In this episode of China Money Podcast, Huaming Gu, co-founding partner of Baird Capital Partners Asia, talks about his fund's fund raising during the depth of the financial crisis, and how his firm works with small and medium enterprises in China to clean up corporate governance and establish financial discipline, while hoping to achieve nice returns.
Listen to the full-interview in the audio podcast, watch the shortened video version, or read a transcript summary.
Q: First, give us a brief introduction of Baird Capital Partners Asia and your strategy?
A: We are a China-centric growth equity fund that is dedicated to the small end of mid-market. We invest in three sectors: health care, manufacturing and business services, where we have deep knowledge globally.
We look at companies with EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) north of $2 million. We take significant minority stakes and work with the company to improve the business.
Our current fund has $75 million under management in China. Globally, we have $2.4 billion under management and have invested in over 250 companies.
Q: China's private equity industry faces many challenges right now. Many fund managers say that right now is the time for private equity firms to add value. What have you done to deepen your own niche and create value?
A: For us, it's actually a good thing. We never bank on IPOs as our primary exit route. We are more toward building a business for M&A exit. We are very operational intensive. We tend to look for companies that we can help them to make them better. We are investing more into operating expertise to our portfolios, an essential part of our strategy. For example, we add an in-house financial director to a portfolio company and try to put in place financial discipline at the company.
Q: What kind of specific financial discipline do you try to instill in the company?
A: The companies we invest in are smaller companies, which are probably run by an entrepreneur. Often times, they don't have a good financial controller. They probably will have bookkeeper or a cashier.
We go in there to help them to first keep the records straight. We also install the discipline of expenditure, making capital investments and collecting money. Some industries in China are known for longer receivables. We help companies to manage cash flows to support their continued growth.
Q: How do you plan the M&A exit process, and how do you help companies to go through that process?
A: For us, we only invest in those three sectors where Baird understands, part of that is to understand the landscape of those sectors around the global. We have a good mid-market investment banking team where we get market intelligence from. We know who are the potential buyers, in the U.S. or Europe, increasingly they are companies within China.
Q: Your first deal of leading a $10 million investment was in Frontage Laboratories. What have you done and where is the company now?
A: We invested in Frontage, which is a contract research organization for pharmaceutical and biotech companies in China and the U.S. in 2008. We identified a clear path of value creation. We improved the management team by recruiting a CFO and a sales director, replaced the general manager in China operations. We brought an industry veteran to serve on the board, and helped set strategy. Also, we help them to integrate a small add-on acquisition.
Therefore, we doubled the revenue of the company in the space of three years. We are planning an exit through an M&A transaction right now.
Q: In the three sectors where you invest, where do you see attractive opportunities?
A: We still see lots of opportunity at the small end of the mid-market. Take health care, for example, it has two subsectors: medical services and medical devices. We are looking at a couple more medical services deals in the pipeline. China is spending a lot on health care reform and increasing coverage in rural areas, that will promote a lot of opportunities of the service sector.
Q: Current macroeconomic climate is very uncertain. Have your own investment activities slowed?
A: No, our activities have actually picked up. The sectors we are involved in have more layers separated from the macro environment. We like the niche industry and niche leaders. Our first investment was 2008, but we didn't complete our first fund until 2010. We went into the market in 2009 to raise a fund, which is not a good timing. Since then, we have kept the pace of making just around three deals each year.
Q: How are the macroeconomic uncertainties impacting your own portfolio companies?
A: We will finish deploying our fund next year, so we continue to work with our portfolio companies. We just invested in a company that makes instrumentation valves and fittings for oil and gas, petrochemical and nuclear power plants called Xinghe Valve. We are in the process to bring on board a sales director. Companies like that are less impacted by the overall economy. If you are good, you could still manage to find good opportunities to grow faster than the economy and competitors.
Q: It seems like what you are doing for your portfolio companies follows a general formula: helping to install financial discipline, bringing in managers, boost sales; expand its growth. It is definitely a very different kind of value creation than elsewhere?
Q: Yes. We invest in good companies — might not be great companies – but we help them to grow into the next phase. It's typical growth equity and operational upgrade. We also leverage our global platform. For example, we have engaged already a sales representative in the U.S. for Xinghe recently to help grow their sales in North America.
Q: How many companies do you look at that leads to a final investment?
A: Maybe 100 companies might lead to one investment.
We have never done a deal more than 10 times of net earnings. We pay a fair and reasonable price. When we sell, at EBITDA multiples, we can probably command around 10 times EBITDA. By EBITDA multiples, you probably want to go in there at around 6 times. That's because it is now a better company, and companies have to pay for that.
About Huaming Gu:
Huaming Gu is co-founding partner of Baird Capital Partners Asia, a private equity fund focused on China's small and medium enterprises in the healthcare, manufacturing and business services sectors. Previously, Mr. Gu was at EQT Partners Asia, a China-focused buyout fund. Before that, Huaming was the general manager of China sales and marketing at General Electric Advanced Materials Automotive in Shanghai and Emerson Electric.