Fireside chat on global private equity: challenges and opportunities

Euan Rellie, BDA Co-Founder and Senior Managing Director based in New York, recently joined a unique fireside chat with three global private equity firms and the largest & most active global PE legal practice.

Panelists:

Euan Rellie, Co-Founder and Senior Managing Director, BDA Partners
Duncan Enista, Partner, Kirkland & Ellis
Andre Puong, Partner, Cathay Capital
Joanne Yoo, Managing Director, DPI
Bob Landis, Founding Partner (Origination), Riverside Company
Moderated by Jordan Selleck, CEO & Co-Founder, 51 Labs

Here are some of the key takeaways. Check out the full video for more detailed insights.

Global buyout transactions fell 60% from January to April and transaction volume is now trending around 1/3 of the five-year monthly average
Uncertainty in the US is hampering deal flow relative to other markets
Deals are getting done, but largely for add-ons and platforms known pre-COVID
Earn-outs: Not seeing a significant uptick in earn-outs; however, Duncan is seeing them as a way to get sellers back to the table when the valuations weren’t what they had hoped for during the lockdown
Hong Kong: The mood is bleak, according to Euan Rellie, Senior Managing Director at BDA. Firms are moving out and there’s a feeling that it’s quickly becoming less of the multinational hub that attracted people for decades. In the short term, tying Hong Kong closer to China might not be all bad. For example, Chinese companies which may have be reluctant to do IPOs in Western markets might favor listing in Hong Kong
China: Doing cross-border deals with China is more difficult now. Today, you have competitive local brands that are going to eat your lunch if you’re not extremely aggressive and localized. You can’t use the playbook of 20 years ago
Africa: Joanne Yoo, Managing Director at DPI, made it clear that Africa is not as connected to the rest of the world so the pandemic hit later and caused less damage. DPI’s deal activity is actually busier than before. Their portfolio companies have largely been deemed as essential businesses, and like many lower/mid-market company in Africa, they hold more inventory than other markets
What impact will the upcoming US election have on their business and strategies, based on a scale of 1-5? Joanne 2, Bob 3, Andre 3, Duncan 2, Euan 2

Latest insights from BDA:

About BDA Partners

BDA Partners is the global investment banking advisor for Asia. We are a premium provider of Asia-related advice to sophisticated clients globally, with over 24 years’ experience advising on cross-border M&A, capital raising, and financial restructuring. We provide global reach with our teams in New York and London, and true regional depth through our seven Asian offices in Mumbai, Singapore, Ho Chi Minh City, Hong Kong, Shanghai, Seoul and Tokyo. BDA has deep expertise in the Chemicals, Consumer & Retail, Health, Industrials, Services and Technology sectors. We work relentlessly to earn our clients’ trust by delivering insightful advice and outstanding outcomes.

BDA Partners has strategic partnerships with William Blair, a premier global investment banking business, and with DBJ (Development Bank of Japan), a Japanese government-owned bank with US$150bn of assets.

US securities transactions are performed by BDA Partners’ affiliate, BDA Advisors Inc., a broker-dealer registered with the Securities and Exchange Commission (SEC). BDA Advisors Inc. is a member of the Financial Industry Regulatory Authority (FINRA) and SIPC. In the UK, BDA Partners is authorised and regulated by the Financial Conduct Authority (FCA). In Hong Kong, BDA Partners (HK) Ltd. is licensed and regulated by the Securities & Futures Commission (SFC) to conduct Type 1 and Type 4 regulated activities to professional investors. www.bdapartners.com

BDA Co-Founder and Senior Managing Director Charlie Maynard talks about opportunities in the Asian M&A market and how BDA runs an excellent sellside process and delivers the best results for clients.

In this working-from-home chat with BDA senior leadership, we talked to Charlie Maynard. Charlie co-founded BDA Partners with Euan Rellie 24 years ago in Singapore and New York. He has spent many, many years in different countries in Asia before and after founding BDA. We talked about the opportunities he sees in the Asia M&A market, and how BDA runs excellent sellside processes and delivers the best results for clients.

What opportunities did you see in the Asian market when setting up BDA in 1996?

We realised that there was a gap in the market, because the big banks were talking about being interested in global M&A and how important Asia was to them, but in reality they were much more focused on Western M&A and Chinese IPOs, where the big bucks were. While we understood that Asian M&A was a tough market, but we reckoned we could build a business by entirely focusing on it.

How has BDA evolved over the years?

When we started out in 1996, we were largely a buyside shop, working for large, primarily Western MNCs looking to acquire in Asia. The buyside work was very useful in terms of helping us understand sectors and what clients wanted. For the first ten years of BDA, the sellside market and particularly the private equity buyout based sellside market didn’t really exist. But around 2006-2007 there were signs that it was beginning to take off, and that was when we made the switch to focus on the sellside which is 80% or more of our business today.

The other two big changes were a few years back when we started both to build out and focus on our six core sector expertise including Industrials, Chemicals, Health, Technology, Consumer & Retail and Services as well as to set up a dedicated financial sponsors group coverage team which would focus full time on our relationships with sponsors.

