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This article first appeared in Personal Wealth, The Edge Malaysia Weekly on October 23, 2017 - October 29, 2017

Almost two decades ago, Loong Mei Yin helped many family business owners get back on their feet after the traumatic Asian financial crisis. Today, as deputy CEO of local private equity firm TAEL (The Asian Entrepreneur Legacy) Partners, she continues to partner many of the family businesses in the region to help them grow.

Loong joined UOB Asia, previously an investment banking subsidiary of UOB Bank, as an investment banker in 1999. Many of her clients were family business owners who had to scale back plans due to the financial crisis.

“There were many business owners and families who [faced financial] constraints, but not so much because of their core businesses. In many cases, those were intact and their fundamentals were very strong,” says Loong.

“Instead, it was because they had accumulated certain levels of debt, perhaps in the course of diversifying their businesses. Plus, because the foreign exchange [rates] worked against all of us during the crisis, many of the business owners had to consolidate their business platforms and footprint.”

One family business owner she worked with at the time had been engaged to come up with an ambitious transport project that would transform a city’s transit system, but the financial crisis brought his plans to a halt. “With revenue in the local currency and debt in US dollars, the company had to go through a major consolidation phase. It was an extremely challenging period for the business owner and his management team,” says Loong.

“When we were at UOB, we worked in partnership with them, but we needed to formulate a partnership arrangement that would be bankable and fit our funding framework while meeting their corporate initiatives. For more than two years, we deliberated over various approaches to arrive at an optimal win-win solution. 

“There were days when nothing seemed to work. If the exercise was not successful, the company could be subject to a takeover by other parties.”

But Loong and her colleagues did not want to give up on the client because they believed in the company’s fundamentals. After two years, they finally reached a partnership and funding arrangement, resulting in a corporate restructuring exercise in 2004. 

“It emerged as the eminent player in its sector and today, the group ranks among the top companies on the stock exchange. We continue to partner the business owner and his son, who himself has built and spearheaded a billion-dollar market-capitalisation business,” says Loong.

This is a common story for many of their clients, she notes. But over the years, the region has recovered, with countries such as Vietnam and the Philippines now among the world’s fastest expanding economies. Many of the businesses have recovered and are ready for further growth, which means they are eager for funding.

Owing to the nature of family businesses, several of their clients maintained their relationship with Loong and her colleagues. “During our tenure with UOB, we partnered a number of family businesses to help them consolidate their business platforms and put them on a much sounder footing. By doing so, it really helped us cement the relationships we had with many of the business owners and corporate groups in the region,” says Loong.

“We always subscribe to the belief that when we help others in their time of need, it reinforces our relationships of trust that transcend decades and generations. Some of the regional family businesses we have worked with, such as those in Indonesia and Thailand, are today ranked among Forbes’ top 10 richest in their respective countries.

“After six or seven years at UOB, many of them said, ‘Thanks to your team. You have helped us consolidate our businesses. At the same time, there are so many opportunities in the market, so we would like a growth partner.’”

Recognising the demand for capital and assistance from Southeast Asian family businesses, Loong and her colleagues Michael Sng and Ati Sugiharti decided to leave UOB in 2007 to start TAEL Partners with the aim of funding family businesses in the region. “We were among the early players in Southeast Asia partnering family-controlled businesses as a growth capital private equity firm,” says Loong. 

TAEL Partners does not have a headquarters. The trio are based separately in Malaysia, Singapore and Indonesia to cover the different markets. 

TAEL Partners currently has three funds. TAEL One, which was launched in 2007, raised US$551 million at the final close in 2010. TAEL Two closed in 2014 after raising a total of US$700 million. 

A shariah-compliant fund called TAEL Tijari was launched in 2011 and US$90 million in commitments has been raised to date. The countries TAEL Partners currently covers are Indonesia, Singapore, Malaysia, Thailand, Vietnam, Myanmar and the Philippines. 

Second-generation family business owners

Family businesses in Southeast Asia are considered younger and smaller than their peers in developed markets. In the US, for instance, some family businesses, such as the Ford Motor Co, are already at the fourth generation. But as companies are passed down the generations, family members sometimes cede control to professional managers or other parties.

