In the last couple of years, higher interest rates and broader geopolitical uncertainties have cast a dark pall over the once-bustling private equity (PE) space that saw a recent peak in 2021.
Global fundraising last year dropped by 22% and the amount of “dry powder” as a proportion of total assets under management (AUM) increased yet again, indicating a more cautious stance in deploying the funds, according to consultancy McKinsey.
However, new firms in the PE space are still getting off the ground, finding and doing deals in their niche areas when they identify appropriate trends and sweet spots. Of course, having substantial backgrounds and relevant experience helps.
Take the case of PrimeMovers Equity, which was set up recently by Goh Soo Jin and Randy Teo. The founders bring to the table not just financial chops but also actual operational experience in managing companies similar to or larger than the companies the firm is investing in.
Before venturing into PE via their own firm PrimeMovers, Goh was with the likes of Standard Chartered. Teo, meanwhile, was running multi-billion operations for the likes of Stanley Black & Decker. Both men were colleagues at Platinum Equity Asia.
Teo sees his experience in the broader manufacturing industry as something he can offer when dealing with investments and when speaking to business owners. “We are not just a financial sponsor coming in just for the sake of making a return, we are here to help take care of the people. That’s how we can execute what we have invested and what we are doing.”
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In May last year, along with Lingotto Investment Management, PrimeMovers took a controlling stake in Penang-based EngTek Group, which focuses on die-casting and precision-machining components. The deal valued EngTek at $150 million. Within months, EngTek, with the backing of PrimeMovers, set out to acquire the Philippines business of Japan’s Asaba Manufacturing. The deal is expected to close this quarter. The two entities complement each other in geographical presence and customer base.
From the perspective of Chiam Tao Koon of law firm Ashurst ADTLaw, capital markets are getting increasingly crowded — both for funds finding a worthwhile place to deploy and businesses looking for a reliable investor to bring in more than just money.
Chiam, who runs the law firm’s M&A practice for Southeast Asia, believes that PE firms such as PrimeMovers, which he had advised in both the EngTek and Asaba deals, are increasingly sophisticated and focused, eschewing the throw-and-see-what-sticks approach. Instead, they are sharply focused on where they can be involved to bring value in growing the businesses together.
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Nonetheless, despite the shift towards greater specialisation, Chiam sees overall investment activities, especially cross-border deals, growing in line with the broader trends. “I expect to see growth across sectors because of that capital flow into the region,” he says.
The right trends
From Goh and Teo’s perspective, the business they are in is riding on a couple of broader themes. First is the so-called China-plus-One strategy where manufacturers are compelled to set up at least one alternative site outside China, which used to be the main activity hub for years. Asean countries such as Malaysia and Vietnam are among the favourite secondary locations.
Together with favourable policies to draw in such new capex, Southeast Asia is increasingly seen as a “much more investible” region compared to 20 to 30 years ago, says Goh.
There is another growing trend PrimeMovers sees: Many entrepreneurs across the region founded their companies in the 1970s and 1980s and built them up with their collective will and effort, benefitting the regional economy. These founders are now looking to retire although not every business will have a next-generation family member ready or willing to take over.
The alternative is to sell their equity to other investors and entrust professional managers to bring their decades of work to a higher level. “This has become a very fertile and fruitful hunting ground for us,” says Goh. “We have many interesting opportunities to team up with business owners to help them transform their business from bad to good and from good to great.”
In the case of PrimeMovers, owners are looking for investors who can bring more than just money. Teo, in particular, had extensive operational experience growing and running multinational companies, which fits the bill just fine. “We are operators first, then investors. That’s our DNA,” says Goh.
Goh recalls how he and Teo convinced EngTek’s chairman and CEO Teh Yong Khoon to do a deal by telling him that the business needed to pivot and that they could help. EngTek had mulled over an IPO but that would not be a clean exit for other shareholders, which apart from other family members, included an external investor who had invested in the company for 11 years and was understandably eager to lock in his profits and sell. Following the sale, Teh retains a 30% stake and remains in charge of running the company, making his interests aligned with PrimeMovers.
