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Changing investment landscapes: classical traditionalists vs. new age strategists

Posted by on 19 February 2018
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In recent years, we have seen a change in the approaches used by big players in private equity  investment, where they move from being pure financial investors to strategic investors. Is this set to be the trend? And how will this play out on the future investment landscape?

PT Go-Jek, the Indonesian based ride sharing app, has an all star roster of investors. Its board members include executives from KKR, Sequoia and Warburg Pincus. Sequoia is perhaps the most respected name in venture investing in Asia. Warburg Pincus has always had growth equity investing in its DNA at home and in Asia where it has one of the best portfolios. KKR is perhaps the most successful of all the big listed private equity firms in Asia as the might and the speed with which it raised its $9.3bn Asia fund shows.

Go-Jek is currently locked in battle with Grab, the Singapore-based Southeast Asian ride sharing app for dominance in Indonesia. And while Grab may like the star power of some of Go-Jek’s investors, it has its own powerful backer in the form of Masayoshi Son and Softbank.

Softbank has a reputation in Asia for writing the largest checks on both sides of the Pacific, giving entrepreneurs globally the highest valuations in the process. It can afford to do so since it has about $270bn to invest, according to estimates from McKinsey, through its own balance sheet, its Vision Fund and the cheap capital it can borrow from Japanese banks.

Today, Softbank, along with Tencent and Alibaba are changing the investment landscape globally, posing new challenges for private equity and venture capitalists on the one hand, and start-ups on the other.

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Changes to the traditional investment model

Traditional private equity and venture firms are purely financial investors, seeking nothing more than high returns. But the trio of Ali, Tencent and Softbank are not purely financial investors whose only desire is to reap lucrative profits from the money they give to young companies. Alibaba, Tencent and Softbank are also strategic investors, who take stakes in start-ups as part of their efforts to build ecosystems across a wide range of businesses.

The threat these players pose to traditional investors is a function of their identity, their incentives, their lower cost of capital and their far longer investment horizons. In addition, the three have a far lower cost of capital than more traditional investors, but Softbank with its $100bn Vision fund or Alibaba and Tencent with their $500bn market capitalizations don’t have to worry about such constraints.

That leaves traditional private equity investors facing a new challenge as they think about adapting to these elephantine creatures who have invaded their territory.

Many entrepreneurs say they feel (rightly) that the clock is ticking from the moment they take money from traditional private equity and venture funds. They also claim that in many cases they are forced into going public far too early. That is far less a problem when taking money from the trio of internet giants. These novel investors can hold their stakes in their portfolio companies without thinking about exits on day one.

That leaves traditional private equity investors facing a new challenge as they think about adapting to these elephantine creatures who have invaded their territory.

Forecasting for 2018

Meanwhile, as we prepare to gather in Berlin for SuperReturn International, there is no lack of more familiar challenges. Private equity firms have been among the biggest beneficiaries of the easy money policies of the central banks, as they put masses of cheap debt on the companies they bought and then listed them in buoyant stock markets. Meanwhile, investors hungry for yield were happy to pay their fees in the belief that returns from alternative funds were the only way they could reach their own return targets.

The first month of the new year seemed to suggest that the game would go on a while longer. But since then, sentiment has abruptly changed as tremors in the bond markets were swiftly transmitted to equity markets worldwide.

The initial response to the Fed’s interest rate hike in December was still cheery, since, after all the Bank of Japan (BOJ) and the European Central Bank (ECB) were still on their easing trajectory. "A combined $700 billion rise in the BOJ and ECB balance sheets more than offsets the Fed's unwind," the economists at JPMorgan noted.

Only a few analysts contradicted that optimistic stance. The unwinding of quantitative easing is probably the most dangerous process currently under way in policy circles," said Jan Dehn, global head of research for Ashmore Group, a U.K. investment manager specializing in emerging markets.

Assume that one message we will all hear in Berlin is that operational heavy lifting more than financial engineering will be critical going forward. And that may not be a bad thing.

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