Even as global private equity (PE) firms are increasingly focusing on opportunities in Asia, there is still enough room for regional players to succeed, according to Ravi Thakran, former group chairman of LVMH Asia.
Thakran, who is also the CEO of Aspirational Consumer Lifestyle Corp and former managing partner at L Catterton, said competition will increase because all major global players who do not have an Asian play will come here for growth.
“Yes, competition will grow but the answer is differentiation. Country-focused funds will still be able to win if they are very differentiated. Regional funds could still do well,” Thakran said during a fireside chat with DealStreetAsia’s founder and editor-in-chief, Joji Thomas Philip, at the Asia PE-VC Summit 2022.
Thakran expects more global funds to enter the region as only 40 of the 591 funds with over a billion dollars in AUM, per rankings by Dow Jones, are currently in Asia. He also noted how American and European firms are suddenly wanting to recruit more Asian investors to learn how to invest better in the region.
“They would come here to find opportunities and to build a bridge for their portfolio companies in this market,” Thakran added.
He also stressed that while PE investments in China have come down a lot, the country still has a lot of potential that should not be taken for granted. “Asia has the best story going for it. Despite the problem of our biggest market, I think the dragon will wake up and rise again,” he said.
Thakran also oversees two US-listed special purpose acquisition companies (SPACs). His first blank-cheque firm — the $225-million Aspirational Consumer Lifestyle Corp — merged with private jet charter firm Weals Up in a deal worth $2 billion last year.
During the summit in Singapore, Thakran said the SPACs phenomenon happened so fast that a lot of wrong players started backing companies without much logic. “It becomes a weak phenomenon,” he pointed out. “But do not count it out. I think good quality SPACS would re-emerge.”
During the fireside chat, Thakran also talked about India, the future for exits, and LPs becoming a prominent source of capital for PE, among others.
Edited excerpts:
In the last two years, PE investments in China have come down a lot. Has PE’s love affair with China cooled?
All of us suffer from the recency effect. We all go by what has happened yesterday or today or tomorrow. But if you zoom out, you will see that until 1990, China and India followed pretty much the same policy. They gained independence around the same time. But 1990 onwards, the economy took over the agenda in China in particular and from 1990 until last year, China grew faster than any other economy in Asia.
However, the growth this year is likely to be 2.8% in China against 8.2% last year. For the first time in 30 years, other Asian countries will go ahead of China. But if you look at 1960-90, it was the northern tigers — Japan and Korea — that grew faster than anybody else. So they had their innings for 30 years. China has had its innings for 30 years and, potentially, now could be the innings of the other Asian economies. But do not count the dragon out. China still has a lot of potential.
There have also been talks about companies looking at moving the supply chain out of China and into Southeast Asia, Vietnam and India. How big are these opportunities for the PE space?
The supply-chain shift was already underway before COVID itself and that was primarily a result of the geopolitical clash that started almost 6-7 years ago. And the geopolitics between the US and China is bound to happen. China became a manufacturing behemoth so much so that players like Apple didn’t find anywhere else a single source of highly skilled people with great infrastructure.
But with geopolitical things happening, the shift is also already happening. It got accelerated with COVID. It got accelerated with recent geopolitical frictions becoming a little bit larger because of Taiwan etc, and the recent announcement by Apple saying they will make iPhone 14 in India or Foxconn announcing a $19.5-billion chip manufacturing with Vedanta are seminal events for India, for example.
India was never a place for manufacturing. Only 20% of the economy is manufacturing. It is sluggish on their part being the lowest-performing manufacturing country in the region. But these are seminal events for them. I hope they will capture this and run with that.
I think the opportunity is emerging across Asia. And I would say again, McKinsey recently came out with a report that among the three fastest-growing economies in the next decade will be Saudi Arabia. We often forget about that part of the world. It is growing now and is likely to grow 7.5% in the next decade, and with the Saudi Vision 2030, I think that’s one big area.
In India, the private sector has a lot of vitality that certainly will take up a big space although the public sector is incompetent. A country like Indonesia, which has a skilled dynamic, certainly could come up as well. So I think Southeast Asia, India, and part of the Middle East, particularly GCC countries, will be great gainers if they play it right.