How are BDA set up to deliver the best results for clients?

To run excellent sellside deals, you need to have global reach in order to access all buyers and be agnostic as to where the buyer comes from. There are very few parties that can really access all relevant buyers, regardless of geography, and why this business that we’re selling is attractive. We are one of the very few M&A advisories who can do that.

You also need to have the sellside process nailed. We are very, very process oriented. We systemize and automate the basic bits of a sellside process, which are normally repetitive, so we can focus on the difficult, critical bits which are specific to individual transactions and help our clients as fully as possible by adding real value. This is another key differentiator that we have in terms of systems and processes compared to our peers and competitors.

What can we expect from BDA Partners for the next five years?

If you do M&A, you want to be doing sellside M&A. The growth in the buyout market over the last 5- 10 years has been enormous in Asia. And if you look at the capital that has been raised over the last 1-3 years, it’s clear what we have seen to date is only a fraction of what we are going to see in the future. It’s a huge and rapidly growing market, but because of the complexity and global reach required, there are very few advisors that can effectively service this market. Sellside M&A advisory will remain our core business and we’ll continue to focus on raising our deal size.

Beyond that, we started to get involved in debt advisory and restructuring by a partnership with Zerobridge, as well as trying out principal investing with BDA Capital Partners. There are quite a lot of exciting opportunities for other avenues of growth in addition to the core M&A business.

What have been the biggest challenges in BDA’s journey so far?

The hardest challenge has been creating the global network we have today, where each person in each office can deliver much more than they are able to do individually. This has taken a lot of time and it is completely and utterly about the people inside BDA. It’s ever evolving and must always be improving and progressing through our team efforts. Keeping the team moving forward and focused across nine different offices and 12 different time zones will always be challenging.

What are you most proud of about BDA?

It is the team that has created this seamless global network that allows us to deliver the best results for our clients. I love our team and I love our team spirit. Very, very few organisations have as diverse and international a team which truly works together in a fast, coordinated and intelligent way. I love the fact that we have so many people from so many countries liking each other and enjoying working as a team – and that this teamwork delivers great results.

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Latest insights from BDA

About BDA Partners

BDA Partners has a long track record of completing complex cross-border carve-outs. As one of the most active M&A advisors in Asia, we complete several carve-outs for clients each year. We share our insights below on how to complete a cross border M&A carve-out transaction successfully.

Carve-outs are a growing feature in the current M&A deal market for multi-national corporations (“MNCs”) and financial sponsor-backed companies, particularly as CEOs and shareholders assess non-core segments and assets and look to improve financial return metrics.

Acquiring a carved-out business is attractive. Significant value can often be created through margin improvements and revenue / cost / operational synergies with the new owner. Carve-out transactions require buyers who are experienced with reviewing, diligencing and identifying the value-add opportunities, and have an experienced investment team to implement changes from day one. These criteria make financial sponsors ideal acquirers of carved-out businesses. The growth in dry powder with private equity funds, estimated at US$830 billion for buyout funds at December 2019[1], is increasing deal volumes and competition between private equity funds searching for acquisitions to put committed equity to work. This in turn is having a positive impact on the valuations MNCs can realise.

During the current COVID-19 pandemic, we see management teams and shareholders using this time to identify any non-core segments and assets which could be carved out in the future; either to raise cash to improve liquidity; or as part of a wider restructuring of the Group. If the potential carve-out is not urgent due to a distressed financial position, this time during the COVID-19 pandemic is being used to assess and plan for future carve-out transactions when local and global economies begin to recover.

Carve-outs are not for the faint of heart. They present the seller with a range of complex, time consuming and potentially challenging deal hurdles from day one. Deal complexity arises from company business operations including international subsidiaries, logistics, procurement, HR, back office functions and IT systems, resulting in an array of deal challenges. No carve-out deal is the same, which means customised solutions will be needed to bridge the needs of the buyer and seller of each deal. Early preparation with an experienced financial advisor is critical in order to avoid potential pitfalls.

Being poorly prepared for a carve-out can have a major impact on the chances for success. Poor preparation or neglect of key areas may jeopardise the transaction itself, and will certainly:

Increase scope and time of buyer due diligence
Lead to value mismatch between the shareholders and the buyer
Damage potential post deal synergies
Impair post transaction relationship with the seller where Transitional Service Agreements (“TSAs”) are required

We believe there are a number of common themes and actions which can be considered to help address these risks and challenges of completing a carve-out transaction, and ultimately increase the likelihood of successfully completing the transaction.

Appoint experienced external advisors as early as possible

Areas of deep complexity and risk include standalone financials, legal risk and integration planning / implementation with the new owner, employee transfer and shared IT/compliance. In advance of a process we recommend appointing a financial advisor and other sell-side advisors to help manage the process in a disciplined approach. This would include a Big 4 accountancy firm and a legal firm as a bare minimum, but IT and HR advisors may also be needed. Advisors who have past experience in carve-outs will help maximise value and provide confidence to buyers about the carved-out business they want to acquire.

