Private equity cash piles, soaring stocks keep dealmaker’s dance card flush
If any dealmaker felt the pandemic pinch, one would expect it to be Euan Rellie, founder of cross-border M&A boutique investment bank BDA Partners. The sun never sets on BDA’s sprawling network of corporate matchmakers, with offices across Asia’s burgeoning economies, New York, and London. But COVID travel restrictions meant bankers and clients alike had their wings clipped for most of 2020, unable to peruse the tasty corporate assets on offer in places like China, Vietnam, India, and Korea.
Not only is Euan an ardent Asian frequent flyer and bon vivant, but he also has a reputation as a New York socialite. He is married to fashion executive and novelist Lucy Sykes. He adopts the sobriquet #thefashionbanker across his prodigious social media presence.
Against all odds, BDA reported its best year ever under lockdown conditions and was named #1 sell-side banker in Asia for 2020. Curious about what could explain this anomaly, we decided to catch up with Euan through a video conference call, which he took in his car en route to his next video conference call. He shared his thoughts about U.S.-China relations, the next leg in the M&A bull run, tips on virtual due diligence, and maintaining his sanity in a world of shuttered restaurants and closed borders.
Can you start off by telling us a little bit about BDA and how your business has evolved over the last couple of years?
I invented BDA in 1996, so this will be our 25th anniversary. In the early days of BDA, the intention was to help U.S. multinationals — who were the best fee payers after all — to access opportunities in Asia. Our focus in the very early days was really Singapore, Malaysia, Thailand, and Southeast Asia. By the year 2000, all CEOs of U.S. multinationals wanted to grow in China, and Wall Street analysts were telling them, "You better get bigger in China." So, we gravitated first to Hong Kong and then Shanghai, and those became the firm's engine room.
The second iteration of our lifecycle was helping U.S. multinationals and European multinationals shuffle their portfolios. To divest assets in Asia that they didn't want anymore, as they were changing their business mix or portfolio or model.
Nowadays, the focus is helping private equity firms to divest assets in Asia. As an investment banker, you love to work for private equity firms because they transact frequently. They have to buy and sell every couple of years. That's their model. Funnily enough, despite the well-documented geopolitical tensions between the U.S. and China, actually the great global private equity players — Bain, Carlyle, KKR, Warburg Pincus, and firms like that — are all still absolutely determined to grow in China. The fact that both U.S. political parties are skeptical of China and consider China as at best a strategic competitor but at worst a deadly threat has not discouraged the big global PE firms. There are also pretty significant private equity players in Asia. Like Hillhouse, like Hillhouse with over $50 billion under management, PAG in Hong Kong, MBK in Korea. We like to work for those guys too.
2020 would seem a pretty unpropitious time to be in the cross-border M&A business. Yet, I understand that you had a record year. How were you able to pull this off, given that many of these countries were on lockdown for at least a part of the year?
Well, first point. Global activity was down very sharply in the first half of the year. When the pandemic started to hit in February and then March, everything ground to a halt. But by June and July, we saw promising signs of recovery. Globally, M&A was down a bit last year, but not by nearly as much as you would imagine.
Point two, BDA succeeded in growing market share through the pandemic. We recognized some of our smaller competitors would struggle. We picked up some business and selectively a few managing directors from some of those firms.
Point three, we have a very high-quality partner in William Blair in Chicago, a firm that owns nearly 10 percent of BDA's equity. We have been in business with William Blair for seven or eight years now, and William Blair continued to bring us excellent deal flow, so that helped.
Finally, I think there's something about our firm's nature, which is a bit scrappy and entrepreneurial. We have hustle in our blood if it doesn't sound too ridiculous. We helped our clients understand that they could close transactions remotely. Even if we couldn't bring businesses physically to meet management teams and visit factories, we helped our clients make videos of their factories and engage local consultants who could visit on behalf of buyers. We evolved quickly towards a work-from-home, more online type of way of doing business.
I know that you're an avid traveler, diner, and man about many towns. How did it impact you personally when COVID has clipped your wings?
It has been tough, frankly speaking. We find jobs that fit our personalities. For me, visiting BDA's offices in Asia was one of the most fun, joyful experiences. I found it intellectually stimulating and fun to travel on behalf of clients and behalf of BDA. And I think there is a mental health toll taken on all of us. I love my family, but at this point, they are eager to see me on the road again. I'm looking forward to giving my family a break from me.
As an entrepreneur, one of your roles is to be a cheerleader for your own company. Motivating young coworkers and trying to give candid feedback to professionals as they rise through the ranks of BDA, whether that's positive or negative. It's painful, and sometimes it's less effective to do that remote control by phone or by video link.
I read some people may never travel again for business. I'm desperate to do it. I miss it. And I'm looking forward to getting back.
