In this episode of China Money Podcast, guest David Pierce, CEO of Squadron Capital, a fund-of-funds manager with over US$1 billion-under-management, talks about China's private equity industry in a slowing economy, lessons he learned from investments that have gone wrong, and why his firm doesn't want to become a QFLP (Qualified Foreign Limited Partner) yet.
Listen to the full interview in the audio podcast, watch the shortened video version or read an excerpt.
Q: First give us a brief intro of Squadron Capital?
A: We are a boutique fund-of-funds manager, focused on private equity funds principally in the Asia Pacific region. We also have a separate account program that includes the private equity portfolio of our sponsor, The Research Investment Group, which is the family investment office of Mr. Robert Miller, a co-founder of the Duty Free Shoppers.
Q: What sets you apart from other fund-of-funds in the region?
A: I think it's mostly our longevity in the market. My own experience of investing in private equity in Asia goes back to 1995. Most of the FoFs here, frankly, have arrived in the last few years. So we have a history with GPs (General Managers) in the region, so they are not fearful that we are carpetbaggers who are coming in for a bull market moment. So we are in for the long haul.
Q: You have been in the industry for a long time, so where do you think the PE industry in China is right now, and where is it headed, particularly considering the slowing economy?
A: Right now, there are a lot of uncertainties in the world, with China's economy slowing and troubles in Europe and the U.S. All these make investors and companies more cautious. China's private equity industry has also gone from the go-go period into a period of more reflection. Right now, people are thinking to themselves: Let's think about (our strategies) more carefully. Let's focus on how to create value for the long-term.
Q: Can you give us some examples of the funds that you backed and you are very proud of today?
A: China's private equity market is much deeper and broader than other markets in the region, with strategies ranging from early stage investment to buyouts. So we have the luxury of choosing from different strategies.
At the later stage end, we've invested with Hony Capital for a series of funds now. We identified John Zhao and his team fairly early on before he was out raising money and became famous. Hony Capital has changed with the overall private equity ecosystem. It is focusing increasingly on the things that other private equity firms can't do, such as having in-house consulting teams, and working with portfolio companies to transform the business. So they can do state-owned enterprise restructuring and controlled buyouts.
At the other end of the spectrum (on the growth capital side), we've long been a backer of Orchid Asia. It is a fund founded by Gabriel Li. It's on their fifth fund now, primarily investing in smaller companies to provide growth capital. Their investment process involves finding the right entrepreneurs and finding a way to work with them to transform their businesses through persuasion, rather than control.
Q: Going forward, which strategy do you think will become more advantageous?
A: Eventually, controlled buyouts will become more important in China, but I think we are some years away from that. First of all, there aren't a lot of companies for sale. Good companies that are established by first-generation entrepreneurs are never really for sale. The plan for them is to become a public company. So there are still lots of room for growth capital investing to continue to dominate. But we will see a maturing and deepening of the growth capital sector.
Q: What are your thoughts on the outlook of state-owned enterprise buyouts?
A: It's a very difficult strategy to execute, but those who can execute it should have lots of opportunities.
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