People getting pickier about value
By Paul Mackintosh - 02/09/13
The recent closure of the second Asia Pacific fund of L Capital, the LVMH Group/ Groupe Arnault and YTL-backed luxury goods-focused sector investor, at US$950 million, just six months after launch with only one close, seems a good opportunity to reflect on that entity and on sector funds in general in the region. And although claims that the second L Capital fund is the largest sector vehicle ever raised in the region look a little overblown in the light of China's many industrial investment funds, to say nothing of the various infrastructure and real estate platforms raised in recent years, it certainly is one of the most conspicuous, and eye-catching.
For one thing, the new fund and its lightning closing triumphantly refutes sceptics who wondered whether its proposition would ever fly. Whatever its sectorial ties to its parent, it does not need LVMH money: the parent group only contributed about 10% of the final total, according to public statements by Managing Partner Ravi Thakran, and the great majority came from institutions worldwide. Furthermore, Mr. Thakran claimed that the fund had limited partner (LP) expressed interest of over $1 billion, but decided to stick to its target.
Commitments like that into a second fund are obviously based on results. L Capital found ways to invest its $635 million first fund and exhibit performance that had LPs coming back for more. And they did it by targeting not only obvious choices like Chinese domestic cosmetics brand Marubi or Singapore's Sincere Watch, but also unexpected opportunities that just turned out to fit its bill. Australia, particularly, yielded often world-class entities like clothing and lifestyle brand RM William that are hampered by a small, geographically remote home market. North Asia and Greater China also offered attractive assets stymied by their relatively stagnant home markets, but where L Capital saw the chance to use its networks and domain knowledge to add value.
For value add is the key in the sector thesis, and it is the area where the previous generations of private equity firms have had the most trouble. Now that their kind of capital is no longer news, and almost all the ripe low-hanging fruit have been plucked, generic plain-vanilla funds across the region, but especially in markets like India, face a struggle to exhibit value in growth environments where no one ever especially had to look to leverage to generate returns. This ought not to be as much of a problem for the industry as it apparently is, but fundraising figures regionwide and beyond show that people are now far pickier about value – potential investee companies and LPs both.