Identify the carve-out business senior management team early

The senior management team of the carve-out business needs to be identified and aligned with the carve-out transaction and strategy early in the process. The potential buyers will need to meet and hear the management team discuss the business early in the process and give the buyer confidence about the carved-out business they are looking to acquire, including the short-to-medium term strategy and growth opportunities.

To ensure the management team are aligned and motivated, the seller should ensure there are transaction and retention bonuses in place as part of the sale process. This will motivate the senior management team to get the deal done, but also provide confidence to the buyer they will inherit a senior management team that knows the business inside out and will drive the integration and growth plans from day one.

To the extent there are full time employee (“FTE”) gaps in the senior management team being carved-out, it is best to be upfront and communicate this early in the process to the buyer, so they are aware the positions which need to be filled on day one. However, the costs for such unstaffed positions, should always be included in the historical and forecast financials.

Finally, if needed, the seller should bring in dedicated cross departmental support as part of the sale process to help buyers understand a particular area if not covered by the senior management team. For example, the seller may have a Group Head of IT who is not transferring with the carve-out transaction, but they will be important for educating the potential buyers on the IT framework / systems in place.

Prepare a “what’s in, what’s out” analysis

Early in the sale process, the seller along with external advisors should prepare a detailed “what’s in, what’s out” analysis setting out all the assets including real estate, contracts, back office / IT services and people by entity / location that will be included in the transaction perimeter. This exercise is fundamental to complete early in the sale process as it will dictate how you approach preparations of the historical / forecast financials and how you sell the equity story to potential buyers as you take the carved-out business to market. If this analysis is detailed, thorough and well thought through, it will give buyers confidence about the business they want to acquire. This analysis will help identify any services such as IT, finance, procurement, contracting, etc. that might need to be covered by a TSA on day one.

Prepare the standalone financials

Once the “what’s in, what’s out” analysis is completed, the preparation of the financials will be somewhat easier. To the extent possible, the financials should be prepared and presented with the buyer and its due diligence in mind. For example, the financials should be split by key segment, geography and even a customer / products / services / SKU level, if possible.

You should ensure that the carved-out financials have all the costs required to run the business on a standalone basis from day one, post carve-out. For example, if a sales or finance person previously spent 50% of their time working for both the carved-out business and the parent group, then you should include the costs for one full FTE and not a half FTE in the carved-out financials. This will be a key focus of due diligence for a buyer, so it is important standalone costs are detailed and well thought through.

In the current COVID-19 environment, forecasting the financial performance of the carved-out business will be inherently challenging and difficult to set out accurate and reliable assumptions. Time should be taken to assess the impact of financial forecasting under COVID-19, and if needed, you should delay the process until the financial forecasts can be modelled accurately with solid underlying assumptions, and when the local / global economies have stabilised.

In our experience, the carve-out financials and operating model are certainly the areas where clients believe there would be significant room for improvement if they could start the sale process again.

While this may appear straightforward, accumulated habit and internal company shared resources may give a false impression of true standalone costs and requirements. Deep review and analysis are required to verify the completeness and accuracy of the standalone accounts.

Prepare the equity value add story for a new owner

There will be a fundamental reason why the MNC or private equity fund wants to divest the carve-out business, and this could include being a non-core business, lack of senior management focus, lack of investment, better management of asset portfolio, or struggling financial performance in the face of market competition. It is critical to tell the equity story to the buyers as to why it is a great business to own and how under the right owners, the business has great growth opportunities and can create significant value for the new owner. This could be achieved through investments in new plant & equipment, geographical growth, product development, or from positive market forecasts. If required, consider engaging commercial due diligence providers to prepare a report to help tell the market story.

Legal, tax and jurisdiction complexities

The legal aspects of a carve-out transaction tend to be one of the more complicated areas. This is largely associated with how to separate the in-scope legal entities (or assets) from the wider Group, along with how to legally separate customer & supplier contracts, IP, fixed assets and employment contracts. Critical assets or employees may fall out of the perimeter of the carve-out and may need to be re-assigned to the carved-out entity before or on closing. There may also be change of control clauses in customer, supplier or lender contracts which need to be communicated. Furthermore, there may also be tax implications for the seller or the carved-out business from the carve-out, and if so, internal or external tax advisors should be consulted.

As the business is being carved-out from a wider Group, it is likely there could be legacy issues or provisions from the prior owner or day-to-day operations, such as legal or environmental provisions. Assessing these legacy issues early in the process can help to prevent further value erosion from material debt-like items.

For a successful outcome of the transaction, to preserve value and provide protection to the seller, it is crucial that the Sale and Purchase Agreement (“SPA”) is prepared early and sufficient time is provided for sell-side and buy-side lawyers, consultants, and investment professionals to negotiate and share the mark-ups back and forth. Furthermore, schedules to the SPA should be added which set out the assets, customer & supplier contracts, and IP for example, that will be included in the transaction perimeter.

Finally, it is crucial to have the TSA designed, planned and fully costed for immediate implementation. Drafting should begin early, with a draft TSA in the dataroom, as part of the buyer’s due diligence will be understanding how quickly and challenging the separation transition period will be, and what the associated costs, penalties, services provided, and performance reporting are. There will be significant additional one-time start up transitionary costs to be borne by the buyer and seller in preparation and implementation of the TSA.