“In developed markets, a larger proportion of private-sector businesses have institutional investors as major or substantial shareholders, whereas the private sector in Asia’s developing economies tends to be dominated by business owner and family-controlled businesses. These businesses tend to be relatively young in terms of their business cycle, helmed by first or second-generation business owners who are entrepreneurial and growth-driven,” says Loong.

This means that most of the business decisions are still in the hands of the founders and their family members, who have a lot of their own capital at stake. “In our investing space, that is a positive because when we choose them, they will be very selective of us because they have a lot of capital at stake. We jointly put capital into the business so both of us have a lot at stake,” says Loong.

The age of the leaders and companies also determines their style of doing business, she adds. “If the business owner is young, he or she may not have gone through so many business cycles, ups and downs, so they may potentially be less resilient. On the other hand, there may be some businesses where you need the creativity and mindsets of these business owners. So, it depends on the sector you are investing in.”

One factor that has changed the mindsets of family business owners was the introduction of the Asean Economic Community (AEC), says Loong. She has observed an evolution in the mindsets of the business owners the firm has worked with, from its first fund to its more recent fund.

“There is a difference between five years ago and today. At first, these families were all looking to grow, but perhaps the vision was more towards emerging as a domestic champion. Now, they see the potential to grow as a regional champion,” says Loong.

“Also, previously, perhaps the trend was to invest outside of Asean. But increasingly, they wonder why they are going so far away when there are so many opportunities within the region. I see this commonality in the mindsets of our business owners.”

The AEC was introduced in 2015 as part of Asean’s regional economic integration agenda. Loong says the biggest impact of the concept is that it has encouraged business owners to have a regional mindset. This is where she and her partners saw an opportunity for private equity firms to assist and educate family businesses on the opportunities out there. 

“Businesses [in the region] that have been operating in a certain market would still hesitate to go into another market in the region because they are comfortable where they are. Moreover, there could still be a lot of opportunities to grow in their home market. On the other hand, they do see opportunities — for example, in Indonesia, which has a huge population base,” says Loong.

Identifying growing sectors in the region

TAEL Partners’ strategy is to target the growth in consumption and burgeoning middle class in Southeast Asia. The areas the fund focuses on include food and agriculture, healthcare and pharmaceuticals, renewable energy, lifestyle and consumer goods, education and logistics.

Other than the opportunities for growth in these sectors, there are also products with relatively inelastic demand, says Loong. “We tend to cater for the very core needs of people in the region. We believe these will be the more robust sectors because in good or bad times, the demand for things such as food will be resilient. From that perspective, identifying these key verticals helps address the more macro risk factors.”

The focus on urban sustainability is driven by the trend of migration into cities in the region. “A lot of people are moving to cities to look for jobs and better lifestyles. The development of cities run ahead of the infrastructure, so one of the sectors we are investing in is waste-to-energy because as people consume, they generate household waste,” she says.

“For instance, we always think if we put trash in our Alam Flora bin, it disappears. But in reality, a lot of the time, it goes into landfills. Ultimately, as cities start to expand, you will have a limitation of land. We invested in a waste-to-energy plant in Thailand that looks at holistic waste management to convert the waste into organic mixed soil and fertiliser to generate power.” 

The urban sustainability focus is part of TAEL Partners’ adoption of the circular economy concept. With growing consumption, there will be more waste and this will require more infrastructure to manage it. 

“Now that there is a consciousness of sustainability across the region, there are good opportunities. Here we focus on waste-to-energy and biomass-to-energy because in our region, a lot of agricultural waste is generated as well. We have a little exposure to solar. We also focus on water and wastewater treatment and other clean power projects,” says Loong.

In terms of healthcare and pharmaceuticals, the types of companies TAEL Partners invests in vary because each Southeast Asian country is in a different stage of development. In emerging markets such as Vietnam, it invests in hospitals that provide core services while in more developed markets such as Malaysia and Singapore, its focus is on specialist clinics. The private equity firm invests in both types of facilities in Indonesia and Thailand.

