ingredient Success Ingredient Stephen Law TPG 14 January 2010
A PLUS Company coach TPG s Stephen Law tells Helen Luk that developing growth companies is his true calling Photography by Mike Ho Stephen Law s job is in a way similar to that of a football coach: A coach identifies players that have the best potential, trains them well and sees them flourish; the club may then reap a huge profit by selling the top players for millions of dollars. What a coach does with his footballers, Law does with companies. As an executive director of TPG, one of the world s three biggest private equity firms managing funds worth around US$50 billion, he looks for good investment opportunities in North Asia, acquiring growth companies, building and revamping them before selling them to the right buyers. Working in private equity requires steady nerves, Law says. I need to manage my portfolio companies well and sell them at the right price, the right time to achieve a satisfactory return, he says. Very often, we spend a few years on a company, watching it grow into a bigger company and experience the ups and downs with its employees so that we all make a profit in the end. There are a lot of obstacles as well as satisfaction. Law, a chartered accountant who qualified in the U.K., joined TPG in July 2006 after working for private equity firm Morningside Group for six years. He is in charge of managing a fund targeting growth companies involving deals of up to US$100 million each in mainly Greater China and Vietnam, another buzzing emerging market because of its cheap production costs and sizable workforce. Happy deals in Vietnam The first deal he struck after joining TPG was preparing the listing of a leading Vietnamese information technology company, FPT Corp., in Ho Chi Minh back in 2006. TPG and a co-investor owned a US$30 million stake in the company. We sold most of our stake nine months after our investment, earning a profit three to four times of our entry cost, he recalls. Two months ago, Law helped arrange the initial public offering of another TPG portfolio company in Vietnam, Masan Group, which owns food manufacturer Masan Food and Techcom Bank, of which HSBC is a strategic partner. The sale of a stake in a portfolio company by a private equity firm is known as an exit within the industry. Big, global private equity firms usually spend three to five years beefing up a company s operation before selling. We are not speculating on a company, but we are hoping to benefit from a company s long-term growth, he says. TPG brings to these companies professional managers and a strong global network of contacts. We can offer expertise to boost their profit margin, source more clients for them, identify appropriate employees and other value-added services, he says. For example, if a company needs to conduct an IPO, we have good connections with investments banks, January 2010 15
Success ingredient Stumbling into accounting Like many Hong Kong students who studied engineering in the U.K. in the 1980s, Law, whose father was an engineer, stumbled into accounting by accident. He graduated from the University of Birmingham in 1984, the same year China signed the Joint Declaration with Britain to resume its sovereignty over Hong Kong 13 years later. Because there was so much uncertainty about the city s future, Law decided to stay in Britain and applied for a job as a chartered accountant trainee with Arthur Andersen. After the Joint Declaration was signed, the prospects of the civil engineering industry in Hong Kong looked very gloomy, he says. I then heard that accounting firms would recruit non-accounting graduates as trainees, so I decided to give it a try and succeeded. Coincidentally, the course of Law s career seems to mirror key turning points in the history of China and Hong Kong. One of these was the 4 June 1989 pro-democracy movement in Beijing. Like many overseas Chinese, Law was in Britain at the time, anxiously watching the event unfold, which eventually prompted him to quit his job and return to Hong Kong. I was very concerned about what was happening in China. I was watching news on television about the former president of the Soviet Union, Mikhail Gorbachev, visiting China and the student protests that followed, he says. I wanted to come back to see my family and assess the situation. Upon his return, he joined KPMG in Hong Kong as an audit manager and worked there for 18 months. Hoping to broaden his skills beyond auditing, Law left the Big Four firm to work as the regional financial controller of Acer Consultants, a civil engineering consultancy. In 1995, when China s transformation into a global economic powerhouse was gathering pace, Law seized an opportunity to foray into the mainland he became Wheelock and Co. s investment control manager, collaborating with foreign multinationals for investments in China. During those two years, Law learned the intricacies of doing business in the mainland, which, in some cases, required skills stretching far beyond his accounting and financial knowledge. He cited the