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Squadron Capital CEO on buyout by FLAG Capital and LPs' appetite for India

Outsized returns will come from country-specific funds with local teams, believes David Pierce.
David Pierce

Asia-focused fund of funds manager Squadron Capital got recently acquired by US-based FLAG Capital Management. The transaction pulled up FLAG’s total assets under management from $4.5 billion to over $6 billion, besides enhancing its ability to deliver solutions in private equity, venture capital, natural resources and real estate. Squadron has backed several India-focused PE firms including Avigo Capital and more recently backed Motilal Oswal PE’s India Business Excellence Fund-II. It has also just kicked off the process to raise its third fund. David Pierce, CEO of Squadron Capital dons many hats including chairman of the Hong Kong Venture Capital & Private Equity Association and is a member of the United States Department of State’s Advisory Committee on International Economic Policy. In an interview with VCCircle, Pierce talks about what the new combine means, the increasing role of fund of funds going forward and the appetite of LPs for India. Excerpts:

FLAG Capital recently acquired Squadron Capital. What does this combine mean and how will this benefit Squadron?

It’s a true combination of Squadron and a platform in the US which is quite well established in strategies like venture capital, real assets, US private equity as well as international. It enhances their ability as an organisation to enhance their presence in Asia by marrying that with the Squadron team. We, at Squadron are getting the benefit of additional resources in the form of two professionals of the FLAG team based here in Hong Kong. With FLAG based in the US, constantly in contact with particularly the North American and European investor base, it also increases our efficiency in terms of business development and investor relations. So, we think it’s synergistic.

With Squadron now being part of a larger institutional platform like FLAG, will your Asia investing approach change?

I think one reason that we came together is that we have a similar approach to investing. So, there will be no change really to the way we approach Indian private equity markets or funds that we cover in Asia. I don’t think there is any change in what we are looking for in managers. We will continue with the same strategy, which is to really focus on deep due diligence, hard-to-identify and access funds, country-specific funds, where we really have value to add with the local nature of our team. Both FLAG and Squadron believe that these are the kinds of funds where the outsized returns will come from.

Do you think that combining with a large platform is the way forward for boutique fund of funds?

I don't really know how the industry is going to develop. The Asian fund-of-funds industry is somewhat different from the industry in other parts of the world. It is primarily developed in North America and Western Europe. In Asia, given the complexities of the region with different countries, cultures, language, legal systems and economy makes the fund-of-funds model more necessary than other parts of the world, where you have a common legal system or language. It is possible that others do some of the things that we have done. Our situation is quite unique as it is a combination of two organisations which have similarities in the way they work. This is a strategic combination for us, not a shake-out, making the proverbial “1+1=3".

Given the liquidity crunch faced by the industry globally, there are also talks that LPs prefer direct relationships with GPs...

Some of the more established Asian general partnerships now have developed some strong direct relations with investors. But, I think, it depends on the nature of the limited partner. One of the issues with limited partners in North America and Western Europe, which is the largest source of capital for the industry at this moment -- which overtime may change though -- is the geographical and the linguistic challenges in doing due diligence directly into fund managers in Asia. The investors might well have a preference to be direct investors, but that kind of remoteness from the scene makes it somewhat more difficult. Secondly, the other issue is scale as many of the more interesting funds in the market we address are smaller funds and some of the large pension funds in N America and Western Europe really cannot make smaller commitments. So there is a mismatch there.

Can you map the limited partners' appetite for Indian PE? How are different types of investors looking at it?

Investors are still doubtful on how capital could be usefully deployed in Indian private equity. That said, people see the dynamism of the market and believe that India will continue to develop its domestic consumption story considerably over the next few decades. There is combination of interest and some degree of scepticism on how rapidly private market capital can be effectively used to access that opportunity. The situation may be a little bit different for smaller investors, family offices and HNIs, who may be more opportunistic in their investing approach.

How are the investors looking at the recent set of reforms announced by the government. Has it changed the expectations substantially?

A few knowledgeable investors are enthusiastic, but then there are concerns about stability and how long-term it is.

A few Asia-focused fund of funds have raised fresh money. Does this necessarily translate into good news for Indian private equity funds?

I can’t speak for other fund of funds, but in our case we are bottoms up investors. We look for fundamentals and we don't have an allocation model to pin a certain amount of money to any country. That said, these group of fund of funds having capital to commit to Asia means that they are looking at opportunities and that means general partners now just need to persuade them that they are the right pick for them.

How do you see the role of fund of funds playing out in the industry in the near future?

My views might be a bit biased being a fund of fund manager myself. Asia’s an enormous region and given the complexities of investing into these markets, institutions will go use fund of funds. I think the fund-of-funds model actually works very well for the Asian market. There are always new groups emerging, and just in the last year some of the famous names have shed people. The model makes it more necessary in Asia than in some other places because of the diversity of cultures. A well-resourced fund of funds, which comprises of people from several nationalities, speaking numbers of languages, having local people from all the key markets – will be in high demand for many years.

(Edited by Prem Udayabhanu)

(Squadron Capital Advisors Ltd.)

Squadron Capital Management Ltd. is a private equity firm. It provides capital to infrastructure and construction sectors. The firm also makes co investment transactions in its portfolio companies. The firm invests privately held companies around Asian Pacific region. The company is an affiliate of Search Investment Group of Hong Kong. The firm is based in Hong Kong, China.