After the global financial crisis, Chinese buyers were very active purchasers of assets both in the U.S. and Europe, partly because their economy just came out of the crisis so much faster. How does their behavior compare this time around?
China has navigated the pandemic better than anybody expected. Every now and then, they still have a flare-up in Harbin or Wuhan with a couple of dozen positive tests. And then they literally go and test seven million people and lockdown for two weeks. That's particularly irritating to politicians who call COVID the China virus because it doesn't seem fair that they’ve handled it so well. But China's in great shape. It's growing fast, and there's a lot of optimism.
Having said that, the Chinese do feel very bruised and locked out of the U.S. economy. Chinese companies who bought assets in the U.S. are keeping their heads down and even looking to sell in some cases. Effectively, it's impossible for Chinese companies to buy anything in the U.S. today. When we're selling a business in the U.S., we don't bother even approaching Chinese buyers.
The Chinese looked for a while at the EU. And they were very aggressive buyers of auto companies, auto component companies, industrial robotics, and so on. The EU has started to echo the U.S. concerns about Chinese trade practices, IP non-compliance, and security threats over the last year. They are looking most of all at Southeast Asia and South Asia. However, there are now tensions between China and India too.
China remains ambitious to grow. It's just they are being locked out of lots of different markets. I suspect the Biden administration may show some thawing. We may start to see selectively and cautiously some business start to come back between China and the U.S. over the coming 12 months.
Looking at multinationals, they've consistently reported a less favorable business climate in China for the last few years. Has that had an impact on their appetite for M&A? Do you more typically see them as buyers or sellers in China today?
We see both. There's not a simple answer to that question. We see U.S. multinationals still excited about China as a destination but also a bit wary and scared. We've seen some sellers and other people doubling down their bets. China continues to be an essential manufacturing location. If you're selling to other multinational companies, it's too big of a market to ignore
President Xi Jinping was originally somewhat of a reformer. He has now become a pretty stark authoritarian and a conservative in almost every sense. And the government under Xi is not welcoming or warm toward liberalization of any sort. Many U.S. companies are very successful in China, and multinationals try to look through the short-term political tensions. I don't think most big multinational companies will turn their backs on China.
One sector that China at least is passing regulations to liberalize is the financial and investment sector. Do you expect the landscape there to change much in the coming years? Is that creating opportunity?
In some ways, China is more advanced than the U.S. For example, WeChat and Alipay. These super apps allow people to perform a whole range of personal and small corporate financial transactions online. China is allowing foreign companies to play a more significant role in its financial services sector. The Chinese government recognizes that if China is to advance as a global economy, it needs to engage in the highest quality financial services. We're seeing the capital markets in China develop quite quickly. For example, on the STAR Market, you can have registration-based IPOs now. The big western investment banks have lobbied aggressively to participate more in China in a whole range of different spheres, from derivatives to wealth management to private equity to even M&A advisory. And we're seeing relative openness in those sectors.
You mentioned earlier that private equity was a significant source of both deal flow for you and potential buyers. How much dry powder is there focused on the Greater China market right now?
Massive amounts of dry powder. If you talk about those global mega PE firms like Carlyle, Bain, Warburg Pincus, KKR, they've basically got $10 billion each at least of dry powder dedicated to Asia. Most of them seem to be trying to direct roughly half of that dry powder for Asia towards China. It used to be very hard for them to find deals bigger than $200 million to invest in. Still, increasingly as the Chinese tech sector has grown, global private equity firms can find ways to put $500 million or more to work in a single deal. So, the Chinese market is a pretty exciting one for them.
We talked earlier about the tariff regimes and the tensions under the Trump administration. How has that impacted your deal flow in other parts of Asia? Vietnam or Southeast Asia? India?
Quick-witted bankers — and we hope we can fit that description ourselves — will find ways to direct capital or help capital move to wherever it can be most profitably deployed. Koreans and Japanese investors have loved Vietnam. We've seen people from those countries invest in Vietnam as a proxy for China.
Secondly, we've seen some global companies look at India as an alternative and proxy to China. We see some evolution of the supply chain towards other Southeast Asian markets. The relationship's complicated because Malaysia, Indonesia, Singapore, and Thailand all trade actively with China. They want to keep a healthy relationship with China, but they also want to take advantage of China's struggles when they can.
The China-U.S. market, which was such a vast corridor for us, has more or less ground to a halt. But if you put a dam up on one part of one river, the water starts to flow in other directions. We've seen lots of intra-Asian business. And Japanese companies have become more acquisitive in the U.S. because they've seen the Chinese buyers precluded. So, that's created a window for Japanese companies. The population in Japan is shrinking quite by over one percent a year. So Japanese companies have no choice but to move outside of Japan.
