Intermediate Capital Group opened its first Asia-Pacific office in 2001 when current chief executive, Christophe Evain, followed the London-headquartered firm’s private equity clients east in search of more business, explains Chris Heine, ICG’s head of Asia-Pacific. The firm is in the market with its third Asia-Pacific fund and is also raising a Japanese mezzanine vehicle in partnership with Nomura as well as an Australian senior debt strategy. The third fund will replicate and expand the successful formula of mixing mezzanine positions with minority equity stakes and offering financing to both sponsored and unsponsored businesses, explains Heine.
Fourteen years on, ICG Asia-Pacific also has offices in Sydney, Singapore and Tokyo. The firm lends to businesses in Japan, South Korea, Greater China, Singapore, Australia and New Zealand. The new vehicle adds Malaysia and Indonesia to the mandate.
Heine, who has himself been based in Hong Kong for the last 30 years and with ICG for the past nine years, is very familiar with the firm’s development in Asia-Pacific. He sat opposite Evain on the sponsor side as the current chief executive executed the first two Asia-Pacific deals for ICG. Heine was then at CVC Capital Partners when ICG provided the mezzanine financing to back first, CVC and 3i’s acquisition of a 50 percent stake in a Korean cinema chain, followed by the purchase of a telephone directory business in Singapore by CVC and its partner on the deal, Unitas.
After ICG closed its first Asia-Pacific fund in December 2005, Evain, then back in London, and Piers Millar his successor, asked Heine to set up a growth capital business in Asia-Pacific, along the lines of what they were doing in Europe. That arrangement didn’t last long though, as Millar moved back to London and Heine was asked to lead the Asia-Pacific region.
For the firm’s second Asia-Pacific fund, ICG pursued a mixed strategy like that deployed in Europe Fund V where the firm sought out a mix of deals including financing for non-sponsored companies and combining minority equity stakes with its more traditional mezzanine offering.
Comparing the Asia-Pacific region with the US, Heine points to the huge deal pipeline virtually always in place for ICG’s US business. But that pipeline has a low conversion rate, either because the deal is rejected or a competitor nabs the mandate. The terms and coupons are pretty standard with a combination of cash and PIK while the regulator, the Federal Reserve, wields significant influence over the market, most recently with its leveraged lending guidelines.
In contrast, on Heine’s home turf every deal looks different. The firm will do equity, take warrants, offer co-investment to its investors or take a straight cash coupon. Leverage is lower and bank lenders maintain discipline except on the biggest “crown jewel” deals, Heine explains, when competition will drive terms. And private equity buyout deal flow is low, he adds. “We’ve heard a lot from the LP community that one of their biggest concerns in Asia-Pacific is the ability to deploy capital,” notes Heine.
With quantitative easing pushing up valuations and banks advising vendors to take advantage by running dual-track initial public offering and private auction processes, asset prices are high. In an environment like that, the debt end of the capital stack is where investors will see most protection, Heine argues, but the same factors are also hitting the deals that traditionally feed mezzanine debt investors.
COPING WITH DEAL DEARTH
Australia, one of the jurisdictions in which the firm has most experience, and New Zealand together were the testing ground for the mixed approach that means ICG is less worried about the low deal flow in Asia-Pacific. “For us, it’s different, we’ve got a confluence of circumstances that’s helping our deal flow enormously. The first is the presence on the ground and the team being built out. The second is the relationships that it’s taken time to build out,” explains Heine.
The mixed sponsor and sponsor-less approach implemented in the second fund meant that Aussie and Kiwi deals made up just over half of the second fund’s investments. “We can say to people that we don’t just do mezzanine for buyouts. And to the buyout teams, we say that we don’t just do buyouts, we can support their recapitalisations,” adds Heine.
ICG began flying into Australia in early 2000, says Ryan Shelswell, who runs the Australian mezzanine team at ICG. He says that Evain jokes that the firm started investing in Australia in response to the SARS outbreak but the opportunity was there because in 2006, they established an office in Sydney. ICG has invested $900 million across 11 transactions over nine years in Australia, Shelswell adds.
The jurisdiction, because of its size and distance from other markets, tends to have less competitive markets with one or two major players in many sectors. This feature made the Aussie and Kiwi markets the ideal place for the firm to road test its mixed mezzanine and minority equity approach in Asia-Pacific. The tactic worked. Around 40 percent of Fund II was for non-sponsored deals, said Heine. It’s also proved itself in terms of returns so far, notes Shelswell. On the roughly 70 percent of capital returned to investors so far, the IRR is between 17 and 18 percent with a 1.9x money multiple.
On the impact of the ending of the commodities supercycle, Shelswell says that the firm’s portfolio has been well insulated from the effects with no defaults. Just one company, a specialised transportation container producer, has been affected. And the specialist mining kit that they produce, which includes both material transportation units and mobile accommodation for mine workers, makes up just 10 percent of the firm’s order book, he explains.
The firm’s strategy, whether investing via mezzanine, minority equity or supporting recovery or growth capital, is clear. “We have chosen stable defensible industries. [For example,] we’ve got money invested in bus companies, we’ve invested in superannuation fund administration, not dependent on share prices, just reporting people’s superannuation accounts,” Shelswell explains.
Between the other offices and local teams on the ground and the relationships established with sponsors and advisors, the proportion of Australian and New Zealand deals is likely to reduce in the new fund, Heine says, adding that the firm will move slowly into new countries.
The expansion of their investment mandate to include Malaysia and Indonesia was on the back of investor interest, Heine remarks. He says it is very likely that the firm will do a deal in Malaysia through Fund III with Indonesia a bit less likely. In both countries, ICG would prefer to make its first investment with a sponsor.
The firm has also opened a Tokyo office to support its joint-venture with Nomura, a Japanese mezzanine fund which reached a first close of ¥28 billion ($226.5 million; €201.5 million) in December last year. The third Asia-Pacific fund will piggy-back off its origination efforts to source transactions that meet its higher return criteria (the Nomura JV has a lower return hurdle and mezzanine in Japan usually yields around 10 percent, says Heine). These deals are more likely to be unsponsored and in support of succession at a family-owned business, Heine explained, adding that if the firm could do two deals like that over the next four years in Japan, he would be happy.
And while the growth in Malaysia and Indonesia is attractive to investors, ICG will continue to do the bulk of its deals in Asian-Pacific jurisdictions with established markets and decent creditor protections. Some investors expect an Asia premium, he says, but explains that the markets ICG concentrates on are developed and do not carry a coupon premium, but do offer higher GDP growth rates than the US or Europe, which is where the real benefit lies. With better national growth rates, there is more inbuilt downside protection for the businesses that ICG lends to, he says.
The firm monitors the slowdown in Chinese economic growth and well publicised problems in the real estate market, but does do business in China. Around $13 million of the firm’s more than $800 million second fund was for domestic Chinese borrowers, says Heine, and the firm is happy to lend to borrowers with a business model set to benefit from the growing Chinese consumer market.
For Heine now, it’s time to jump back on a plane and visit more investors – the fundraising train marches on. But looking further ahead, he outlines a path very similar to the rest of ICG. Over the last two years a remarkable number of new strategies have been established by the firm. The Australian Senior Loan Fund is in the works, as is the joint venture with Nomura, but Heine spies several other different but complementary opportunities on the horizon. “If you look at what we’re doing in Europe and what we’re doing in the States and look at the adjoining strategies that we could look at, real estate, infrastructure, real assets – those sort of strategies are complementary to what we’re doing so that’s the opportunity; the opportunity to bring in talent from outside,” Heine concludes.
So watch out for ICG in Asia-Pacific. The firm is ambitious and not afraid to execute.