SINGAPORE — L Capital Asia has been busy lately.
This story first appeared in the April 5, 2012 issue of WWD. Subscribe Today.
The private equity fund set up by LVMH Moët Hennessy Louis Vuitton in 2009 to invest in the Asian luxury market has fully deployed its initial $650 million in funding. The fund uses the LVMH platform to help companies grow, but unlike its parent company, only takes minority stakes in firms, from which it targets an exit within four to six years.
This year alone L Capital Asia has taken stakes in Chinese casualwear company Trendy International Group and Fabindia Overseas Pvt. Ltd., a New Delhi-based craft and food producer. Ravi Thakran, its managing partner, who also serves as LVMH’s group president for South and Southeast Asia, spoke to WWD about how he sees his fund growing.
WWD: What investor value does L Capital bring?
Ravi Thakran: We’re a 100 percent subsidiary of LVMH and our help is more specific than plain vanilla private equity firms. We can help with how you design a store or a display window, with the uniform of the team and how to handle a cash register because we ourselves are operating players. We’ve not only succeeded in launching 66 leading brands worldwide but also built them successfully in an Asian context.
Most entrepreneurs in Asia are of the first or second generation. In China, they’re mainly first generation due to the Cultural Revolution. They know how to make good quality at a reasonable price for the whole world. What they need is knowledge of how to build a brand. In watches and garments, 80 percent of the goods’ value is in the brand, and if they learn how to build brands, they can be world-beaters. Some have it, but most haven’t learned yet.
WWD: Are you able to give a specific example of how the LVMH platform has helped add value?
R.T.: Sincere Fine Watches [a Singapore-based retailer] was our very first deal. We got in two years ago when revenues were very much smaller. In the past two years, it has almost doubled in revenue and tripled in earnings before interest, taxes, depreciation and amortization. In watch retail, some watches mean more. They did not have Rolex distribution, so we reached out to Rolex and impressed on them to award rights. Rolex added a lot of value because most men in Asia want a Rolex watch.
We’ve also helped them get better locations at places like Starhill [Gallery], Marina Bay Sands and ION Orchard at better rates. So we help expand the brand portfolio and reduce the cost of negotiation.
WWD: How involved is L Capital in the day-to-day running of firms you invest in?
R.T.: After each purchase, we have board seats in every company to help mold the thinking of shareholders in one direction. We have a steering committee for each investment within L Capital and we talk with managers about things like media strategy and product selection, even the supply chain. We don’t just offer financial help. I spent 25 years in operations. Someone here ran Zegna in the region and someone else [ran] Tommy Hilfiger.
But Asia is a very complex market and we cannot replace the entrepreneur’s knowledge suddenly. We are smart but not smart enough to suddenly replace management. They have experience, understanding of nuances and knowledge of the footprint, all of which are very important. The captain of the ship should remain the entrepreneur if he is the majority shareholder.
WWD: What do you look at prior to investing?
R.T.: Companies should not be at venture capital stage. We’re not [interested in] loss-making companies — we are about growth equity, not turnaround or distress-stage equity. The internal benchmark we use is that firms should not have below $100 million in revenue and $10 million in profit. That is, unless or until they have a growth rate of more than 30 percent if they are under $100 million in revenue.
They should also be led by strong management. We can plug holes if they have no visual marketing skills or a franchising or p.r. [manager], but we cannot inject management. We also look at governance and transparency. In Asia, a lot of firms have been caught with cooked books. If the governance structure is not tight, we insist on it being super tight. If we have doubts, we walk away even if it’s an attractive asset.
The biggest hedge is the quality of an asset. So I tell my team to focus on the top three companies in the region or country.
WWD: What kind of return on investment do you expect?
R.T.: At least 25 percent ROI, with two-and-a-half times the cash multiple. The track record [we seek to emulate] is L Capital Europe. In Europe, the platform is stagnant or recessionary. If in that atmosphere [they can achieve such results], we should do better.
WWD: There has been talk that you will be taking a stake in India’s Raymond Apparel.
R.T.: There’s a non-disclosure agreement in place, but I can say that we are talking with them. You can pick up where we’re going here if you look at our other deals this year. It’s a signature brand that’s number one in men’s wear in India, its market share by value is more than 50 percent and market share by volume is about half.
WWD: L Capital has been described as an investor in mass affluence brands. What are the challenges of investing in this category?
R.T.: Such firms have done very well so far in China. The market is hungry for better merchandise and displays [while there have been] no international brands beyond first-tier cities. The local brands have done well in second-, third- and fourth-tier cities, which have much bigger markets. Now there is a big challenge, because international brands are looking beyond first-tier cities. Zara opened more than 150 stores in China last year and there’s H&M, Uniqlo and Gap. Inditex will go in like a bulldozer and take them on. All of a sudden, there is greater consumer choice.
It is a big challenge and many will lose their shirts. Zara and the others will make their own mistakes and learn from those mistakes; so Chinese brands need to be as good. In this onslaught, some will learn and go on to compete in China and outside. If they can achieve [similar] quality, they can then [press their] advantage over others. Their advantage is that they know Chinese bodies. Northeastern Chinese are taller. Women in Harbin and Dalian are different. There is deeper winter in some parts of China, so there are different needs.
WWD: L Capital has invested significant sums in India recently. What do you make of events such as the bid to impose retrospective taxes on foreign investors like Vodafone?
R.T.: India was very disappointing last year. Almost everything went wrong and policy making was at a standstill because politicians were busy making others look bad.
India’s parliament should subscribe to China Daily. China has its own issues, but there is a focus on the big agenda. A lot must be corrected in India, but the negative agenda shouldn’t take more time than the positive agenda. With the currency and stock market, India has been very severely punished.
But various fundamentals are strong. The factors that have worked in favor of China over the past 15 years will work in India’s favor for the next 15. Take the percentage of working-age population, which will peak in 2025. That’s a huge advantage going forward. Hundreds of millions of people wake up every day wanting a better life, and irrespective of policy making, that aspiration can help [with] coming ahead.
WWD: As the luxury industry in Asia grows, do you think you will face more competition from funds like Fung Capital and IDG-Accel that have invested in similar sectors?
R.T.: We hope more come because there’s so much space and a lot to be done. If we invest in one company, we don’t want to invest in another [in the same sector]. If entrepreneurs believe in us, we will get the deal. If not, we should not do the deal. We’ve deployed a large pot in a short time frame and [in the Trendy deal] co-investment opportunities were offered to many players.
WWD: What’s in the pipeline for you and the M&A scene in Asia?
R.T.: In two months, we would be talking differently. We’re doing due diligence in an advanced stage on two companies. One is a leading company in Hong Kong and Singapore and the region that specializes in Chinese food; the other is an Australian food-concept company that’s focused on expansion in Asia. We’re also looking at two beauty firms — one from China, and one from Australia that’s looking to expand. It’s very much diversified.
There are many synergy opportunities in Asia and big companies in China that are listed in Hong Kong or locally that can easily acquire Southeast Asian producers and become Pan-Asian. There will be a lot more Chinese firms acquiring Southeast Asian firms.
In Asia, particularly India, valuations are high. There is a tendency for valuations to normalize over time, so to be sure, get in at a reasonable valuation. You must make sure the EBITDA is right anyway, to get a great exit.