Mid-sized businesses with robust business models
Houghton Street Partners specialises in control buyouts of Asian mid-sized businesses of between US$25m and US$250m in enterprise value. The mid-market segment is typically characterised by privately held companies that are mostly “undiscovered”, “overlooked”, “restructuring” opportunities or potential “roll-up” plays. Through its proprietary screening methodology, Houghton Street Partners combines fundamental research and deep local knowledge to identify companies that fit this profile from c. 18,000 mid-sized companies in the Core Countries for inclusion in its target list. Houghton Street Partners’ value-oriented and sector agnostic approach seeks undiscovered, overlooked, restructuring and potential roll-up plays with robust or potentially robust business models that meet the following requisites: (i) operates in attractive industries with typically large potential market size, positive macroeconomic and/or secular trends and favourable market structure such as high barriers to entry, (ii) sustainable market leadership position (i.e. domestic/regional champions with access to large domestic/regional markets or leading exporters with competitive advantages in international markets), (iii) robust financial position including healthy margins, recurring cash flow and strong balance sheet that can be leveraged while supporting multi-avenue growth of the business, and (iv) motivated seller and strong management team.
Proprietary fundamental research and ICCM super-infrastructure
Houghton Street Partners’ takes a research-intensive top-down origination approach centred on proprietary fundamental acquisition research to minimise reliance on competitive situations such as auctions, “intermediated-turned-proprietary transactions” and limited intermediary deal flow. The Firm achieves this through its heavily invested Intellectual Capital, Computation & Methodologies (“ICCM”) super-infrastructure which has at its core an artificial intelligence predictive system driven by investment rules, databases and fundamental research that guides the origination of high quality investments as well as the generation of operational improvement and exit opportunities in the portfolio monitoring and exit stages. The Firm’s ICCM super-infrastructure provides a distinct competitive advantage in sourcing and executing high quality investments by generating proprietary target screens through (i) applying systematic top-down fact-based analysis and use of computational filters and analytics to its proprietary knowledge base and mid-market database complemented by (ii) bottom-up origination through the Partners’ deep business networks and market experience. This super-infrastructure also keeps the Investment Team highly coordinated in its hub-and-spoke model whereby investments originated by local partners are passed through the same filters and analytics to minimise country bias and promote a portfolio approach to evaluating potential investments. In the past, this systematic and proactive approach has enabled the Firm’s leadership to acquire good companies at attractive multiples, and conduct due diligence, negotiation and structuring processes in exclusivity.
Pure Control Portfolio
Houghton Street Partners believes that control-oriented private equity investment firms outperform growth capital private equity firms during both downturns and bull markets. The Firm’s absolute discipline and adherence to a pure control regime enables it to unlock value effectively through the implementation of value creation initiatives as well as to restructure if and when required. Control transactions may either be in the form of majority transactions or leading minority stakes with alternative control or alongside other financial sponsors that, as a consortium, collectively control the underlying investments. The track record of the Firm’s leadership demonstrates the Firm’s ability to set up and work with consortiums for investments that have generated above average returns. As a control investor, Houghton Street Partners adopts a hands-on approach to actively manage its portfolio companies via its Functional Improvement and Transformation (“FIT”) framework and working with management teams to develop and implement value creation initiatives covering functional areas such as strategic development, IT strategy and digitisation, process and organisation redesign, accounting systems and innovation design and advertising.
Macroeconomic country allocation
Houghton Street Partners’ macroeconomic research and pan-Asian geographical coverage and dynamic country allocation approach allows it to take advantage of pricing mismatches and arbitrage opportunities that arise from different economic, market and industry cycles across countries, as well as seasonal changes in competitive intensity posed by other private equity firms within each country. This gives the Firm flexibility to construct a portfolio consisting of the most attractive buyout opportunities across the Region, supported by locally-based teams in Southeast and Northeast Asia who are strategically positioned to access attractive investment opportunities at the country level while integrated within the broader Firm network, super-infrastructure and regional macroeconomic outlook. The local teams are supported by the Transaction Team (defined herein) in Singapore who manages all deal executions and negotiations. This super-infrastructure distinguishes the Firm from other mid-sized private equity firms that tend to have self-contained country teams. Houghton Street Partners believes that its approach provides insights that local teams do not possess and better mitigates the risk of over-paying for deals.
Proximity and deep extensive local networks
Complementary to Houghton Street Partners’ systematic top-down deal identification approach, its bottom-up origination process is driven by its proximity advantage and deep extensive local network of contacts the Partners and members of the Strategic Advisory Board (“SAB”)(each as defined herein) bring to the Firm’s sourcing network. As residents of their respective countries, they have developed and fostered strong industrial, financial and political contacts over the years. Houghton Street Partners’ network includes distinguished advisers comprising former prime ministers, deputy prime ministers, finance ministers, bank governors and prominent corporate leaders. The Firm also seeks to proactively create investment opportunities by establishing relationships with leading entrepreneurs and management teams in advance of a potential buyout transaction. As a result of their long-term and proactive approach to relationship building, the Firm’s Partners have distinguished themselves as a partner of choice for management teams, entrepreneurs and family-owned companies in Asia.
Low variance portfolio
Houghton Street Partners will target a narrow band of absolute returns of 25% per annum Internal Rate of Return (“IRR”) and 3.0x Multiple of Invested Capital (“MoIC”) while minimising volatility across market cycles. The Firm subscribes to a “zero-dog” policy and therefore does not believe in the singular pursuit of “homeruns” which increases volatility and risk to the Fund. The Firm believes that pricing discipline is key in avoiding “dogs”. Pricing discipline is also driven by a clear exit strategy formulated as part of deal execution. The Firm intends to build a portfolio of robust investee companies to mitigate downside risk. The Firm uses a flexible financial structure in its investee companies with leverage at an optimal level, which allows its portfolio companies to continue to grow.
Financial and operational leverage with debt discipline
Gerald Leong is one of the pioneers of classical LBOs in Asia, which typically involve control or joint-control with stakes of between 50% and 100% as well as non-recourse acquisition finance being secured early in the deal. Houghton Street Partners uses a mix of financial leverage and operational improvement to enhance deal returns as well as instill debt discipline to focus management on their core business and performance targets. As such, the Firm targets companies with limited access to bank debt, sub-optimal financing structures and operational improvement potential. Houghton Street Partners’ has over the last two decades, evolved to become a debt specialist in Asia and has developed strong banking relationships for non-recourse financing of mid-sized businesses. The Firm believes it is one of the few Asian mid-market buyout firms with this unique capability to raise acquisition debt, allowing it to effectively apply debt discipline and possibly benefitting from the c. 13% IRR leverage advantage on top of its leverage in operational improvements.
Houghton Street Partners’ investment policy is built upon strong fundamental research and relies on seven investment principles to help guide the Firm in seeking above benchmark returns for its investors.