Despite rigorous preparation for a corporate carve-out, flexibility is needed by both buyer and seller to arrive at an agreement. TSAs may include sharing of commercially sensitive information, IT infrastructure, expose the seller’s customers to a new party in the form of a buyer, and lead to potential legal ramifications if handled poorly. A well-designed and managed process will build trust which is the essential ingredient to achieve agreement.

If you would like to discuss carve-outs further, or if you are considering a carve-out transaction, please reach out to any of the BDA Partners team members listed below.

Jonathan Aiken, Managing Director, London: jaiken@bdapartners.com

Ruari Sinclair, Vice President, London: rsinclair@bdapartners.com

[1] Bain Global Private Equity Report 2020

About BDA Partners

While there has been broad discussion on how businesses and markets have responded to the coronavirus outbreak and how they will adapt to a post COVID-19 world, arguably, no industry has received as much attention as clinical diagnostics. With the heightened focus on testing, terms such as antibody test and nasopharyngeal swap have jumped from medical journals to the front pages of newspapers the world over.

Thanks to previous experience with SARS, Asian IVD companies in many cases have led innovation in combating SARS-CoV-2. Regulators worldwide are closely studying the rapid response and mobilization of testing resources seen in China and Korea at the outset of the pandemic. However, even with the situation stabilizing in East Asia, companies in the region continue to innovate – developing more rapid point-of-care tests and antibody testing platforms, not to mention the urgent research into a possible vaccine being led by companies like CanSino and Shenzhen Geno-immune in China, Bharat Biotech in India, SK Biopharma in South Korea, and Takeda in Japan, to name only a few examples.

While the response to the pandemic has lifted the valuations of diagnostic tools and technologies companies globally, Asian companies have been trading, on average, at over 30x trailing EBITDA, led primarily by premium valuations achieved by Chinese diagnostic tools companies. We expect the spike in valuations will create opportunities in the space and accelerate consolidation efforts in the region, especially in China where the IVD market is less concentrated and the rise of import substitution in the diagnostic products space has attracted increased investment from both healthcare companies and firms in other industries looking to capitalize on the trend.

While year-to-date M&A activity has been muted across all industries, BDA and our partners William Blair continue to participate in deal activity in the diagnostics space, including the recently announced sale of FountainVest’s stake in Chinese IVD business Shanghai Kehua Bio-engineering in China and the sales of Stratos Genomics to Roche and of Exalenz to Meridian Biosciences in the US and Israel, respectively. We have also seen significant capital markets activity in the diagnostic tools and technology space so far this year.

In many ways, the coronavirus pandemic has accelerated a growth trend already taking place in Asia. Thanks to a focus on preventative care to reduce healthcare costs and the increasing prevalence of diagnostic testing, the Asian IVD industry had been poised to achieve double-digit growth over the next five years, even before the first cases of COVID-19 were reported.

While it could be argued that the impact from COVID-19 on the diagnostics space will be short-term, BDA has seen an interesting dynamic emerge where demand for more routine test kits, such as flu tests, have fallen due to COVID-19. We expect this will be temporary and not dampen mid-term demand. If anything, the pandemic has triggered increased spending on development that will spur further innovation for years to come.

Download the full report

Contact BDA healthcare team

Andrew Huntley, Senior Managing Director, Asia/Europe: ahuntley@bdapartners.com
Lei Gong, Managing Director, Shanghai: lgong@bdapartners.com
Kumar Mahtani, Managing Director, Mumbai: kmahtani@bdapartners.com
Peter Moreno, Vice President, New York: pmoreno@bdapartners.com

Related content

COVID-19: Impact on opportunities in the China health sector

About BDA Partners

The COVID-19 pandemic has already caused significant damage to the global economy. All markets and sectors have been affected. Asian countries are working with some success to revive their economies, and to begin to loosen lockdowns across the region, although we have seen numerous setbacks.

The pattern today feels like two steps forward, one step back.

Technology and the practices developed in past pandemics have enabled governments to track potential infection cases, trace their close contacts, and quarantine all affected individuals to stop the virus from spreading in the community. Singapore’s contact tracing application, TraceTogether, uses Bluetooth technology, as does Australia’s COVIDSafe app. South Korea’s drive-through testing centres have enabled testing for large sections of the population. In China, the government has used a combination of QR codes, colour-coding, and the ubiquitous Alipay and WeChat apps to track and permit healthy travellers.

Several Asian countries, including China and South Korea, have experienced an uptick in cases sometime after restrictions were eased. In several instances, authorities have re-imposed measures to restrict interactions between citizens, to fight secondary spread of the virus.

For most of the past month, China has reported very small numbers of daily new cases, most of which were “imported”. In recent days, the Chinese government has found new local clusters in cities including Wuhan and Shulan. The global press has been sceptical as to the true number of China cases, but the country has taken dramatic and extensive steps to regulate and monitor all its citizens so businesses can largely return to work. Businesspeople are now able to travel around the country via cars, trains, buses, aeroplanes, etc.

