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Mezzanine as a means

Southeast Asia-focused Kendall Court has plans to expand its assets under management and its network of offices, bringing its growth capital-style of mezzanine financing to more of the region’s up-and-coming companies. Managing partner Chris Chia tells Hsiang-Ching Tseng why the 7-year-old firm believes strongly in a niche that has yet to really take root in Asia

Chris Chia and his partners, Yeo Kar Peng and Dennis Wuisan, quite purposefully avoided founding a traditional private equity firm. The trio crossed paths as investment bankers – Chia met Wuisan while both worked at Goldman Sachs in Singapore, while Chia and Yeo worked together at Salomon Smith Barney (now Citigroup) – and realised there was a place in the market for a firm that could provide funding to Asia’s plethora of small, often family-owned companies unwilling to cede control to outside investors.

ASEAN countries in particular – including Indonesia, Malaysia, the Philippines, Singapore, Thailand, Brunei, Cambodia and Laos – have a “fundamental gap”, in that many small companies with positive cash flow can’t get access to traditional funding sources, Chia points out.

So in 2004 they founded Kendall Court to provide mezzanine financing to such companies, and in 2006 the firm closed its first fund on $90 million. Originally targeting $75 million, the fund attracted commitments from limited partners including Citigroup, UK development finance institution CDC Group and EDB Investments, an investment arm of the Singapore Economic Development Board. Kendall Court tends to invest in growing companies with revenues of $15 million or more, typically providing convertible debt, preferred equity or senior debt with warrants of $7.5 million or more.

“Mezzanine financing fits the profile of the predominately family-run businesses in Asia,” Brian Lim, CDC’s former portfolio director for Asia, said when the institution re-upped with Kendall Court’s second fund. Fund II closed on $150 million in August 2010 and may deploy as much as 75 percent of its capital in Indonesia, a growing market that has been hard for many private equity firms to crack given family-controlled businesses’ reluctance to give up control.

Asian entrepreneurs “understand debt more than they understand equity”, says another LP source. “People don’t want to dilute [their equity] that much, but they want the money. I’m surprised there isn’t more mezzanine in Asia.”

Although Kendall Court is one of just a few domestic mezzanine-focused firms operating in Asia, that might be slowly changing alongside market conditions and the maturation of Asia’s private equity markets. In July, for example, China’s CITIC Private Equity Funds Management began fundraising for an RMB-denominated mezzanine fund with a target of RMB5 billion (€542 million; $783 million).

The volatility that has recently plagued public indexes, coupled with rising inflation and pending regulation such as Basel III, is likely to adversely affect global credit markets, Chia says. He expects banks to become more conservative and liquidity to become tight for many companies – which can result in good opportunities for mezzanine funds to both back new companies and refinance existing loans. Globally many private equity firms, including Kohlberg Kravis Roberts and Intermediate Capital Group, are raising large mezzanine funds in anticipation, however, the bulk of that activity is expected to be in places like Europe, where fears over sovereign debt defaults have effectively closed the high-yield bond market.


Mezzanine may be less dilutive and less expensive than equity, but one of the challenges facing mezzanine providers in Asia is a lack of understanding among investors and investee companies alike as to what precisely they do – a situation exacerbated by the range of strategies employed by mezzanine providers in the region.

A large part of what Chia and his partners have worked hard to do over the past seven years is educate Asian entrepreneurs and potential limited partners about the flexibility and benefits of mezzanine instruments.

“It is a bit of struggle, still today,” Chia says. And he acknowledges that even when potential fund investors do understand mezzanine, which traditionally is of a higher risk-higher yield nature relative to senior debt structures, they may still wish to dedicate their allocation for private illiquid investment in Asia to private equity funds or other asset classes.

“I think there may be some reluctance from investors to cap the upside [of Asia’s growth companies] with mezzanine structures,” says one Hong Kong-based fund of funds manager.

But Chia insists that mezzanine structures can be tailored to generate equity-like returns as well as have some protection from risks embedded in traditional equity investing.

Kendall Court, for its part, has slightly changed its credit-oriented strategy to generate more equity-like returns and become more of a partner to portfolio companies.

