Episode 1- Series - 1
Over the past years, the hotel sector had remained a hot market for investors, as hotel investment volume reached US$66 billion in 2019, with initially cautiously optimistic projections for 2020. Although the short-to-medium-term prospects of the market now remain uncertain due to COVID-19, there may be opportunities amidst these times, both for companies to innovate their models and investors with a keen eye and open mind. In an EHL webinar, EHL alumnus Min Su Sung, Head of Product Strategy, Asia-Pacific and Middle East at BlackRock Private Equity Partners, shared some insights on the private equity market.
Note: The views expressed in this webinar are based on personal experiences and perspectives; they do not represent the views of BlackRock nor the position of the firm.
I graduated from EHL in 2001 and I recall having dreamt of being a great chef or restaurateur or hotel manager traveling around the world. After graduation, I joined Samsung as part of a corporate recruitment program to work for the Shilla Hotels and Resorts, a luxury hotel brand in Korea. After five years there, I pursued my MBA at the Wharton School and then came into the world of finance here in Hong Kong. I was in investment banking at first, and then landed in private equity, where I have been since. Today, I am at BlackRock heading product strategy and business development for the private equity solutions group, as well as managing business across the APAC and Middle East regions.
I think my MBA helped me prove that I was able to do analytical and number-crunching work. But there were also other skill sets. When I joined investment banking, I was on the real estate side and we were going through a lot of IPO underwriting, as well as private placement of real estate funds that focused not only on multi-use and straight-off logistics assets, but also hospitality assets. At the time, they didn’t have anybody with a real background in hospitality that understood and was able to interact with those hotel operating companies or hotel owners.
It’s a business development, product structuring and investor relations function: overlooking Asia and Middle East accounts that we manage on a separate account basis, as well as fund investors who are coming into it. I think the most interesting part is structuring products and mandates. We have off-the-shelf products that we offer in a commingled manner, but two-thirds of our business comes from separately managed accounts, with clients requiring a tailored solution to access private equity asset class. We have fund investment programs, secondary programs, and co-investment capabilities. We bring a combination of that to structure a portfolio for them to build out or helping them to complete a portfolio. Now with COVID-19, we also have very close dialogues with clients, go through their portfolios, assess the impact on performance, as well as the extent of duress of each underlying portfolio company.
One of the misconceptions is that nobody made money out of the travel business. There are several GPs (General Partners) that specialize in this field and there are branches of major global buyout firms that are investing into this field as well. The travel industry accounts for about 10% of global GDP, which is not as much as the healthcare or TMT (technology, media, and telecom) sectors – but it is a less crowded space than tech and healthcare. I think there is a true opportunity investing in non-real assets-based travel-related businesses, especially in travel services and travel & mobility tech businesses that people with a hospitality background can really excel in.
We start by looking for the break cases of businesses – what needs to happen for this business to really fail? We also look at the cash flow positions and the business strategy and competitive landscape – is there anything that would hamper operations and substantially reduce our investment value? We focus on the downside risk a lot; if you can mitigate that, I think the upside will take care of itself.
The liquidity position of companies is crucial for survival, we don’t know when COVID-19 will end, but we need to see what cash position these companies are in to able to survive and their cost-cutting measures. I am also hoping that some of the businesses will create innovative models out of this crisis and change their business model, that may bring additional value to the company and its investors.
BlackRock is voicing out our view on companies that are not living up to the ESG (Environmental, Social, and Governance). We are implementing ESG to all our investment processes; for example, in Japan with GPIF (Government Pension Investment Fund), they are really voicing out loud on the concerns of ESG standards. It is becoming the mainstream and I think we’ll continue to see more opportunities and more firms will follow.
From the institutional investor side, there is a strong movement towards tapping ESG through UNPRI (United Nations' Principles for Responsible Investment) programs and the UN Strategic Development Goals; whether they are entrusting their money to public market or private equity or real asset managers, they want to see some sort of ESG standards adopted in the funds of the mandate they invest into. Certain countries’ pensions or institutional investors have a more acute awareness of the need to implement ESG.
After the global financial crisis, we’ve been going through a very low-interest rate environment and institutional investors, especially the pensions, have been searching for yields. So, they’ve been increasing their allocation to private markets, especially to private equity and as a result, I think we’ve seen many of the buyout firms coming out with 10 billion-plus funds and that continues to proliferate.
There’s been an innovation in the private equity industry. Secondary has evolved to also become a mainstream product, and the strategy within the private equity, whether it’s buying LP (Limited Partner) commitments into different funds at discount or there is an innovation going on within the secondary itself. Because when you look at it, the primary capital that is being raised today by institutional investors in to the GPs today, at some point, there will be a need for liquidity – and that creates opportunities for secondary players to come in and provide liquidity in an illiquid asset class.
Another evolving trend is the push for long-term private capital and long-term investment. We call it similar to Warren Buffett-style investing or value investing, where you are using private capital to hold on to a company for longer and you don’t really have to accept, so you’re not constrained by that. The other trend is coming with perpetual programs that allow for policy liquidity, as well as evergreen structures that you can stay in and recycle capital throughout its life, and you don’t have to accept traditional commingled funds from them.H3>What is the driver behind these perpetual programs?
It’s coming from institutional investors. There are sovereign wealth funds like GIC which are not really pressed to sell their investments. Their view is, “why go along with a 10-year program? We want to hold on to good assets for longer.” But the challenge is that not every fund has a full-fledged investment team to execute those investments and manage those assets. So private equity firms like KKR and CVC are creating innovative solutions to allow institutional investors such as sovereign wealth funds access to these assets and enjoy the dividends from these good quality assets over a long time.H2>The Fundraising Process
Fundraising is part- ‘systems and process’ and part- ‘art of dealing with people’. My skill sets from EHL and the hospitality industry have benefited me in the fundraising space, with a lot of interaction, presentation skills, and convincing and negotiation. At the same time, it also involves a lot of legal knowledge to negotiate with the client in specific terms.
The fundraising process, in a nutshell, depends on whether it’s a first-time fund or second-time fund. The performance of the product will dictate how you set up the new fund with the pipeline of transactions. That will determine how easy or difficult it will be to raise funds. But the secret to it is timing; coming out to the market to fundraise at the right time will give you a higher success rate than anything else. If you’re coming on during the off-cycle and there is only one competitor rather than ten, the likelihood is that you will both get commitment, and a bigger one at that. There are also documents you need to prepare, such as the investor presentation and the PPM (Private Placement Memorandum) and LPA (Limited Partnership Agreement) documents etc.
I think the main things are management fee rates, carry rates, and hurdle rates. Some of the common themes that we see in terms of negotiation are no-fault divorces, as well as negotiation around GP catch-up. The maximum time you have is typically 18 months from the initial close to the final close, with a possible 3 months extension. But given the current environment, it’s very much bipolar – firms with good performance and reputation are raising capital within 6 months, while those which are struggling can take more than 24 months.