Navis Capital Partners has been making mid-market investments in ASEAN since 1998. Please describe the opportunity set in ASEAN at both the regional and local level, how do investment opportunities vary across the individual markets in which you are active?
The opportunity set Navis pursues in ASEAN is focused on three themes: satisfying consumer needs in sectors where there is pent-up and accelerating demand; creating regional champions from national champions, either by cross-border M&A or organic expansion; and investing in the globally competitive industrial ecosystem of ASEAN, which is particularly connected to China, North America, and Europe.
While it is difficult to generalize about the opportunities across individual economies, the wide range of GDP per capita across the ASEAN economies helps predict periods of accelerated demand for specific goods and services. For example, in Vietnam, with a GDP/Capita of USD3,000, there is currently tremendous pent-up demand for low-cost private education and general health care as millions of households reach the income threshold at which these scarce services become affordable. By contrast, most households in Malaysia, which has a GDP/Capita of USD12,000, are well beyond this threshold, so there is limited growth potential with plenty of private sector capacity to cater to existing demand. Conversely, Malaysia has reached a level of affluence where specialist health care needs are increasing rapidly, hence there is an accelerating need for specialty, as opposed to general, hospitals.
Since its founding, Navis has made over 80 investments across education, health care, consumer goods, retail, and business and professional services. What is the typical size of the firm’s commitments? How do you think about scalability across geographies and synergies across sectors?
Navis targets the mid-market space with an investment size of USD50m to USD150m. The investment size may be smaller when we expect to make follow-on investments to build a multi-country platform or to consolidate a domestic sector.
Building regional champions from national champions is a key theme for Navis. With the establishment of the ASEAN Economic Community in 2015, the strong linkages between the local economies have created a commercial, regulatory, and social environment that is fertile for organic and inorganic cross-border expansion. For example, Evolution Wellness, a chain of fitness centers, has grown from 10 centers across Indonesia and Malaysia at the time of investment to 170 centers with presence in six countries, becoming the largest fitness chain in ASEAN. This expansion has allowed us to benefit from greater economies of scale compared to national and local operators.
Navis is typically a control investor. How difficult is it to find business owners in ASEAN willing to work with PE investors? Does Navis often bring in new management teams?
As a control investor, Navis strives to maintain a reputation as a partner of choice and solution provider for business owners and management teams looking for a fundamental transformation in size, scope, governance, and ultimately in ownership. Often, Navis works with business owners who have come to the realization that cross-border growth is becoming a strategic imperative for their business, but are lacking capital and expertise; or they are thinking of retiring but lack a willing or able next generation to continue the business. About 75% of our investments are self-originated or from approaches by a business owner who knows of Navis. Having exited over 50 investments, we have established a large network of business owners, managers, and employees from our portfolio who serve as advocates and references for the firm.
Additionally, Navis always puts in place incentive plans to promote alignment with existing management teams, while often hiring additional management team members either to institutionalize the business or to support the growth agenda. Today, we have an in-house human capital expert and we pre-plan and often pre-hire before we close an investment. This is particularly relevant when partnering with a business owner who is nearing retirement. As our goal is to exit 100% of the company to a trade buyer, we have to fully professionalize the management team. This means that involvement by the Founder/CEO and other family members, if any, must be on a non-executive basis by the time we exit. This has to be agreed upon prior to making the investment through months of mutual engagement, which is why our investments take 10 to 12 months to complete.
To date, Navis has shown a preference for exits via strategic sales to trade buyers rather than through public markets. What type of strategic acquirers are most active in ASEAN? Please share any examples of recent exits that reflect your approach.
Multinational corporations (MNCs) have generally considered the Asia region a priority for internationalization. While much of the focus and growth has been focused on China over the last two decades, the high and rising wage rates and shrinking working-age population of China have driven a shift to expand the manufacturing ecosystem in ASEAN.
Some of our businesses are global in nature, with headquarters in ASEAN, and these are attractive to MNC buyers. An example is Navis’ investment in King’s Safetywear, a family-run safety products manufacturer that had a low-cost, high-quality production base in ASEAN, and a global sales network across 40 countries. After a five-year partnership, during which we made acquisitions in Australia and Europe, improved procurement and inventory management, and brought in more professionals at the executive level, we sold the business to US manufacturing conglomerate Honeywell, which has a large global PPE division.
How has the onset of COVID-19 affected your portfolio companies? What specific challenges does Navis face in the sectors in which it operates, and how is the firm addressing them?
All Navis portfolio companies went through a degree of stress during the COVID-19 pandemic. At best, it has been a matter of managing business continuity risks such as health and safety of staff and supply chain interruption. At worst, our retail portfolio companies have been facing an existential crisis with little to no revenue as our cinemas, fitness centers, and restaurants were shuttered, and costs had to be aggressively controlled. The challenge was immediate and dramatic cash preservation – not paying landlords and implementing dramatic cost reduction across the board.
We asked many of the senior managers in our portfolio to take little or no salary, while all Navis partners agreed to reduce our own salaries by as much as 90% so that we could look our management teams in the eye as we proposed/imposed life-impacting decisions on them.
Some of our portfolio companies are outperforming by a wide margin – our supermarket businesses are seeing record sales, our educational resources businesses are selling record amounts of educational items for at-home learning, and our medical distribution businesses are focused on meeting additional needs dictated by the pandemic.
We are lucky that a majority of the countries in which our portfolio companies operate took early and decisive measures to control the spread of COVID-19. We also consider ourselves fortunate as our conservative approach to the use of leverage and acquisition financing has enabled operating cash flows to be prudently managed for the business as opposed to lenders.
Several of our portfolio companies are currently deploying capital for organic and inorganic strategic expansion, where follow-on acquisition opportunities are now available as weaker companies falter. We are striving to position our companies so that they may come back stronger once the crisis has ended.