Chia says the shift came about after he realised how a high debt return focus could impact portfolio companies.“If there’s a downturn, what really happens is that the company is suffering because of the debt you put in for them. You go in and say I’m your partner, but you’re actually yielding the returns at the expense of the company,” he explains.

To achieve the same type of returns on a risk-adjusted basis, but with more of a partnership approach, the firm has lowered its debt return expectations but expects more equity upside alongside the entrepreneurs. “I make sure that I’m still in some sense ahead of the equity in terms of the rights and structuring, but I would also then make sure that I will be getting equity-like returns,” Chia explains.

At the end of the day, [the entrepreneur is] the one driving the car; I’m the one sitting at the side passenger seat

Chris Chia

The firm says it is happy for its Southeast Asian entrepreneurs to generate bigger returns than Kendall Court does. “At the end of the day, you’re the one driving the car,” Chia says he tells them. “I’m the one sitting at the side passenger seat. But I want my air bag, I want my seat belt. I’m certainly not going to reach out and grab your wheel if things are going bad; you’re always in control of where the company is going.”


Kendall Court may not control the middle market companies it backs, but it is adamant that they have top-notch governance, place high importance on human capital development and have a creditworthy management team and controlling shareholders characterised by integrity.

The motto one sees on its website, which relates to a much longer, loftier, vision statement, is, “Seeking to uplift the human conscience through business”.

“We want to be very clear that the money we put out is elevating some level of good in the people, markets and economies that we’re involved in,” Chia says. “We’re deeply passionate about this. The money has to be used to do something [good]. It’s to put seeds into the ground, it’s to grow something.”

Chia’s eyes light up with enthusiasm when he talks about Kendall Court’s strong focus on environmental, social and governance (ESG) policies. Chia wants to make sure that the entire value chain at investee companies incorporates more ESG practices. And he also expects Kendall Court to embrace the same principles; the entire senior management team at the firm has been given specialised ESG training, demonstrating to its portfolio companies that it is developing a business that is long term and sustainable.

“[All three partners] are extremely ethical and ‘above board’ individuals and I think this made them partners of choice for many entrepreneurs and co-investors that I have spoken to,” says one Kendall Court LP.

At every portfolio company, Kendall Court establishes an ESG committee that monitors how the business is run according to ESG standards. The firm is a signatory to the United Nations Principles for Responsible Investment as well as the Global Reporting Initiative, each of which advocates an extensive, transparent ESG reporting framework.

But just like mezzanine financing, incorporating ESG into every day business decisions also involves educating entrepreneurs and management teams at portfolio companies.

“I tell them there’s a massive amount of empirical data that would show companies that invest in sustainable [manners] actually end up with higher market valuations, happier employees and greater productivity,” says Chia. “It’s very scientific to show [the entrepreneurs] that people who care about [ESG] actually do yield stronger companies.”


Chia believes Kendall Court’s strength comes in part from staying close to its portfolio companies. He is based in Singapore, while his co-founders anchor Kendall Court’s other two offices: Yeo calls Kuala Lumpur home and Wuisan is based in Jakarta.

“You need to understand the personalit[ies] you’re working with, the environment and the market you’re in,” Chia says. “And for investee companies, it helps when they know you’re in the same zip code that they can come and reach you.”

As the firm prepares to launch its third fund within the next 12 to 18 months, it also plans to open two new offices to better capture Southeast Asian dealflow – one in Vietnam, which has been generating an increasing amount of buzz in investment circles, and the other in Thailand, whose political issues have perhaps kept it from enjoying the same interest.

Chia says the political risk related to Thailand shouldn’t overshadow its investment potential.“If you look at Thailand in the last three to four years, despite the volatility in politics, fundamental growth has still been chugging along. Thailand being an export market, a larger consumer domestic market, the merits are still quite compelling.”

He remains conservative, however, when asked whether the firm would consider expanding into another Asian market with a large consumer base and export market, and which continues to attract the most attention – China.“There’s enough to do in ASEAN – it’s a fantastic market,” he says. “With over 500 million people, at some point it was larger than the EU (until they expanded the EU). Also, because we live in such a heterogeneous market between different countries, it creates an amazing opportunity set for us.”