Assuming that geopolitical tensions continue… you spoke about India being a big gainer. If this results in PE inflow into China coming down further, do you see that capital coming into Indonesia or Southeast Asia, or India?
Capital availability will not be constrained. The global capital allocation to the region is only growing. Even the capital that was recently going to China is shifting. But the question is where in this region to find it? And, again talking about India in particular, I am, midterm, still bullish on China, short term not; similarly for India, a little bearish but there are spots within that overall bearish scenario. The reason is India’s private sector has a lot of vitality. If you look at it from 2010 onwards, almost 800 startups in emerging markets crossed $1 billion, of which 150 were Indian. That’s a phenomenally large number crossing and becoming unicorns. China was the only country that was ahead of it.
Similarly, in terms of billionaires, India had 55 billionaires in 2010. Now, 140 billionaires. Two-thirds of them are new billionaires. The private sector has a lot of vitality, overall. The digitisation of the economy is leading to major consumption. Digital revenues have been growing at 30%, which are highest for any developing country and three times more in the developed world. So there is a lot of vitality.
India, however, gets hubris much too fast. Valuations start to become crazy much too early. They start to demand multiples, for valuations, of developed market dynamics in a market that has not even got the lead in the developing world.
So I would say, yes, the world wants to bring more money to India. Geopolitically, it stands in the best place but India has to play its cards right. The macro agenda in India has to be driven stronger. Everybody wants to do more with India. It needs to get its act right.
Specifically to PE, when it comes to India, getting money out of that country is a big challenge historically. Is that changing?
Another seminal event happened between the spring of 2020 and autumn of 2021. The IPO market was surging, particularly for technology stocks. Zomato went public and soon after Nykaa and then PolicyBazaar, etc. We were looking fantastic. India became the darling. The amount of money that came in was great.
And then came the Paytm saga, and everyone started saying you need to go to India with a bigger magnifying glass because Indians are very good storytellers. PE needs to look for three layers below the skin of what is happening. Owners and entrepreneurs should not give inconsistent messages to the market if they are in the public markets. Even if you’re in the private market, there must be consistent messaging. If you’re telling near-term profitability is three years, say three years, and not 18 months, because that 18 months will come soon.
India has to manage the storytelling to reality. Predictability is what investors want to see more and if that happens, both public and private markets will get better.
But overall, trend-wise, the overall ecosystem could never have been better for India than it is today. This is the best time to pick up capital, the best time to attract investment, best skillset. A lot of international majors are setting up Asian platforms besides the local players and regional private equity players. All of that coming to play for you is a huge advantage. I hope they pick up on that and run with it in a better manner.
Moving on from India, let’s get into SPACs. This was a terrible year for SPACs but until the end of last year, there was a SPAC boom. What is the road ahead? A lot of PE firms are also banking on SPACs for exit. How do you see the future?
If you look at the psychology of the market, what happened in mid-2020, COVID was at its peak, markets were shut and, surprisingly, a new phenomenon came to the market — SPACs. Initially one or two, and eventually it started to become eight listings a day. When a new phenomenon starts… to harness the market, to be able to go to the market even when markets are otherwise shut.., it is a fantastic alternative. But when the whole gang starts to back it without much logic, it becomes a weak phenomenon.
We were the first from Asia to list on NYSE within six months. It was a great experience but in H1 of 2021, the logic in the US stock market was everybody was going for hyper growth and near-term profitability. The whole logic changed in H2 when everybody was ready to sacrifice hyper growth but wanted near-term profitability and 73% of the companies that listed through SPAC were all not profitable. That became an issue.
Today, whether it is the main market or SPACs, companies with solid fundamentals, either with a truly profitable model or near-term profitability, could still succeed. SPAC happened too fast, too many wrong players entered and, as a result, it went down too fast. But do not count it out. Good quality SPACs would re-emerge.
How do you identify a good SPAC?
The category you’re investing in has to be the category that has got a tailwind, is secular, and is not a fad. Secondly, you do not invest in a category or a country. Invest in a company. The company’s fundamentals have to be fantastic. If they are not, then don’t go by just category tailwinds. Finally, focus on founders. Founders mean a lot. If you focus on these things, whether through SPAC or not, profitable businesses that you bring to the market will succeed.
How do you see the future for exits? As IPOs have stalled in most markets, is it secondary or M&A? Where will exits come for private equity?