South Korea managed to lower the number of new cases without fully locking down its economy. Instead, the South Korean government responded quickly to ramp up testing capacity and aggressively trace and isolate every potential case.

In Japan, Prime Minister Shinzo Abe has extended the nationwide state of emergency to 31^st May. Japan’s Economy Minister Yasutoshi Nishimura has said the declaration will be lifted in many regions outside Tokyo, this week.

Singapore’s citizens will soon be able to get a haircut and visit bakeries, as the government loosens restrictions slightly. Despite an upsurge in cases due to an outbreak among foreign construction workers in crowded dormitories, transmission in the local community has dropped. Singapore has reported 26,000 infections, the most in Asia, after China, India, Pakistan and Qatar. But it has a low fatality rate, with only 21 deaths.

As of 12^th May, Vietnam has, according to official statistics, still suffered no deaths from the virus, and has limited total infections to just 312, despite its shared border with China, and its role as a popular regional holiday destination. Vietnam has managed a rigorous pandemic control strategy including extensive structures of control and tracking via mobile phones.

Despite rising numbers of COVID-19 cases, both India and Pakistan are loosening their strict lockdowns, hoping that deaths will remain low and their hospitals will be able to cope with the serious cases. The surprisingly low level of South Asian deaths so far, may signal a milder pattern to the disease outbreak, which has convinced authorities the economic harm of extended lockdown is not justified when set alongside the apparently manageable health risks. Official statistics in both countries show a relatively low level of infections to date, but analysts suggest that a growing number of infections may be lurking undiagnosed.

We see many bright spots in key BDA markets.

Financial sponsors have been resilient and quick to act. Initially they performed triage on their existing portfolios, but already they are beginning to explore new growth opportunities including looking at prospective acquisitions. Global sponsors have been particularly aggressive in Japan, with local government support. Notably, Bain Capital has acquired Showa Aircraft Industry and Nichii Gakkan. Private equity firms are increasingly looking at take-privates and PIPE transactions.

As in all downturns, we see the strongest and best capitalised, most differentiated players, as benefitting and often growing market share aggressively. Tech-enabled businesses, and those which sell online, have become markedly more successful.

We see some price dislocation, slowing the progress of deals: sellers do not want to accept a significantly lower price, but buyers are looking for bargains. Realism is seeping through, and the most sophisticated players are looking beyond the crisis. Stock markets have bounced to some extent off their low.

We are seeing some distressed seller activity, and evidence of business groups looking to sell certain assets via carve-outs to generate cash or refinance existing debt facilities.

Life goes on, for now, in the new abnormal.

Notwithstanding lockdowns and social distancing, BDA is succeeding in helping clients to close transactions. Buyers are hiring third parties to carry out site visits, to be their eyes on the ground, when the buyer is unable to travel. Management presentations are being done virtually as video conferences with Microsoft Teams and Zoom. BDA is proud to have advised on transactions involving India, Vietnam, Thailand, China, Germany and the US in the last two months:

We have been monitoring each sector and geography, working to provide timely insights to help our clients understand and weather the storm.

We have published the following reports which you may find useful:

BDA has a track record of providing high-quality M&A advice, over 24 years. We have built scale, focus and connectivity between sellers and buyers across Asia, and worldwide. We will continue providing premium, Asia-related advice to clients globally, to achieve the best transaction outcomes – including walking away from deals which don’t make sense.

We are available at short notice to discuss what we are seeing, and how we can assist with your strategies and potential transactions.

We trust that you and your families are staying safe and healthy. We are operating well, across all our offices, and from our homes. We are confident we are well placed to help our clients achieve their goals during the rest of this year and beyond.

Please let us, or our senior colleagues, know if we can help you in any way.

Euan Rellie, Charlie Maynard, Andrew Huntley and Paul DiGiacomo

Senior Managing Directors
BDA Partners

About BDA Partners

In the weeks following India’s lockdown to contain the spread of novel coronavirus (COVID-19), the chemicals sector has witnessed considerable short term volatility but is well positioned to benefit in the near future, given the decline in prices of key feedstocks, and COVID-19 related manufacturing shifts away from China. We have examined both the short-term and long-term factors shaping this sector in India, and where future opportunity may lie for corporates, private equity and private owners of business.

The BDA Chemicals sector team would like to share our latest findings with you.

