reserved.

This is an unofficial transcript meant for reference. Accuracy is not guaranteed.
This is exchanges of Goldman Sachs, where we discuss developments. Curtly shaping markets, industries in the global economy objects Europe's global had of corporate communications here at the firm one of our recent episodes was all that chinese markets. What to make of trade? Ten since in the continued opening up of the stock market there. But one big area we didn't touch on was what the private equity landscape in China looks like today joining us to talk about that. Other topics out en masse and Brian descends, o from our investment banking division. Awesome runs the financial and strategic investors group within that vision, and Brian runs the innovation lab for the investment bank, Alison Brow, welcome to the problem. Thank you. Thank you. So arsenals you. You ve been going to Asia for over twenty years to meet with private equity clients. Have you watch we the chinese private equity market.
You're in what's been different, that you ve seen a most recent trip there, Brian and I came back, we were traveling together over the course of about a week earlier this year. There are three things that really hit me. One, the scale of both the funds and the deal's being done. Second, is the sophistication of the clients we met with in the discussions that we were having. We're just on a completely different level and third, just their relevance to the global markets. When I came back- and we looked at the number of deals that are being done, the fees paid It just really have me. I mean litter. I've been going on for twenty years, seeing the same client base sing them evolve, having the same discussions that we have with private equity firms in the U S and Europe, but it never felt real. It felt like I was developing it we felt that it had heft and I literally walked out of these meetings, and I said I could have been in New York. I could have been in London, it could happen anywhere in the world, so it feels at a very
level and I think the scale the sophistication and the role in the global markets are here to stay just to give you a perspective of scale. The average deal sizes getting much larger and two thousand eighteen year to date, the deal sizes are almost nine hundred million dollars average. You should also know that twenty five percent of all deals done in the sponsor emanate space are in Asia, and that has been for the last couple of years and if you look at the algorithms that the public databases show, twenty percent of all fees are coming out of Asia. In the private equity space, now that's algorithm, so it's not a hundred percent accurate, but it directional II shows why this client base and Asia are so relevant used to be that there was a decent market for investing, but the fees were lower right and today that's really changing correct There have been some really significant deals done. The region, including the vain Toshiba eighteen billion dollar transaction Hell House, hope. Hu Jia ice
did sixteen billion dollar deal see Icy, Blackstone real estate logic. War was fourteen billion dollar shall just the scale of the deal's were seeing is something we ve never seen before. In two thousand seventeen alone. There were fifty deals done in Asia. That were a billion dollars or more. And if you think about that relative to light the o, seven two thousand thirteen timeframe, there are only ten deals done a year in that size, so they're, just more large deals getting done. Mister Gould Hebron scale use of the scale striking many of the big about firms have raised big Asia Focus funds billions and billions of dollars would operate. These others from seeing that are making them so active in fundraising, for investing in that region will. First of all when you look at GDP, even looking at the government fork the emerging economies: China, Indonesia, Malaysia, Philippines, Thailand, the GDP fork.
Cast from Goldman are six point: seven percent six one slash two six point: three percent for one thousand, eight hundred and nineteen and two thousand and twenty, and if you look India, similarly higher gdp growth rates. Seven point seven. Eight point: two percent: by contrast: the growth forecast in the US or, like three percent two point: twenty one and a half percent for. Same period of time in Europe. Even less two point: two percent one point: nine one point: six percent, so these investors are looking for growth. Opportunities are looking to generate outsize, we're HANS for their limited partners, and this is an area of the world where they feel like they can get those kinds of returns. Brine. Let's talk about this of escape,
videos what's changing about the kinds of deals that are getting down in the region and how they different than what kind of investing as happened in the past, as you think about the region, it's dangerous to think about it as a region as a monolith. There very distinct markets. It exist across that region and you can sort of break it down. Historically, between developed markets like Japan or Australia more in a developing markets, China in particular, but certainly others, Alison mention India, etc. The thing that were Thing right now is deal activity is really fun during an all cylinders across all of those different markets in a developed market. Large scale way so over the course of the last year two. We ve seen multi billion dollar transactions off the Singapore Stock Exchange of the Hong Kong Stock Exchange in Japan and China.
