This article first appeared in Capital, The Edge Malaysia Weekly on October 31, 2022 - November 6, 2022

Warburg Pincus, the grandfather of private equity, had its beginnings as EM Warburg & Co, an investment banking and private investment consulting firm founded in New York in 1939 by Eric Warburg. In 1966, the firm was acquired by Lionel I Pincus & Co, a venture capital and financial consulting firm, to form Warburg Pincus, which remains a private partnership focused solely on private equity to this day.

“Warburg Pincus is one of the oldest and largest private equity firms in the world,” says CEO Charles “Chip” Kaye of Warburg Pincus in an exclusive interview with The Edge Singapore at his office in OUE Bayfront overlooking Marina Bay. “We had a public equities business when the firm first started, which was sold to Credit Suisse in the late 1990s. The traditional business of the firm that it is known for, and which has grown substantially over time, is our private equity business,” he adds.

In 2000, Kaye became co-CEO along with Joseph Landy. Both assumed leadership of Warburg Pincus from the founders, representing one of the first generational transitions in private equity. Landy stepped down in 2019. Kaye is CEO with Timothy Geithner as president of Warburg Pincus. Geithner was treasury secretary during former US president Barack Obama’s first term and played a key role in government efforts to help the US economy recover from the 2008 global financial crisis.

The concept of private equity is to find a company with talented people, for which Warburg Pincus can provide capital and with which it can grow and build a business.

“During the early days of the firm, if you were an entrepreneur with a clever idea and wanted to raise capital, there wasn’t a wide variety of places to turn to. There were traditional banks, but they might not have been in that particular business. Warburg Pincus was the true pioneer of the idea that you can raise capital institutionally and professionalise the idea of investing,” Kaye explains.

Private equity is often viewed as the domain of institutional investors, high-net-worth individuals and family offices. For instance, the Liechtenstein Princely family, through their private bank LGT Bank, invests in private equity. Pension funds and sovereign wealth funds are also investors in private equity. All these entities are likely to be the capital partners of Warburg Pincus.

Investing in private equity is for long-term investors as some private equity funds are long-dated with lifespans of 10 years or more. Indeed, returns from private equity depend somewhat on the vintage of the fund or investment. In recent years, Singapore retail investors have become familiar with private equity through Astrea bonds offered to them. The coupons on these bonds are backed by cash flows from private equity funds.

In addition, accredited investors, family offices and the investing public are increasingly familiar with private equity property funds. Over the past 20 years, the likes of CapitaLand, Mapletree Investments, Keppel Capital and ARA Asset Management (now part of Hong Kong-listed ESR Group) offered an array of private equity property funds.

In 2018, the Monetary Authority of Singapore (MAS) allocated US$5 billion to management with private equity and infrastructure fund managers. The rationale behind encouraging private equity to be managed out of Singapore was that fledgling companies on the local start-up scene could benefit from coming under the mentorship of private equity firms and fund managers to grow their businesses.

Warburg Pincus, which has more than US$85 billion (RM400.8 billion) in assets under management (AUM), prefers to focus on thesis-based investing. “We are inclined to know what we want to invest in before it shows up. The whole architecture for the firm is that people living in sectors, domains and geographies have a feel for the megatrends we want to pursue,” Kaye elaborates.

Warburg Pincus also seeks talented people to run these companies. “Our capital is injected to grow those businesses. If we are successful at doing that, we’d find the opportune time to realise the value of what we’ve created, based on market conditions. However, our starting point is more of partnership, business building and growth. This is our greater day-to-day concern,” he continues.

Investing early for Warburg Pincus does not mean being merely involved in the first round of financing. The firm believes in helping entrepreneurs identify opportunities to grow their businesses. “By being here early, we tended to work with early entrepreneurs in this region. They became iconic successes, thereby attracting others that wanted to do business with us,” Kaye points out.

An example of early-stage investing with the firm was in 2011 when Warburg Pincus co-founded a new platform, e-Shang (which means “e-commerce” in Mandarin) in China with two entrepreneurs, Jeffrey Shen and Sun Dongping. In 2016, it merged e-Shang with Redwood, a logistics developer in Japan, to officially form ESR Group.

In 2015, Warburg Pincus sold all of its retail and commercial assets in China, reported Bloomberg. It then grew its New Economy property investments to more than two-thirds of its real estate portfolio.