“As people get richer, sometimes they want to do something aesthetically related, so we invest in aesthetic clinics in the more developed markets. Also, in more developed markets such as Malaysia and Singapore, they have expertise in in vitro fertilisation. Some of the hospitals in the region are looking to acquire this technology from these countries,” says Loong.

This is where TAEL Partners utilises cross fertilisation and facilitates the sharing of technology between investee companies in different markets. The firm also invests along a supply chain, which means it may invest in a pharmaceutical company in one country and a hospital in another.

Loong says Southeast Asia is a huge producer of food-based products, but many companies could reap better returns if they improved the branding of their offerings. Many of TAEL Partners’ investments in food and agriculture are in Vietnam and Indonesia.

“Hopefully, we can aggregate all of this and perhaps also create a level of branding for our investees’ products so they are able to generate better pricing,” she says. The firm has invested in a tea plantation in Vietnam that exports to regional markets. 

“But when the plantation is acquired by a buyer, they will brand it as their own and after packaging, sell the product to the global market at a premium. Things like this tend to happen, so this is where our industry specialists come in and help them optimise the process and do the packaging,” says Loong. 

“Quite a number of our investees already export regionally and globally, so they do have the required standards. Perhaps they don’t have the distribution channels or packaging to command a premium. This is where we can add value.” 

Going forward, much of the firm’s strategy will be to assist business owners in exporting regionally and to encourage the sharing of technology between countries at different stages of development in Southeast Asia, she says. “The trends would be in the context of the AEC and the shift in the mindsets of business owners. That will thematically drive us in the coming fund, such as the co-investment fund we are looking to exit in 2021.”

Growth partners for family businesses

TAEL Partners views its role as a growth partner of its investees. Together with the business owners, it comes up with a strategy and sets goals. 

“What is crucial is to identify partners who share a common vision with us. We are not passive partners and our investees do not want us to be passive partners,” says Loong.

“Ultimately, I think what is important is that we are able to come up with an investment strategy and management approach that complement and strengthen them and add to our own investment value as well.”

Of the close to 50 businesses the firm has invested in, there has only been a single case where the investee deviated from the plan. In such situations, the firm tries to navigate an optimum exit.

“In identifying business partners, chemistry is a key element. Ultimately, it is a people business and chemistry has to come into play because, as patient capital providers, we and our business partners need to be like-minded in formulating and pursuing the business growth roadmap,” says Loong.

“They are also selective of their growth partner because ultimately, we are going to be sitting on the companies’ boards and putting in place certain governance frameworks. So, I think there must be mutual comfort in each other so that we can ride the good and challenging times together.”

Identifying the right investee also helps mitigate the risks of investing in family businesses, which tend to be very much influenced by the owner and major shareholders. So, instead of looking at the financials first, TAEL Partners’ starting point is always to evaluate the business owner. It also has regular interactions with the business owner, who will update the firm on any developments in the company. 

“If we feel like we have a shared vision, that we can work with them and grow the business together, then everything else will fall in place. We try to mitigate any misalignment of interest with the business owners from the outset by formulating a road map of how we want to grow in the partnership. We try to stick to the road map as much as possible to mitigate the risk where we suddenly have a different vision and business direction,” says Loong.

The goal of the collaboration between TAEL Partners and its investees could include an initial public offering or a trade sale, depending on the wishes of the business owners. “In some cases, we will exit on our own. Or if we do an IPO together with our business partners, they may continue to retain the majority stake in the company. In other cases, we could realise our investment together with our partners via the platform, an IPO or a trade sale,” says Loong.

“In some instances, this may be because their children prefer other businesses or have career options. The exit options are quite varied depending on the profile of the business and the owner. There will also be those who want to pass their business down to the next generation as they want to perpetuate their business legacy.”

The typical exit time frame in private equity is three to five years at the minimum. But it can be flexible when the macroeconomic conditions are not healthy. In this case, TAEL Partners may choose to remain with the investee company until the economy recovers. 