example of Wheelock s 50-50 joint venture with Australian top brewery Foster s to acquire a state-owned brewery in Tianjin, where Law and his business partners had to turn their attention to a seemingly minor production glitch. One problem we had at the time was the sub-standard quality of glass, which caused a lot of beer bottles to break during production, Law recalls. So we needed to figure out how to improve that. His China experience set the stage for his future career moves. At the time of Hong Kong s handover to China on 1 July 1997, Wheelock s top management transferred Law to its subsidiary, i-cable Communications Ltd., because of his outstanding performance. During the three years he worked there, Law spearheaded a multibillion-dollar project exploring the feasibility of introducing two new business lines broadband Internet access and voice-over-internet protocol or broadband phone services. Law also played a key role in preparing i-cable s dual listings in Hong Kong and NASDAQ in November 1999, making it the first Hong Kong company to list on both exchanges simultaneously and raising US$500 million. All of this frontline work cooperating with multinationals in joint ventures, improving the company s revenue and preparing for the IPO allowed me to gain a lot of satisfaction from my work. I like leading the company forward by doing something new, he says. Law credits his accounting background for enabling him to succeed in his roles as an auditor, an in-house company accountant, a chief financial officer and now as an investor, where he has to regularly review a lot of businesses. Behind every business is a bunch of numbers, financial statements and disclosures. If you have an accounting background, you ll be able to interpret the data and gain a much deeper understanding of a business finances. It s good business training, he says. accountants and lawyers to help them. A new survey released last month by the World Economic Forum shows that industries where private equity funds have been active in the past five years grew more rapidly than other sectors in terms of total production, value-added services and employment. The study examined the impact of private equity investments across 20 industries in 26 Organization for Economic Cooperation and Development countries between 1991 and 2007. Bringing in a CEO Apart from integrating elements of a business and shoring up its accounting practices after investing 16 January 2010
A PLUS in a company, Law says one of his top tasks is to introduce good corporate governance measures. This includes putting in place a reporting structure with a proper audit committee and board of directors, and setting performance goals. Very often, the first person we hire for the company is the CEO or CFO; without a good CEO or CFO, the good practices cannot be implemented, he says. For example, if the company is not using a Big Four auditor, we ll help them switch. Law was so successful in revamping an outdoor advertiser listed on the Hong Kong stock exchange, Media Partners International Holdings Inc., that it became the first growth enterprise market company to win one of the top prizes at the Institute s annual Best Corporate Governance Disclosure Awards in 2004. Media Partners, a portfolio company owned by Morningside at the time, was eyed by JCDecaux, the top outdoor advertising company in China, which bought and privatized it in late 2005. Media Partners had such good corporate governance practices that after the buyer did a background check on the company, they didn t even bargain down our asking price and just bought it, says Law. Despite the benefits of good governance, some companies, particularly family-run businesses, still regard it as a cost and may resist implementing the changes an outside partner like TPG suggests. It is our responsibility to explain to them the importance of corporate governance and its benefits. Once they see the changes bring about good results, they will appreciate our work, he says. The China pie With other household private equity names such as KKR (Kohlberg Kravis & Roberts) and The Blackstone Group all vying for a piece of the China pie, Law admits TPG is facing keen competition. Apart from foreign private equity companies like us, more home-grown private equity companies are also emerging, he says. Competition has become more intense, so we have to work harder on sourcing the right investments and growing the portfolio companies in order to achieve our target return. The number of venture capital and private equity firms in China has risen from 50 in 1995 to more than 300 now. Law predicts that the value of private equity deals in the mainland will jump tenfold to more than US$100 billion within a decade. Profile Stephen Law 1981-84 Obtained Bachelor of Science degree from the University of Birmingham 1984 Joined Arthur Andersen as chartered accountant trainee in Birmingham, the United Kingdom 1989 Returned to Hong Kong and joined KPMG as audit manager 1991 Became regional financial controller of Acer Consultants, a civil engineering