Do you feel like you have any particular insight as to how engagement with China will change with the new administration? How do you position your business for that?
I often say we don't tell people where to invest. We help them invest once they're in the process of deciding. Trump tapped into a deep-seated and broad concern with China and tapped into it very effectively. Politically, very effectively. And at times, we've seen Chuck Schumer and other U.S. politicians almost sometimes try to out-Trump Trump in anti-Chinese rhetoric.
Having said that, we're seeing clear evidence of the Biden administration trying to move back towards the way that the Obama administration operated, which was seeking multilateral cooperation—seeking engagement rather than a total shutdown. Even though Tony Blinken and many other Biden administration members are very, very wary and skeptical of China. The EU has quite cleverly made a significant diplomatic outreach towards China. I don't think the U.S. wants to get left behind.
U.S. multinationals continue to lobby aggressively for more engagement between the U.S. and China. The big clients we work for want to go in with their eyes wide open about the risks, and they want to clamp down on IP non-compliance by Chinese companies. I suspect we will see selective and cautious engagement starting quite quickly.
You touched on the STAR Market. Valuations and deal volumes in China's domestic IPO markets have been surging. Does that make M&A less attractive for targets? Or is it fueling consolidation in these industries?
The first challenge for us is that business owners in China have dollar signs in their eyes because they can go public potentially at astronomical valuations. But I think that there will always be U.S. companies, multinationals who want to invest in those markets. Some creative multinationals and certainly private equity firms are exploring ways to take advantage of those very robust Chinese capital markets.
It does help sellers because when stock markets are frothy, buyers recognize they have to pay up in an environment of very high multiples. I suspect some of those multiples are not sustainable. But sometimes, those apparent market distortions last much longer than anyone believes they will or should do. For now, the NASDAQ-style markets in China look very, very rosy indeed.
For a long time, Hong Kong was home-base for most Asia-based deal makers. Now that Hong Kong is increasingly more tightly integrated with China's legal system and its financial structure, how do you see that city's role evolving?
Hong Kong was such a fun place to live and to do business. There were lots of like-minded yuppies and professionals throwing lavish parties, having interesting dinners, and exchanging business ideas. It was just a fantastic place to live and work in the late '90s and the first ten years of this century. We used to talk about if you failed in London, go try Hong Kong.
Now, because the people I associate with have grown up, they have different interests. They like safe schools and good hospitals, and clean air. Partly because mainland China is clamping down very aggressively on Hong Kong, and because the Hong Kong protest movement made Hong Kong a pretty tough place to live for a while, many professionals have wanted to move from Hong Kong to Singapore.
We're seeing some people move onto the mainland, and cities like Shanghai and Beijing are becoming more livable. Even though there's press censorship, the Chinese authorities will basically tolerate any multinational using a VPN, so you can find ways in terms of technology of circumventing the great firewall of China. And the restaurants are great in China.
We've definitely seen the center of gravity of the private equity industry inextricably nudging down towards Singapore, and I suspect that trend will continue. We are coming up to renegotiate the lease on our Hong Kong office. And for the first time in living memory, we expect to pay considerably less this time for what has typically been our most expensive office rent anywhere in the world.
I wanted to end with your outlook for 2021. We've been in this long upcycle for M&A for several years. Do you think it has another leg to go? Or is it going to get tired soon?
I hope it has another leg to go. I've been worried that it's getting tired for a while. I think we're basically in year 10 of an M&A boom. In my 30-year career, I've never seen one last more than six or seven years. So already, in terms of longevity, this is an M&A bull market that feels very, very mature.
Having said that, the amazing thing has been governments around the world seem to be doing everything consciously or unconsciously they can to prolong the M&A market. We have low interest rates everywhere in the world so that you can borrow money cheaply. It has become easier to borrow money across borders. Regulations have generally been on the whole pro-company, pro-liberalization, and pro-M&A, rather than aggressively anti-trust oriented.
Most of all, we have the private equity market to thank. The global private equity industry has been such a catalyst for transaction activity because that's private equity's MO. They have both to buy and to sell regularly to justify their existence.
I can't predict when it will happen. Still, I suspect we could see something go seriously wrong with the SPAC market — if there are two or three high-profile SPACs that get proven to have drastically overpaid for assets.
What else could go wrong?
M&A requires two things. It requires lots of dry powder, which we have. But it also requires a sense of predictability. A feeling that the underlying economy's doing okay and that markets as a whole are going to do okay. I try not to hold my breath and wait for the downturn, but it may come when we least expect it. Maybe tomorrow. Who knows?
I think we’ll end there. With our fingers crossed. Thanks for doing this.
It’s been a pleasure.