As well as multi billion dollar asian investors into cross border deals into the. U S, and you see deals of all types is he take privately see carve out? so really what their exhibiting is visitation around all deal, types that we see in private equity and in much larger size than we ve seen Thirdly, one of the things I noticed when we were there recently is the sophistication of the dialogue about cross border. Investing was at a new level when we walked into lines that were global p firms who have Asia funds or global funds, do business in Asia. There were people sitting there from their: U S and european businesses because they want to look cross border at what businesses they can invest in that can benefit from their China exposed
We never saw that. We never saw the kind of resources getting poured into the region by the global clients and, by the way, were doing the same thing, we're adding to our headcount unfocused. We used to cover fifteen private equity firms in Asia, and now we cover fifty, probably a hundred if you include. Their side, car funds, it's an area that not only are global clients investing in were investing in and then the local funds as well have just such scale. We met with his house, they raised a ten billion dollar fund. We have bearing six to seven billion dollar fond Phd six billion dollar fine. So it's so it's not only the global funds like the hours in the car, the veins that have raised big funds. It is the local funds as well, a lot of capital pouring into the region or brought. The question is how it will be deployed brain what areas of clients most excited about what sectors they looking at.
And where do they see the big opportunities there? I would put the opportunities that they would like to seek and in some places are seeking into three buckets. So the first one hour scaled opportunities for Asia Quote: unquote: domestic firms, firms that exist within Asia. Broadly speaking, Seen as we mentioned some of those transactions. They also want to do cross border into the- U S and into Europe and in some ways they are very comfortable, doing cross border and dealing with all the attendant issues that come along with that dealing with different currencies dealing with different legal regimes, and then the third thing which we haven't seen as much of, but I think they would really love to do- is partnering with multinational corporations to help them really expand
their Asia operations. So you know you take a multinational corporation, where there may be a little bit underweight from an asian operational standpoint partner with them, either by doing a pipe, a joint venture, etc in order to really focus in on the Asia Growth element of that business. So I think, from a deal type. Those are sort of, three buckets of things that people are really focused on and then what are the other types of things that get them excited about investing in the region? One anything that touches the chinese consumer. You have a market place of one point: four billion people, ninety some odd percent of whom live in the east,
fourth of the country, most of them in urban areas, and that creates a very large contiguous market that if you have a product that you can distribute effectively into that market, you can scale a business very dramatically. The second thing is anything that sort of feeds into the chinese government's twenty twenty five plan: a lot of our discussion, around things like Robotics industrial automation, things that will allow China to continue to be a place of manufacturing for the world and then three- and this is where I think it's really and arresting businesses that solve some sort of logistical developmental problem that exists within China. So you have one point: four billion people, it's difficult to feed one point: four billion people, so we ve seen investments
the food space on a cross border basis, one of the things that China's dealing with right now is they have very limited cold storage logistics and that becomes challenging from a food spoiling standpoint. So businesses that have leverage to solving some social issue in China. That's where a lot of our clients are also focused, you asked earlier: what's really driving investment in the region and we talked about the scale sophistication and relevancy to the global markets, but on the sophistication point to amplify, what brine was saying? It's the first time that we ve been over there, where innovation and disruption has been a theme that the Asia Private equity community is talking about. It has been talked about in Europe and in the Americas for a long period of time, but the dialogue, the sophistication of what's disrupt which industries, what the needs are of China, and how can we get ahead of those trends? Was
thing that we have not seen in historical discussions. You also talked about why there's this capital moving in there. I think we're at a moment in terms of improved macro climate. I talked a little bit about the economic growth prospects and the happened. All that our clients have been able to raise has really changed the way that corporates in Asia think about the private equity buyers as well. When we look historically a deal sizes, we ve never had this kind of scale and the average Jill sizes close to a billion dollars, not even close to where they were five ten years ago. So the largest corporates in all the Asia regions have woken up and said. This is a pool of partners cap it all that we can work with to expand our businesses to streamline our business
and the partner with Russia seeing oversee when? U S, assets got four sellers in chinese buyers come into this market, sometimes with very high bids. So often talk a little bit about the phenomenon of chinese buyers coming into the EU market These buyers have definitely had an impact. On the yemeni markets, particularly with U S, assets Brian, and I spent a lot of time in Asia to get to know those clients. So we can separate the true buyers who have the experience to execute and clothes from those who are a little bit less sophisticated cows were advising our ourselves side, client and we want to make were giving them the best advice. Who are the chinese buyers, who, we truly believe, have strategic interests and assets like this? Have the teams to do the diligence and close? I will tell you doubt about a chinese Byron auction for NASA We're saying in the: U S: it was a media asset and it was a couple of years ago and the
It's a came in from the? U S: buyers were all around certain enterprise bite, evident, multiple and then the chinese buyer came in at three multiple points higher on enterprise to even die so ourselves? I client said to us look weed lastly like to sell it at this higher multiple. But who are these? buyers and they don't ever and are we going to be able to execute and are cover bed the client who, as fully funded, we had a lotta wraps where the? U S claim we knew would be able to deliver was saying: don't use us as a stocking horse. And candidly you have twenty four hours to accept or better, not sore Hey guys had to actually make a decision in what the decision they made, which was brilliant, as they often are, is to say too, level? U S. Client, who was the cover bed, give us sixty days, so we can figure out whether this chinese buyer will close and
or that we will reimburse all of your diligence expenses and I was happy with that, because if they got the three multiple points higher, they would have had plenty of work to cover her act, so it kept our cover bitter happy. They kept our selling. Happy end We had I thought about what I thought would have happened. I'm not sure I would have believed that the chinese buyer would have closed, but they did and so I was happy end of the day. We are happy Celso client. We actually happy cover better who got all their expenses reimbursed and we had a happy buyer and this new chinese buyer. So you have to understand the ability of these firms to execute. Have you noticed, wait, chinese airports are doing with private equity firms, as that evolution, Ben surprising, it'll get there. Another epiphany on this current trip, which is that one of our bankers took us to a five billion dollar enterprise value consumer company in China.