consultancy 1995 Joined Wheelock and Co. as investment control manager; obtained MBA from The University of Hull 1997 Transferred to i-cable Communications Ltd., Wheelock s subsidiary, as senior manager in charge of corporate finance and development 2000 Joined Morningside Group as director 2006 Became executive director of TPG To cope with the growth, TPG is shoring up its presence in Asia, in particular China, a key focus area. We are expanding and hiring more staff in Asia this year, says Law, though he declines to give exact figures. The executive says he is exploring China deals in consumer and retail, infrastructure, energy (both traditional and alternative), technology, and healthcare and pharmaceutical industries with huge growth potential and tipped as rising stars. We hope to see our portfolio companies in Asia experience rapid growth in value and profit in the next few years, Law says. By becoming their shareholder when they are still young, we can reap a bigger profit when they grow bigger. Family objections While Asia s growth potential is tantalizing, private equity in the region is still a long way from reaching the level of maturity in developed markets like the United States, where the model of leveraged buyouts has helped private equity firms generate multiple returns worth billions. In China, the strategy doesn t work very well because takeover rules are very stringent and deals tend to involve buying minority stakes only. January 2010 17
Success ingredient Unlike an accounting firm, which has regular fee income every year, in our industry, our efforts may not yield definite returns. After performing due diligence and investing in a company, we have to wait for years before we can reap our profits. In Asia, especially China, many companies are familyowned and may not want to sell a controlling stake to foreign private equity firms. This is very different from the U.S., where it s a lot easier to do buyouts, he says. The upside is because the deal sizes tend to be smaller in China and Asia, Law says there is less of a need to do leveraged buyouts and TPG can often do the investments alone. We have enough capital to carry out the deals on our own, he says. The abundance of funding also leaves private equity firms in Asia in a safer financial position. When the financial crisis hit, our portfolio companies were not highly leveraged. So our company is less likely to suffer from cash flow problems and go bankrupt, he says. The crisis has granted private equity firms some bargains by allowing them to buy stakes in their targets more cheaply, thanks to lower valuations. Law cites the example of his recent US$50 million investment in a private Chinese oil exploration company, which he declines to name because preparations for an IPO are underway. He is expecting a tidy return because he was able to close the deal at a more favourable price than before the crisis. Surprisingly, Law says the biggest sources of competition he faces in the mainland and Taiwan markets are not from other private equity firms but some of the hedge funds and private companies. Unlike big foreign private equity firms whose due diligence for a deal can take months, he says some of his rivals can often make quicker offers to sellers. Some mainland companies need us to make a quick investment decision and I may not be able to do it, he says. Law says some of his rivals can take more risks and sign deals without imposing as many mechanisms to protect their investments. We, however, need to ensure a higher rate of success with our investments. Sometimes, we need to give up a deal because of this, he says. Even worse, rivals may snatch a deal at the final stage this happened to him when he was negotiating a buyout of a Taiwanese financial services company three years ago. We offered a lower price to acquire the company and met with the Taiwanese regulators, whom already gave their nod. We implemented a trust scheme in the proposal to protect our investment, but we lost out to a family-run company at the last minute because they were willing to buy the company without the guarantee of such a protection, he recalls. I was really, really disappointed because I negotiated the deal for months. Law says it can be very frustrating to spend a whole year working on deals without succeeding in any. Unlike an accounting firm, which has regular fee income every year, in our industry, our efforts may not yield definite returns, he says. After performing due diligence and investing in a company, we have to wait for years before we can reap our profits. It s a very intensive process. But that s also where the fun lies seeing years of work bear fruit and yield handsome rewards in the end. Each deal is different and that s why it s fun, he says. We are in a business to help other companies become rich. I always tell the portfolio companies that we are riding in the same boat with them. If they do better, our stake value in their company will be worth more. A deal should benefit all parties. Otherwise, it s not a good deal. 18 January 2010