“There could be cases where the industry is obviously volatile. If it is a macro situation affecting industries globally, do we force an exit or do we work with the business owner to ride it out? In some of our select cases, when there is such a situation, we demonstrate to the business owners that we will ride it out with them, and we have been able to overcome some of these difficulties and ultimately, exit at a later time,” says Loong.

Another reason the firm chooses to ride out the tough times with its investees is because its relationship with the companies often does not end with only one investment. “As they grow their businesses, they require more partners. And if you already have an existing relationship of trust, it is always easier to go into the next investment with them — even more so today because many of them have entrenched themselves in the market and are now looking to expand regionally,” says Loong.

“Hence, if they have a success story in their home market, perhaps they think it is scalable in another market in the region. And obviously, we hope to be their first partner of choice.”

Building trust in the relationships is crucial for TAEL Partners. This is the key lesson she has learnt from working with family businesses for decades. 

“Capital is a commodity. The key is how we are able to build a relationship of trust with business owners and embark on a journey together,” says Loong.

“We also admire their tenacity. They are all very gifted with vision. But at the same time, the business climate is never easy and there will be challenges. It is really quite amazing to see some of the business owners. We hope to play our part and not only share in the good times but also to ride out the more challenging times.”

Providing value beyond capital

TAEL Partners is looking to raise a US$500 million co-investment fund alongside TAEL Two, with the goal of closing it by early next year. The co-investment fund is aimed at funding five verticals across the region — agriculture and food, healthcare and pharmaceuticals, education, consumer goods and urban sustainability. 

Within each vertical, the firm will invest in companies at various levels of development and facilitate the exchange of knowledge between investees. Those who participate in the co-investment fund have the option of which verticals and companies they want exposure to.

“Obviously, we could have launched a separate fund. But we decided that we could create a lot more value by establishing regional investment platforms with the five verticals,” says Loong.

“I would say it is partly because Asean is a growing region. At the same time, different countries are in different phases of development, so we are able to encourage strong cross fertilisation among our investees in the region. Those in the developed markets will be able to share their expertise with those in the emerging ones. We can basically breed and foster a lot more collaboration among our investees in the same industry via a platform like this. 

“When we exit via a regional platform, we could also potentially augment our exit valuations by offering trade buyers or IPO investors, for example, a healthcare or pharmaceutical investment company that has stakes in businesses throughout Asean, as opposed to a company focusing on a single market.”

TAEL Partners utilises its on-the-ground presence in six countries in Southeast Asia to connect investee companies with one another. They also hire industry specialists to increase the value of their investees’ products. 

“For example, they could help us with branding in the food and agriculture segment, rather than rely on our investees, which are generally agriculture producers that are more adept at selling and exporting. Perhaps with our strong production standards, our industry specialists can come in and help us develop a certain distribution branding,” says Loong. 

“With branding, our products will command a premium and this will be positive for our investees and us as investors. This is where we believe we can add a lot of value beyond just capital.”

TAEL Partners mainly targets institutional investors for now, although some family offices are investors in its funds. Loong says the firm is looking to work with some institutions to set up a feeder fund for sophisticated investors as well. 

“Private equity is a patient form of capital. Investors tend to commit five years to the investment period and three years to realisation of the investment and exit. It caters for institutional investors looking to generate long-term growth and returns as part of their portfolio allocation across asset classes,” she says.

“Whereas for sophisticated investors, they could consider private equity as a form of diversification if they already have investments in money markets, fixed-income securities or liquid shares. Nevertheless, they will have to be comfortable with the fact that private equity is a longer-term and illiquid asset class.”

TAEL Partners is currently celebrating its 10th anniversary. Loong says she and her partners are motivated by helping family businesses grow. “I would say what excites me is that we are able to embark on a journey with family businesses because of the opportunities in our region. What drives me is that at the end of the journey, we are able to walk alongside the business owners to take them to a different level. Maybe today, they are not ready for an IPO. But in five years, they may be.

“It brings a lot of satisfaction to be able to walk this journey not as a passive partner, and when the company goes to that level, we as fund managers can proudly say we have contributed to that growth. That is very much in line with our name to really help business owners to perpetuate their legacy in Southeast Asia.” 

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