And they only had businesses in China and in Australia, and they were looking to expand outside of the region and the reason for the meeting was the founder who own a very large majority of the company and his business development. And wanted to meet me. So I can make introductions two three or four of the best consumer private equity firms in the world, the global private equity firms who could help them build their business in the EU, and Europe, and I just sat There- is someone who's bitterly industry literally since it started since the early eighties saying wow. Is this a role so, like literally in the eightys. The image of private equity corporations was not a very positive one. In the nineties. Then they were allowed a little bit in the board room, but still felt a little bit renegade and started getting credibility in the two thousands? But for now for it
five billion dollar enterprise value business. The founder to ask us to introduce them to these global private equity firms. I thought They really come of anger, I've, so Brian in the? U S, the p models, often by mature business, optimize it in China, P arms are more focused on developing companies that are to help solve. As you mentioned, domestic problems are addressed. The domestic consumer business talk, but that dynamic
Some of the big issues facing China and how're clients responding to those challenges. We talked about the chinese consumer, you think about the: U S: retail market. We have a lot of stores that infrastructure is not nearly as built out and they Boma skip the generation and go straight to the e commerce generation through some of the big players and more local players as well. One thing that people are focused on is how to distribute through that mechanism and a more effective way in order to reach the chinese consumer where they live. There are certain elements of that supply chain. Logistics channel that aren't fully built out the big one is really the cold storage chain, so supply chain really from farms from fisheries all the way through to the consumer and making sure that your fish is being kept cold. The stag show it's like: fifteen percent of fish in China is kept cold through the logistical chain, something like five percent of
I think the spoil a rate of food is somewhere in the order of magnitude of forty percent. So how can you improve that yield? Get more product the consumer and obviously cut down you're waste along the way? The other thing, I would say, is really around next generation manufacturing, anything that plays into that. Whether be the automation theme, so outfitting factories with automated equipment. The robotics theme, which is sort of a related theme in terms of having robots, do the actual manufacturing anything that plays into that thing that our clients are very excited about odyssey. There's lots of momentum in the market that deal size is getting bigger. Fees are getting a little bit more robust and suffocation everyone is on the rise. What's holding the market back at this stage? What are the impediments to even more deal flow in the area
certainly there is a lot of capital to deploy, and there is obviously the growth that we ve talked about, that you can change. The opportunity said that you can choose. One thing we would think about would be the lack of institutionalization around the sort of leverage finance product that exists in Asia. It still largely a bank Mark and what we ve seen in other markets. U S in Europe is the private equity market and sort of the sustainability of the private equity market was really facilitated by the development of the institutional lending market. In skewing the blending for leverage buy outs away from local banks, which may have some advantages, but by and large the institutional market ten be a more durable market overtime, any signs that picking up any major deals with a really have been so the acquisition financing C. In the? U S
me for some of the larger deals that have happened. You ve had to tap into that institutional market. Some of those have been cross borders that had been able to do that in the U S in Europe as it relates to the local market. We haven't really seen the catalyst if you dial it back to the financial crisis, pre financial crisis in Europe. I think that story is important to think about. The lending for leverage buy outs was by and large aid local bank market and again at some advantages. It's often cheaper, because banks are in the business of lending to local businesses and want to facilitate local business activity. But there are some disadvantages things like duration, things like amortization things like the durability for selling from yourself to the next person having that leverage basically role forward through the same group of debt? Buyers, if you think back to the financial crisis, and you think about the difference between the? U S in Europe at that time, and we have a major event both in you
in Europe? The response to it was very different in the: U S: banks, banks, recapitalize very quickly through the tar programme and got back to being front footed around lending activity in Europe. Banks really turned in word and were sorted taken off the playing field for a period of time, and that enabled folks like ourselves to really step that void and facilitate our private equity clients who had a lot of money to deploy that period of time to go out and do deals and as time progressed, even as those banks have come back onto the playing field, the market has really shifted away from a bank market to an institutional lending market. A lot of the same pre crisis dynamics exist in Asia. Today, we just don't necessarily see the catalyst that could force local private equity firms. From borrowing from local bags and more into the institutional market, and then the second inhibitor around that is really again