Warburg Pincus was instrumental in driving ESR’s expansion into South Korea, Singapore, India and Australia through M&A and organic growth. The firm also helped transform ESR’s somewhat heavy property development business into an asset-light real estate investment manager (REIM) model. ESR was listed on the Hong Kong Exchange in 2019. It is the third largest listed REIM globally with AUM of about US$140 billion. According to Bloomberg, Warburg Pincus reaped a more than tenfold return on its investment in ESR.

Last year, CapitaLand Investment (CLI) too followed a similar REIM model, privatising its mainly residential development business and focusing on the development and operations of investment property and alternative assets with a more asset-light approach.

In 2016, Warburg Pincus bought out the minority investors of Singapore-listed ARA Asset Management via a scheme of arrangement, taking a 30.72% stake in ARA valued at S$545.3 million based on the scheme price. This year, ESR completed the acquisition of ARA in a US$5.2 billion transaction comprising shares and cash.

While Warburg Pincus invested in ARA, ESR acquired the manager and a majority stake in Cambridge Industrial Trust, before renaming it ESR-REIT. Subsequently, through a couple of M&A, ESR-REIT was renamed ESR-LOGOS REIT (E-LOG) and grew from an AUM of about S$1.5 billion in 2017 to S$5.5 billion as at June 30.

In March 2020, ARA acquired a majority stake in LOGOS. The latter became the sponsor of Cache Logistics Trust, which was renamed ARA-LOGOS Logistics Trust (ALOG). ALOG was then merged with ESR-REIT in April to form E-LOG.

ESR has since acquired Mitsui & Co’s stake in E-LOG’s manager. It also acquired the stake that Chinese property magnate Tong Jinquan owned in the manager and E-LOG. This makes E-LOG the group’s main perpetual (REIT) vehicle in Southeast Asia. E-LOG, in turn, has access to a pipeline of ESR’s properties in Japan and Australia. This closed-loop system comprises ESR developing logistics, data centre and life science assets via its funds and partnerships, operating and stabilising them, and then offering them as a pipeline to its REIT.

On Sept 9, ESR and GIC announced the extension of the core plus logistics strategy with the launch of EALP III with an equity commitment of A$600 million (RM1.83 billion). EALP stands for ESR Australia Logistics Partnership. The launch of EALP III is a follow-on of predecessor partnerships of EALP 1 and EALP II, which were core plus strategies between ESR Australia and GIC.

EALP I was launched in March 2020 with an equity commitment of A$600 million. This was subsequently followed by EALP II in July 2021 with a further equity commitment of A$600 million. Both vehicles have been invested, with a combined portfolio of 682,016 sq m across Australia.

“Our actual business is much more about trying to understand what’s happening across a range of industries and geographies, and identify those that have tailwinds behind them,” Kaye says.

In Singapore, Warburg Pincus invested in Trax in 2017 and Circles.Life in 2019. Trax provides computer vision solutions and analytics for the retail sector, enabling tighter execution controls in-store through in-store execution tools, shelf-monitoring solutions, market measurement tools and analytics services to unlock revenue opportunities.

Circles.Life is a household name in Singapore. It is the consumer face of Circles’ proprietary Circles-X Operating System (CXOS), a full-stack telco operating system. Circles.Life operates digital telcos and has expanded into Australia and Taiwan.

In 2019, Warburg Pincus co-founded Asia Self Storage with Mike Hagbeck and acquired Storhub. CapitaLand divested Storhub that same year for S$179.5 million to an “unidentified buyer”. Asia Self Storage has since expanded to Australia, Japan, South Korea, Hong Kong, Malaysia and China.

In addition, Warburg Pincus has invested in fintech company Advance Intelligence Group, whose product ADVANCE.AI is used by the financial services sector for digital identity verification, risk products and merchant services solutions for banks.

Elsewhere, Warburg Pincus has a growing presence in Vietnam. In June, No Va Land Investment Group Joint Stock Company (Novaland) announced US$250 million of financing from a consortium led by Warburg Pincus. In 2013, Warburg Pincus acquired a stake in Vincom Retail, a retail mall owner and developer in Vietnam. In 2017, Vincom Retail was listed on the Ho Chi Minh City Stock Exchange, raising the equivalent of US$709 million. It now has a market value of S$3.34 billion. In March 2018, Warburg Pincus invested in the pre-IPO of Techcombank.