Executive Summary

India’s chemicals sector is the 6^th largest in the world and has witnessed strong growth momentum over the last couple of years. Following global supply-chain disruptions and the government’s lockdown measures to restrict the spread of COVID-19, Indian capital markets experienced a significant decline in March 2020, and a subsequent rebound in April. Given the essential nature of the chemical sector, manufacturing operations resumed shortly after the initial lockdown, reflected by a moderate price impact for listed Indian chemical companies
Even before COVID-19, global chemical manufacturing operations had already increasingly relocated to India from China, which will only continue after COVID-19 as more companies evaluate alternative supply chain solutions. Decline in crude oil prices since the beginning of this year will also have a significant impact on the raw material pricing from a short-term to medium-term perspective
The short-term impact related to COVID-19 will disrupt the current year financial performance of companies until virus-related economic disruption is mitigated. However, companies with strong balance sheets and low debt levels will be well-equipped to operate through the uncertainty, likely emerging stronger and more resilient operations
For unorganized players, the inability to adhere to strict social distancing guidelines for resuming operations have led to loss in business to large organized players
Sectors like Specialty Chemicals, Agrochemicals and Pharma Intermediates will have limited impact given their essential nature
Insights informed by BDA’s longstanding experience in the Chemicals sector highlights how M&A activity will evolve for corporates, PEs and private owners of chemicals business. We would see consolidation, new investments, and distress sale raise the level of M&A activity for corporates and private equity

Overall, we continue to see M&A activity such as growth capital and distress sales to continue in the short-term while consolidation will resume once the impact of the virus can be translated to the financials and future of the businesses.

Download the full report

Contact us

Andrew Huntley, Senior Managing Director: ahuntley@bdapartners.com
Kumar Mahtani, Managing Director: kmahtani@bdapartners.com
Kunal Dattani, Vice President: kdattani@bdapartners.com
Aditya Jaju, Associate: ajaju@bdapartners.com

About BDA Partners

Since our last report, COVID-19 impact on the Asian consumer sector, in February 2020, the epidemic has become a global pandemic. Extended lockdowns and stringent social distancing measures have upended consumer behavior and lifestyles, globally.

What new consumer habits are developing, and which are likely to become long term themes? How are businesses around the world responding to the crisis, to position themselves as relevant in the longer terms? What deal-making and private equity activity do we see, in Asia and across our markets?

The BDA Consumer & Retail team is pleased to share our update:

Coronavirus has changed consumer behavior

Extended lockdowns and stringent social distancing measures have upended consumers’ behavior and lifestyles, globally. Even before COVID-19, consumers were already rapidly changing and evolving their purchasing patterns. The pandemic has accelerated this process, and brought about some dramatic new habits.

Many of these new habits will stay, potentially for the long term, even when the pandemic is over.

Consumers have been stockpiling supplies of not only staple grocery items, but also healthcare products and medicines.

Non-essential items such as clothing, jewelry and beauty have seen significant declines.

The accelerating growth in online shopping will spur development in adjacent areas, notably digital payment and last-mile logistics. Paidy, a Japanese fintech company facilitating online payment without credit cards, raised US$48m in a Series C extension from Itochu. Ninja Van, a Singapore-based last-mile logistics provider has raised US$124m in Series D funding.

Focusing on self-care and home improvement

As the lockdown continues, there will be an increased focus on a broader concept of wellness – cleaner ingredients, organic and natural food, physical fitness, and mental rebalancing.

Online demand for cooking and mental health content has grown rapidly as consumers are developing an expansive view of wellness. Online searches for cooking and baking-related terms are surging. As consumers become more mindful of their food choices, the focus is increasingly on less processed food with more natural ingredients including organic food.

Yale’s happiness course, “The Science of Well-Being”, has attracted 1.5 million subscribers since mid-March, compared to 500,000 over the last two years. Meditation apps have seen a spike in downloads as people struggle with anxiety. Moshi, a sleep and mindfulness app for children, has raised US$12m in Series B funding.

With travel and social events curbed, consumption amongst millennials is shifting back from experiences to purchases, centering around the home.

The broader trend will reflect higher expenditure on home furnishings, kitchenware and appliances. Work-from-home arrangements may also lead to a permanent shift in workplace format, and change how consumers design and use their home space.

Virtual classes and home fitness regime

Fitness clubs and gyms are, for now, closed in most countries. Consumers are turning to virtual fitness classes and investing significantly into home fitness gear, which will fundamentally shift and define the fitness sector in the longer term.

Adidas registered record sales of yoga mats in Q1 2020. Aibi, a Singapore-based producer of treadmills and elliptical trainers, saw sales increase by up to 300%. Silver Lake has invested in Equinox, the majority shareholder of SoulCycle, to help build up its digital platform and to introduce a SoulCycle at-home use bike to tap into this trend.

To acquire and retain users, gyms and fitness instructors are going online, first offering free workout content, and gradually exploring ways to monetize remote fitness experiences. Mirror, a technology that streams fitness classes, has reported a rush of new demand.

Personal trainers are finding ways to reach their existing clients through virtual classes on Teams and Zoom. Other platforms have dropped subscription fees. Nike is offering its NTC Premium service, a platform for workout videos streaming and training programs, for free.

Changing business behavior to cope with COVID-19

To keep up with the drastic shifts in consumption behavior, and in anticipation of the future consumer, companies have taken significant measures to boost revenue, manage costs and improve operational efficiencies.

Food service companies have accelerated their shift towards online delivery and heavily promoted take-out options. Putien, a Singapore-based Chinese restaurant, launched a Takeaways Specials promotion, offering their most popular dishes at reduced prices – unheard of for a one-star Michelin restaurant.