it's not a monolith. So you look at the Asia Region Writ large in dealing with multiple different currencies and the depth of some of those markets is enough to attract global capital, to really invest and create a strategy around those markets and other markets it's likely to be more shallow of a market and may not attract that same death of capital? So ass imagine disruption in that be big theme in China. Now Branwell conversations we had with clients around that's base the biggest theme around disruption that we really see in the chinese market, which have seen dramatic growth in over the last ten years, has been taken. The market for consumer payments, feed dial it back into the MID two, thousands most chinese consumers,
and even have a bank account, and you fast forward to today. Not only do they have a bank account, but the economy is ninety five percent cashless and that ecosystem has come to be dominated by some, mainly the e commerce play that have developed these payment apps originally to facilitate payment through their E commerce channel? But now in business of capturing data around what the consumer is doing throughout their life, Whether it be buying things off line, renting bikes, renting cars, the bite sharing car sharing programmes, things like that- that's probably the biggest in best example of disruption. That has happened across the chinese economy in the recent past, and I think a lot of clients are trying to figure out how to feed into that type of disruption. How can they take advantage of that social wave that
Kurt around FIN taken around payments. So often after two decades of travelling to China, one of the biggest non work related changes. You ve noticed is you walking down the street in Shanghai? Does it feel all the same city. You saw twenty years ago. What changes stand out? It is completely different mean. First of all, you can't see the sky had to look where the amount of building and construction that's happened in that city is just extraordinary hotels or better. The food is amazing shopping, which I don't get a lot of, but in between client meetings, justice, sophisticate, of every client dialogue we have. There is very different in all seriousness, sobriety mentioned earlier: you're running the innovation lab within the investment bank. What does it involve data
and what's the goal, and I was created, what what're you hoping to do there? What we're looking to do. There is really take a much longer term view on the big themes and trends that we think are going to shape the global economy. Fifteen, twenty twenty five years out, a lot of it'll, be around technology disruption and then working with our corporate clients on a one off by spoke basis in order to help them think through. How could some technology disruption impact my business and Can I do about it today to potentially insulate my business if I think it's a threat or potentially be front footed around that invest behind that trend, with the hopes that I could be a dominant player behind that trend? Fifteen twenty twenty five years in the future, since it additional service were providing the corporate clients or is it helping them look at transformative transactions that they might do it's a little bit of both. If you think of,
who we are ass, Goldman Sachs? We think about emanate alight and so what we try to do, as we try to think about a problem analyze that problem through the lens of the client and where its appropriate the prescription is. What can you go by? An order to invite behind that particular trend I'll send you recently joined the management Committee, Haired Goldman Sachs, after long career Goldman. What does it feel like to be playing a role in the committee that runs the firm, I have to say it's exciting and I'm so honoured to be part Management Committee. I think for everyone who knows me: I love this firm. I love our people and I'm really excited about the forward, so to be part of the discussion. Shaping the future of the firm is something I feel really privilege to be part of well, congratulations also abroad. Thanks for join me today. Thank you, our pleasure. That concludes this episode
change the common sacks thanks for listening rejoicing and next time, this spot gas was recorded on July thirty. First, two thousand eighteen. The information contained in this recording was obtained from publicly available sources and has not been independently verified by Goldman Sachs. Neither Goldman Sachs nor any of its affiliates makes any representation or warranty as to the accuracy or completeness of the information contained in this recording and any liability as a result of this recording is expressly disclaimed. This recording should not be relied upon to evaluate any potential transaction. Goldman Sachs is not giving investment advice by means of this recording, and this recording does not establish a client relationship with Goldman Sachs
Transcript generated on 2021-10-07.