In Indonesia, Warburg Pincus co-led the series D financing of Gojek in 2016 and participated in the series E financing of Gojek in 2017. Last year, Gojek merged with Tokopedia, forming GoTo, which was listed on the Jakarta Stock Exchange this year.

Exit strategies do not necessarily mean having an IPO in a public market. In December 2021, the press in India reported that US buyout firm Advent International had acquired for US$1.5 billion a majority stake in Encora, a global digital engineering services company with innovation labs in India and the US. As part of the agreement, Warburg Pincus, which was the majority shareholder of Encora at the time, sold its stake and retained a minority shareholding, the reports said. The Economic Times reported that Warburg Pincus had acquired Encora (formerly Indecomm Digital) in 2019 for US$200 million from Capital Square Partners and its promoters.

“One of the more meaningful companies we’ve sold recently is Encora. It is based in India, with business largely in the US, some in Europe, and a sizeable presence in Latin America. Much of what we do has a global flavour to it,” Kaye describes.

Digitalisation is a theme that pops up time and again among the investment portfolio of Warburg Pincus. As Kaye describes it, in most cases, the investments are in “back-end” digitalisation concepts. In February 2021, the firm invested US$75 million in Personetics, an Israeli company that offers a proprietary AI software platform for banks. Its software analyses billions of transactions daily. These included real-time financial data and the behaviour of customers, with the data staying safely inside the bank’s ecosystem so that confidentiality is guaranteed.

Banks use Personetics’ tools and its low-code Engagement Builder, a creation and management console, to modify hundreds of pre-programmed insights and build customised user journeys. This enables banks to share real-time personalised insights and advice, as well as automated, self-adjustable financial wellness programmes across its customer base comprising both individuals and small businesses.

Customers of UOB TMRW, United Overseas Bank’s digital bank, may be familiar with their personalised interfaces which are supported by Personetics.

“Much of our technology business is about improving productivity and consumer experience for businesses through the advancement of technology. It is particularly relevant in areas like financial services and healthcare, which are also our traditional areas of strength, where we can back either incumbents seeking to respond to the competitive challenge or innovators looking to change the experience for consumers,” Kaye says.

“Globally, the firm has a long history in traditional financial services. We were investing in banks and insurance companies and asset management businesses back in the early 1980s,” Kaye points out.

For instance, Warburg Pincus invested in Capital First in India back in 2012. Capital First was merged with IDFC Bank in December 2018 to become IDFC First Bank. IDFC is a universal bank that provides a wide range of retail loans including business loans, consumer durable loans, wholesale loans and liability products.

In the past eight years, with the rise of fintech, Warburg Pincus has invested in several start-ups, including Personetics and ADVANCE.AI, digital-only banks and payment platforms.

Kaye says, “One of the advantages we saw for ourselves in the so-called fintech [sector] is the ability to bring to bear both a mindset about technology investing, which also boasts a long history in the firm, but also an understanding of what it means to live in the regulated world of financial services.”

In May 2016, Warburg Pincus invested in Varo Bank. In 2020, Varo became the first digital-only or neobank to be granted a national bank charter by the US Office of the Comptroller of the Currency. The process to be granted a national bank charter took three years, with approvals from the US Federal Deposit Insurance Corp (FDIC) and the US Federal Reserve. As an FDIC-insured national bank, Varo can now hold its own deposits. Like all banks, Varo also has to comply with regulatory capital requirements.

“In the US, one of our new digital banking businesses called Varo was the first US fintech firm to ever receive a banking licence. The ability to integrate our multidisciplinary understanding across tech and financial services is an advantage that we have globally,” Kaye says.

In 2018, Warburg Pincus invested in Aion Bank, a digital-only bank in Belgium. That same year, it also took a stake in Ant Group of China. While Ant’s much-hyped US$37 billion IPO did not materialise in 2020, it was granted a digital wholesale bank licence by MAS in late 2020. In June, Ant launched ANEXT Bank, whose focus is micro, small and medium enterprises (SMEs), particularly those with cross-border operations.

Increasingly, financial institutions view Southeast Asia’s rising middle class and its large portion of the unbanked, underbanked and underinsured population as potential customers of digital-only banks, e-wallet service providers and other payment solutions. In addition, the lack of a developed social security system proves an opportunity for insurance companies to offer protection, health and education policies.