Emerging brands across the world, from activewear by Lorna Jane and Alo Yoga, to bedding products by Brooklinen, are offering aggressive discounts to boost revenue. Others, including Apple, Sephora and demi-fine jewelry brand, Monica Vinader, are extending free return periods.

Retailers are demanding rent reductions. Related Companies, a major US real estate developer and owner, reported that “only about 25%” of its retail tenants paid rent in March.

As companies navigate this unprecedented period of difficulty, market participants are exploring how to optimize their supply chains and cost base. Some will undoubtedly emerge stronger while others will falter and eventually go bust.

How soon will consumers come back post COVID-19 and which companies will thrive

Consumer spending will rebound post-coronavirus – the question is how fast and how far. We are already seeing evidence of pent-up demand and delayed consumer discretionary spending.

When Hermès reopened its second largest Guangzhou flagship store, it generated US$2.7m, the single highest daily revenue for a single store in China, offering a tantalizing glimpse into one possible form the economic recovery might take.

Wealthy customers bought non-COVID essentials: tableware, shoes, furniture and leather goods. Some spent hundreds of thousands of dollars on crocodile leather goods – suggesting that the pandemic has left some high-end customers ready to engage in conspicuous retail therapy.

Big corporates with sizeable cash reserves and access to extensive cheap capital are best placed to respond to crises. Their strong balance sheets will help them navigate a prolonged global disruption and gain market share.

Small and Medium Enterprises (SMEs) with limited cash balances are more vulnerable. Although interest rates are low, smaller companies are struggling to access financing as risk aversion sets in with the banking community. Some are desperately looking for rescue funding to stay afloat; others are letting their employees go.

Deal-making and private equity during COVID-19

Travel restrictions and local lockdowns have significantly slowed down the M&A market.

Most companies have redirected their management teams to focus on preserving cash rather than pursuing acquisitions. Executives are taking voluntary pay-cuts, furloughing or laying off staff.

Executives are also being asked to provide updated business plans, re-run budgets and assess liquidity needs, factoring a U-shaped rather than V-shaped recovery.

Mid-market private equity players are being more cautious for now, tending to their own portfolio companies, drawing down credit lines, pruning costs, and preparing for a longer period of subdued trading.

However, with the private equity industry sitting on a record cash pile of US$2.5tn across all fund types, according to Bain & Co., some big players are making counter-intuitive, counter-cyclical bets. They are actively seeking deals across the industries hard-hit by COVID-19, such as the travel, entertainment and energy sectors. Silver Lake and Sixth Street Partners invested US$1bn Airbnb in April, as an example.

Some western private equity firms are being opportunistic and have shifted their focus towards taking advantage of distressed opportunities and making PIPE investments, into companies who need cash urgently. Silver Lake, Advent, KKR and Apollo, for instance, see the chance to acquire assets at much cheaper prices than last year. They will move opportunistically and aggressively.

While western players have started to move forward with more confidence, we expect Asian private equity players to follow quickly.

True Capital, a European consumer private equity player, has taken a 50% stake in fashion brand Hush, a UK e-commerce brand with US$75m revenues, focused on casual womenswear, including pajamas and loungewear. Hush claims an agile, digital-first business model, loyal customer base and relevant, contemporary product range. The CEO of True Capital, Matt Truman said: “We think highly profitable, predominantly direct to consumer brands such as Hush are the ones that will emerge in best shape from this current crisis… we’re very much open for business and excited about the opportunity ahead of us.”

We are also seeing global rescue investment in the most troubled sectors.

Engage Brands, a US operator of Pizza Hut, Checkers & Rally’s franchises, has acquired restaurant chain Boston Market from Sun Capital Partners. The restaurant industry is facing extreme challenges. Social distancing is restricting restaurants to take-out and delivery offerings only, and chains have seen a drastic drop in sales. “Engage Brands brings an enthusiastic, experienced, and successful ownership group to Boston Market, as well as access to resources that we need to continue to operate our business in this challenging environment,” said Eric Wyatt, CEO of Boston Market.

Steiner Leisure, an L Catterton affiliate, alongside funds advised by Neuberger Berman, has invested US$75m to support the management of OneSpaWorld Holdings Limited (NASDAQ: OSW), a global provider of health and wellness services and products on-board cruise ships and in premium destination resorts around the world.

L Catterton has also made a significant investment in ETVOS, one of Japan’s leading natural cosmetics brands, to bolster growth by expanding store-footprint and enhancing customer experience. Founded in Osaka in 2007, ETVOS provides 100% made-in-Japan mineral-based makeup products.

These trends will come to Asia – though Asian private equities are remaining more conservative for now.

BDA still closing deals

Notwithstanding the pandemic, BDA continues to help clients close transactions, including:

-The sale of Sichuan Huiji Food, a leading branded, better-for-you snack company in China, to Grass Green and New Hope Group

-The sale of Thinh Phat Cables and Dong Viet Non-Ferrous & Plastic to Stark Corporation PCL of Thailand

-The sale by Henkel of its Asian electronic cleaning chemicals business to Nippon Kayaku, a Japanese specialty chemicals company

-The acquisition by Rich Foods of the outstanding 50% equity in its Indian JV, Rich Graviss, a market-leading bakery ingredients business

We believe transaction activity will bounce back once the virus is contained. Opportunistic investors, particularly private equity firms who are holding record dry powder, are eager to find deals at the right valuation.

