Investor Dialogue

Investor Dialogue: John Lewis

Sameera Anand talks to John Lewis, co-founder and chief investment officer of Unitas Capital, about Asia's much-hyped private equity market.
John Lewis, Unitas Capital
John Lewis, Unitas Capital

You were originally J.P. Morgan Partners Asia then became CCMP Capital Asia in 2005. You subsequently rebranded as Unitas Capital in 2009. How has the transition been?
As the private equity investment arm of J.P. Morgan we had functioned autonomously so not that different, but I'd say being spun out in 2005 has helped us to better define who we are. It also minimises confusion, which sometimes arose when we went in to meet a potential investee company with a J.P. Morgan calling card and were immediately seen as a lender! We decided to change our name to Unitas to avoid any confusion that we are part of the New York headquartered CCMP Capital Advisers.

How many funds have you raised?
We're currently investing our third fund, which is $1.2 billion. Around 30% of this has been deployed. Our first $1.1 billion fund, which has been fully returned to investors, was raised in 1999 after the Asian financial crisis. We were then part of J.P. Morgan and 25% was proprietary money. We raised $1.6 billion for our second fund in 2005, which was fully invested by 2007.

Who are your investors and what returns have you delivered?
We don't disclose returns numbers but the fact that investors from our first fund invested in our second and now our third fund speaks for itself. Most of our investors are US and Canadian pension funds. We also have a number of US and European fund-of-funds as investors. The family of Andrew Liu, who is our managing partner and chief executive officer, has also invested in our funds.

What is your sector focus?
We focus on two main sectors: industrial manufacturing and services; and branded consumer products, and retail. In industrials we prefer buyouts of companies with revenues between $500 million and $1 billion. Over time, we have built a successful track record of investing in global industrial businesses, in particular those with a large and growing market in Asia but headquartered outside the region. We may invest up to $250 million of equity in such companies.

In some markets like China, where buyouts are less prevalent, we may do non-control deals. In consumer and retail we have made control investments as well as taken minority stakes, which can be as small as $25 million.

How do you source your deals?
In India and China informal networks and relationships with management teams are crucial. In industrials where we pursue buyouts, we have invested in some proprietary situations where we have approached the owners with a proposal. But we have also closed some deals which were intermediated by investment banks. By and large we are cautious with auctions and only look at situations where we are confident we can add value.

How have you exited your investments?
To date many exits have been through strategic sales and many buyers have been local Asian buyers or even financial investors rather than the western multinationals we may have expected. We anticipate that exits through IPOs will increase going forward. We are agnostic about exit route as our job is to maximise capital gains.

Has private equity investing in Asia become much more competitive of late?
Private equity has been competitive throughout my 20-year career. Competition has increased but not as much as the noise. What's changed though is the nature of the competition. Now, most global funds look at opportunities from their Asia offices. A number of country-specific funds have also opened. So, there has not been much consistency in who our competition is on different deals.

How did the 2008 credit crunch affect you?
There was definitely a hiatus in buyout activity during that period. This can be partly attributed to the lack of ready availability of debt but equally was because there were few willing sellers at the rock-bottom valuations of that time. At the time our portfolio was heavily exposed to industrial companies so we focused on ensuring they weathered the period. Those companies are now in better shape than they were going into the crisis. They survived well because they were market leaders and because they were appropriately geared — no high leverage levels or restrictive financial covenants.

There is a lot of hype surrounding private equity in Asia. What is the reality?
The relative expansion of the industry in this region has been more than that in the west as most people are seeking to increase their exposure to Asia after the crisis. The euphoria around financing buyouts is coming back in the west so for example covenant-lite deals are back again in that part of the world. However, Asia has always been different in that respect. This is still a bank loan market with five-year, amortising structures carrying the normal maintenance and financial covenants.

Earlier this year you part financed your €525 million ($742 million) acquisition of Hyva Global through a $375 million high-yield bond. What made you confident of using the high-yield market?
Hyva is a Dutch company we acquired from private equity fund 3i. Our bid was backed by a $350 million five-year term loan facility from Bank of America Merrill Lynch, Goldman Sachs, Nomura and Standard Chartered.

As time progressed we all felt that the high-yield market was worth exploring because a bond would provide greater flexibility, so that we would have adequate access to cash to ensure the business would be able to take advantage of multiple growth opportunities. The bond was heavily over-subscribed and what resonated with the investors were the same characteristics which appealed to equity investors: a high-growth company with increasing exposure to emerging markets. This was especially appealing to investors from the US and Europe.

What has contributed to your success in private equity?
Our team of experienced investment and operating professionals has been together for 12 years. The working environment is collegiate and the partnership within which we operate is critical to cross-border deals.

In my opinion, what differentiates Unitas from our competitors is our combination of local knowledge in Asia, operating capabilities specifically relevant to industrial companies and our experience with complicated cross-border financings.


This story was first published in the July 2011 issue of FinanceAsia magazine

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