There is so much capital at play wanting to deploy. Larger PE funds want to buy from smaller funds. Beyond that, there are a lot of global strategics that want to buy Asian assets. The global majors are starting to back solid businesses.
If your business is good, I won’t say exit will be a challenge. Exit is challenging for those who try to go to the market with weaker fundamentals. Therefore, solid businesses will have no problem, but for not-so-solid businesses, exit may be challenging.
You spent a long part of your career in the consumer and luxury space. You spoke about how Asia used to be a very minor market. But for most luxury brands and even consumer brands, a large chunk of their venues today come from Asia. How do you see the road head?
Asia today is the biggest manufacturer and biggest buyer in the world. We have achieved both but we didn’t build brands of our own. Asian brands will become the most dominant force globally in the aspirational category; the Western brands will not be able to stand the onslaught from it. So, where value for money is concerned, you already control the manufacturing here, you already control the market. You just need to learn how to build brands and reach the market.
If you are looking at investing in consumer goods, look for aspirational businesses, value-for-money businesses in a country like India or Indonesia. If you do that, you will succeed. But as far as luxury is concerned, unfortunately, I’m predicting today until 2030, it will remain a domain of French, Italian and British brands. They will still make the best luxury products and Asians will still buy, still queue up at their stores.
In terms of aspirational brands, which segments would they come from?
Consumption in Asia, despite the COVID-led dampening in our biggest economy China, is still colossal. In 2000, Asian consumption was one-eighth of the US, or $1.4 trillion. By 2030, Asia’s total consumption is going to be about $31 trillion, which will be larger than not just the US but the rest of the world. Consumption is a great area to invest in. But within that consumption, things are changing. You are now becoming much more technology-driven. Companies, brands and businesses that are technology-native or riding on the technology bandwagon will gain more. They will grow faster.
Again, consumption overall, when it goes from $14 trillion to $31 trillion, will become by far the largest area. You will find enough opportunities across all kinds of segments. We still have very low penetration. Yes, technology has been a big driver but technology, consumer riding on technology, technology giving consumers a pat through social media, through various other channels, will emerge across the market. They will be a big play.
What stops Asian brands from succeeding in the luxury space? Is it a perception issue?
I’ve worked for 20 years with the largest luxury goods company and before that the largest watches company in the world. Of course, there is a perception issue because for 250-300 years, broadly, we were colonised. We were just learning the lower end of the spectrum. And consumption in all of Asia in 2000 was only $1.4 trillion. It was never a big play for luxury here.
However, if you look 250 years back, Asia was the centre of luxury — the best of silks, ceramics, glass and almost everything was produced and consumed here. Will we get it back? I genuinely believe we can. By 2030, Asia will become a centre for luxury brand creation and will be by far the biggest luxury market already.
Going back to PE, over the last couple of years, most global PE firms have set up dedicated Asian vehicles that are growing bigger and bigger. Is it going to be increasingly difficult for mid-market firms in Southeast Asia, India or Indonesia to compete with global PEs?
Competition will increase because all major players, the US and European funds which do not have Asian play, will have to have an Asian play not only because they want to come and play the market for growth but because more American and European firms are asking GPs to build a bridge to the Asian market.
They will come here to find opportunities and also to build a bridge for their assets and their portfolio companies into this market. So competition will grow but the answer is differentiation. Country-focused funds will still be able to win if they are very differentiated. Regional funds could still do well.
Asia has the best story going for it. Despite its problems, I think the dragon will wake up and rise again. The three major areas of Asia — West Asia, South Asia and Southeast Asia — will play a meaningful role and become the fastest part of global growth agenda going forward. There has never been a better time to be an Asian and to be investing in Asia.
Do you see Asian LPs becoming a prominent source of capital in the future for PE?
They already are fairly large by the way. For example, Japanese LPs are massive. Look at Japan Post and their insurance, massive play. A lot of us many times only run to US pension funds and the Canadians, British or Europeans. Asia has a large pool of capital, only harnessing them has been very different. But I think you will see large pools of capital again. Singapore has massive pools in GIC and Temasek, and many others are emerging.
There is a big LP base here. They may not come in the first round. They may be frustrating to go but so was the case with American endowment and pension funds as well. I think Asian LPs are taking a bigger role.