Nevertheless, the “perfect opportunity” to buy over the Philippines operations of Asaba came about almost immediately. The Japan-headquartered company was similarly managed by a family, with a brother in his 70s heading the targeted subsidiary in the Philippines.
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Again, tapping their operational expertise, the partners at PrimeMovers managed to convince the family controlling Asaba that they had a sound plan to integrate the two businesses and explain why it made a lot of strategic sense to do so.
The way Goh puts it, Asaba’s key priority was to make sure that existing customers, including automotive parts giant Denso, would be well taken care of after the deal and not about extracting the maximum price from EngTek. There was also reputational risk involved if things turned south for Asaba’s long-time customers following the sale, explains Goh.
After the initial contact, things moved pretty quickly, including visits to Japan where the chairman of Asaba was able to meet Goh and Teo face to face and declare that he had already felt a sense of common purpose and comfort even before the deal was signed, sealed and delivered.
As Goh explains, Asaba’s acquisition made sense for EngTek in multiple ways. The latter is a leading operator of die-casting and machining in Malaysia but has a relatively small presence in the Philippines with machining.
By buying over Asaba, EngTek is acquiring not just competency but also new markets and if the two companies work closely together, the teams could identify synergies in cross-selling opportunities and cost savings.
Teo believes PrimeMovers is helping with a goal bigger than just hitting ROI (return on investment) targets. He thrives in helping people working in portfolio companies grow and flourish at the professional and personal levels. “And that’s a joy,” he says.
For all the optimism the PrimeMovers partners might have, it is worth pointing out that the global manufacturing sector has seen better times — especially the semiconductor segment, which is in a downturn following the post-pandemic boom.
Goh maintains that both EngTek and Asaba are “growing very well”. Rather than worry about downturns, Goh and Teo want to help the companies accelerate their growth by focusing more on potential customers who can give more business and how the combined entities can offer more to these same customers. Besides Denso, another customer is Sonos, which distributes and sells high-end sound systems.
According to PrimeMovers, there were plans to do a capital call to fund the Asaba acquisition but that was called off after EngTek was able to generate cash internally using the growth, transformation and operation framework PrimeMovers had drawn up and implemented.
Here to stay
Goh believes that the Asean-plus-One strategy, which creates a conducive environment for PrimeMovers, is not a fad but a strategic pivot that is unfolding over the medium term.
Regardless of whether the Democrats or the Republicans are in control of Washington DC, US politicians from both parties agree China is seen as a strategic competitor and not the partner it used to be. This means US policies are not necessarily in the best commercial interests — including that of US companies and consumers — as domestic politics hold sway.
In the broader context of history, such shifts in strategic orientation will take time to change. Thus, manufacturers, in a bid to make sure they can still trade with both China and the US, must have an alternative base in Asean. “Significantly, you have to diversify beyond China,” says Goh.
Geopolitics apart, the experience of lockdowns and disruptions during the pandemic is still vivid in the memories of manufacturers who now know better than to put their eggs in one basket. Teo, drawing on his experience, points out that Seagate, the leading hard disk maker, is served by suppliers from three different regions — the US, China and Malaysia — to ensure sufficient parts in the supply chain.
When pointed out that setting up additional capacity in different countries could incur a lot of additional capex and risk under-utilised production lines, Goh and Teo point out that this challenge can be mitigated with a newer generation of factory automation capabilities, which helps factories operate more efficiently and nimbly.
What next?
Having done these two deals in quick succession, PrimeMovers are already looking ahead for their next moves. According to Goh, the firm remains focused on the manufacturing space within Asean, and talks with prospects are ongoing.
And, of course, as a private equity firm, the end goal for each deal is a beautiful exit and to give its investors a handsome return. Goh and Teo are not committing to a firm exit timeline for both deals but suggest that a typical exit will take place after three or four years. For now, the focus is to grow both companies and transform them from “good to great” and worry about the exit later. “In the meantime, let’s get down to the fundamentals, let’s do honest work, and then let the results speak for itself,” says Goh.
