ABN bosses discuss private equity opportunities in Asia

ABN AMRO plans to ramp up co-investing with clients in private equity deals. Global head of ECM and M&A, Jan de Ruiter, discusses the trends in private equity and the new roles recently given to Matthew Kirkby.
Following ABN AMRO's decisions to move Matthew Kirkby back to London to be global head of the financial sponsors group, and to replace him as Asian head of ECM and M&A with Neil Galloway, we sat down to talk to both of them, as well as ABN's global head of ECM and M&A, Jan de Ruiter, about the new strategy, the private equity business, and co-investing with clients.

How important is Asia to ABNÆs business now?

De Ruiter: For the M&A/ECM business that IÆm in charge of, in relative terms, it makes up about 20-30% of the revenues. But the growth rates are a bit higher than elsewhere. So it is increasing in relative importance every year.

What drove the decision to move Matthew Kirkby into the new role and bring Neil Galloway back to replace him?

De Ruiter: WeÆre seeing rapid growth in financial sponsor activity and weÆre keen to expand this business globally. Private equity represents a tremendous growth opportunity in Asia, and with extensive Asian experience Matthew is well placed for the role. I think MatthewÆs appointment also reflects the growing importance of Asia to the group as a whole.

Galloway: I was looking for a change. Matthew was looking for new challenges and when there were discussions about who to slot in [MatthewÆs current role], I was quite keen to come back to Asia. Obviously, it worked out well. I have spent a couple of years in Europe [running TMT] and developed good relationships with corporates and ABN colleagues. We have been working on cross-border transactions involving Asia and we think that is set to continue. And the view was taken that rather than starting with somebody new, it made sense to bring someone back who knew the region.

Kirkby: You can have a business that is going in the right direction, then someone who is brought in to run it that doesnÆt know Asia. That then disrupts it. Our Asian franchise, on the other hand, has quite a bit of continuity. Bankers such as Richard Orders have been around for a considerable period of time. So we have consistency and Jan [de Ruiter] was keen to preserve that by bringing out Neil.

And ABN is obviously bullish on the growth prospects for the financial sponsor business?

Kirkby: As with most houses around town we have figured out that this is a significant fee pool û both in Asia and globally. The decision was taken that if it was going to see the growth it demanded, it needed to be carved out as a separate role. And a reflection of the priority we are giving it, is that it now has a separate seat on our global investment banking management committee. We have put it and our co-investment fund under one person. I will be running both.

We donÆt just want to be advising clients, but helping them when they have a need for an equity provider. If it looks attractive we will co-invest.

A bit like the Goldman Sachs approach?

Kirkby: A little bit different to Goldman, as we donÆt want to do the whole investment. We want to invest alongside those corporates or sponsors that are key relationships.

Is this an area of big growth?

De Ruiter: Yes, it is an area of growth. It is a reasonable amount of money we have allocated to this area. We co-invest with clients where we believe it is helpful to them.

Galloway: What this derives from is a view that we are taking risk from financing a transaction, so why donÆt we share in some of the upside. From the clientsÆ point of view it gives another level of comfort that we are putting our money in and endorsing the deal. It aligns interests, and allows us to take more of the upside rather than just an arranging fee.

Kirkby: Thus far the number of investment we have made in Asia is small, but we will be dedicating more resources to this area. These could be pure equity investments or mezzanine-style financings.

De Ruiter: Our co-investment fund is, however, separate from our private equity business, ABN AMRO Capital. That is 100%-owned by the bank, but is run as a standalone vehicle.

Could ABN AMRO Capital invest simultaneously with your co-investment group?

De Ruiter: No, because the private equity divisionÆs philosophy is different. It normally wants to take control û and make fewer investments with a larger stake. Our co-investment philosophy is about cementing a relationship with a client with capital. The co-investment side investments also tend to be of a shorter duration.

Are you concerned that there is too much money going into private equity and there may be too few deals to satisfy the demand?

Kirkby: Private equity is here to stay. There is a significant amount of capital that has to be put to work. And sure, there will be ups and downs. But it is going to be a significant part of the global markets for years to come.

Galloway: In Asia it is true that it is more challenging to find deals of size, and also to structure those deals in a way that works for local regulations.

Kirkby: My view is Asia tends to be three years behind Europe and five years behind the US. So it will take some time before we see mega-LBOs here on a recurring basis.

De Ruiter: In Europe we have seen a wave of private equity deals. And when private equity gets involved, it becomes easier to restructure companies and improve performance. Private equity managers are far more flexible than the managers of listed companies. In Europe we are seeing some big differences between the performances of publicly-listed companies and æprivately-ownedÆ companies. It is amazing.

If you are a public company there a whole set of rules and regulations you have to play by, you are continuously exposed to compensation discussions with management, and the management tends to be making decisions quarter-to-quarter. Life is a lot easier if you are running a private company. There is a greater focus on business performance, rather than on where the share price will be in the next quarter. The private equity teamÆs managers are working off a four to seven year view.

Galloway: Public companies and shareholders are reacting to the influence of private equity - why have a third party implement change if you can do it yourself? For example, Cable & Wireless has put in place private equity style management incentives for the management team, which have added discipline and the Cable & Wireless share price is up 40% in the past six months û since changes were made.

I believe a number of public companies may follow this model. They will have to run their businesses in a much more disciplined and tight way, or face being a takeover target by private equity firms.

De Ruiter: KPN of Holland is another case. It is run as if it was owned by private equity. Their CEO has basically said æWhatever private equity players can do, so can IÆ. So he is buying back shares, and investing cash in a very focused way. And KPN is now the best performing telco asset in Europe.

So private equity is clearly having an impact on how public companies are run.

Kirkby: You cannot be relevant to senior corporate decision makers these days unless you have a good handle on what private equity firms are doing, and hedge funds are thinking.

And if the trend continues û by which I mean the increasing sizes of private equity deals û you probably only have 200-300 corporates globally that are big enough that they are off-limits to private equity acquisitions.

De Ruiter: However, my own cautionary take on all this, is that we havenÆt seen a significant downturn in markets for 6-7 years. When the market goes South, it will change the whole complexion of private equity investments. I am from Holland, and we have a saying: There is a tide, and the sea gives and the sea takes. If the interest rate cycle changes or the equity markets become less favourable, it will have a very negative impact on the private equity business and its returns.
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