In India, Warburg Pincus invested in IndiaFirst Life Insurance in 2019 and SBI General Insurance in 2020.

“In general, if you look at Asia, as the population’s income rises, the opportunity for financial services, whether delivered in the traditional format of banking, insurance and asset management, or in digital form, will become more mixed and hybrid,” Kaye notes.

In Vietnam, in addition to the pre-IPO investment in Techcombank, Warburg Pincus invested in MoMo, Vietnam’s largest e-wallet and payment solutions provider, in 2018.

In November 2021, Warburg Pincus invested in GCash, the largest e-wallet and digital financial services platform in the Philippines. GCash allows its users to send and receive money, top up mobile prepaid cards, and carry out remittance, e-commerce shopping, bill payment and other digital financial services products such as buy now, pay later, cash loans, deposit savings, wealth management and insurance.

Asia is a place where a relatively youthful population use smartphones as banks for money transfers and remittances, debit and credit cards, and shopping and gaming platforms.

“In this part of the world, this advantage is, in some ways, even more relevant, because it is a region that is meaningfully under-exposed to financial services such as payments, asset management and insurance,” Kaye says.

According to Bain & Co, Asia-Pacific set new investment highs for private equity in 2021. Deal value in Japan, Southeast Asia and South Korea more than doubled. Investments in Greater China and India represented 43% and 20% of the total deal value respectively. In addition, breaking with the pattern in previous years, India grew faster than China last year, increasing its share of the overall market.

Asia-Pacific’s share of global AUM rose to 30% at the end of last year. Over the past decade, AUM focused on Asia-Pacific grew 2.4 times faster than North America and three times faster than Europe, which Asia-Pacific passed for second place in 2018.

In 1H2022 though, private equity fundraising for Asia investments slowed from last year’s record pace as investors contend with volatility and other challenges in global markets, according to a press release by PitchBook.

In the first half of 2022, nine Asia-focused PE funds raised US$10.6 billion, roughly a 64% decline from the US$29.6 billion raised by 39 funds during the same period last year, according to PitchBook data. As at end-July, only US$18.5 billion had been raised, setting a pace that, if sustained, is unlikely to surpass last year’s total fundraising value of nearly US$41 billion.

Is the smaller deal flow a result of more expensive money? In the year to October, the Fed has raised interest rates four times: 50 basis points (bps) in March, 75bps in June, 75bps in July, 75bps in September, or by 275 bps in total. The current Federal funds rate is around 3.25% compared to around 50bps as at Dec 31, 2021.

“The slowdown appears to be in line with a broader trend affecting the private equity industry in other regions, in which buyout firms are facing tougher fundraising terrain after drawing a record amount of capital from asset allocators last year,” PitchBook said in an August update. “Shorter intervals between fundraising alongside a challenging exit environment have started to put more pressure on the fundraising prowess of large asset managers.”

Kaye acknowledges this. “There are a lot of risks and issues around the world, but one of the most meaningful is clearly the change in monetary policy. Inflation is a phenomenon that no one has really seen as an investor since the 1970s. It is something new. My personal view is that central banks will know how to deal with this, but we do not yet know how long it will take or how high the rates will go.”

While the Fed’s singular purpose in fighting inflation by quantitative tightening and the interest rate hike cycle is likely to affect markets in general, including the private markets, the strategy of Warburg Pincus is more about finding business partners and entrepreneurs with whom it can grow a business.

What about exit strategies? Will this new environment make it difficult or, at the very least, a lot more challenging to exit an investment? An IPO in a public market used to be a popular exit strategy. Increasingly though, public companies have chosen to privatise. Year to date, the Singapore Exchange (SGX) has experienced five successful privatisations, with about four still in progress. So far, only Frasers Hospitality Trust failed to privatise. On the other hand, SGX has seen eight IPOs, three of which were special purpose acquisition companies (SPACs). In the US, the number of public companies is about half of what it was 25 years ago.

“As an investor, you operate in the macroeconomic framework of understanding the basic construct of how markets are going to behave because private equity is a derivative of market activity. As for how [the interest rate cycle] affects our behaviour, the answer is: It is a framework and not something we ought to worry about every day,” Kaye says.

Goola Warden is executive editor at The Edge Singapore

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