Investors will favor recession-resilient and defensive industries that will withstand the market downturn.

Sectors such as technology, healthcare, business services, essential consumer supplies, EdTech, and O2O businesses will receive increased attention

Deal valuations will be somewhat subdued for the coming months. The public markets have seen a lot of volatility as a result of uncertainty and panic selling induced by COVID-19. Some major stock markets dropped by more than 20%, signaling a potential adjustment to company valuations, at least in the short term.

We expect to see more domestic rather than cross-border deals done in the near-term, until travel bans and prolonged lockdowns in major cities are lifted.

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Contact the BDA Consumer & Retail team

Euan Rellie, Senior Managing Director, New York: erellie@bdapartners.com
Karen Cheung, Managing Director, Hong Kong: kcheung@bdapartners.com
Vivian Ren, Managing Director, Shanghai: vren@bdapartners.com

About BDA Partners

In the first trading week after the outbreak of the novel coronavirus (COVID-19), health sector performance in China’s capital market was remarkably strong. We look here at long-term impacts on the sector in China, and where the M&A and Private Equity opportunities may lie.

The BDA global Health Sector team has investigated these topics and would like to share our latest findings with you in our latest report.

Executive Summary:

COVID-19‘s impact on the global economy is far beyond SARS, with almost 12x confirmed cases globally to date and stricter quarantine measures. While the epidemic in China shows signs of improvement, the outbreak has spread to other parts of the world. We expect the economy in China to rebound strongly in the second half of this year, but the extent of the recovery will depend on the impact of the outbreak on the global economy
We expect the outbreak to have a positive effect on the healthcare sector development in China. While SARS’ impact on the sector was moderate, we believe COVID-19 will have a longer-term impact, with certain sub-sectors benefiting from favorable government policies and increased private and public health investments
The preventative, diagnostic and therapeutic solutions for COVID-19 generate explosive short-term demand for related medical products. While the demand spike is temporary, we expect some medical products to experience a transformation to long-term increased demand
COVID-19 has drastically raised people’s health awareness. It will raise both public and private health spending, and we expect the following subsectors to benefit, generating fundraising and buyout opportunities:
- Vaccines, medical robots, IVD, ICU equipment & devices, online medical consultation, home-based medical devices and OTC medicine
Healthcare has been a hot spot for PE investments in recent years. We expect industry consolidation to accelerate, creating ample opportunities for both industry players and PE investors alike
We believe that COVID-19 does not change the “principles” of cross-border M&A in China:
- Outbound deals focus on the acquisition of international brands, products and technology
- Inbound deals focus on entering and capturing markets with strong demand and growth potential
Overall, COVID-19 outbreak is an opportunity rather than a crisis for capable private equity health investors, especially in certain sub-sectors

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Contact BDA Healthcare team, China

Andrew Huntley, Senior Managing Director, Global Head of Health Sector: ahuntley@bdapartners.com
Lei Gong, Managing Director, Health Sector, Shanghai: lgong@bdapartners.com
Anthony Siu, Managing Director, Financial Sponsor Coverage China, Shanghai: asiu@bdapartners.com

About BDA Partners

Since the coronavirus (COVID-19) outbreak in December 2019, it’s become evident that the disruption to the economy will impact not just China but the rest of the world. Obviously, there is still a lot of uncertainty about what will happen –but the effects are already dramatic. Major cities are locked down. A mass quarantine of tens of millions of people. Millions are stuck and banned from travelling in and out of China. Thousands have died.

Businesses are taking drastic measures. Thousands of Chinese factories are yet to reopen. Tens of millions of professionals are working from home or on rotation. Students are on extended breaks.

Global airlines have mostly suspended flights to China. Travel and visa restrictions have been established in almost 100 countries.

The global supply chain has been disrupted. Countless businesses have been impacted by the outbreak of the coronavirus.

Not surprisingly, demand for most discretionary goods has dropped dramatically across the region. Tourism, hotels and airlines are decimated. Retail stores and restaurants are in deep trouble. Consumer staples such as groceries, rice, instant food and toilet paper have remained resilient. The epidemic has helped supermarkets and e-stores attract new online customers without extensive marketing and promotional efforts.

Some sectors might benefit from the virus outbreak –but not most. Anything that is related to digital, direct-to-consumer, healthcare: online supermarket, food delivery, digital home entertainment, online games, online education, healthy foods, consumer health and drugs, will benefit.

Surgical masks, alcohol sanitizers and other hygiene products are the most obvious beneficiaries of the coronavirus disruption.

We think the coronavirus outbreak will accelerate the shift towards online shopping and entertainment, boosting online segments. The new O2O, ecommerce delivery model fits well with consumer needs when they are asked to stay at home. The new habits people pick up in the next few months will last, in many cases, forever.

We saw US$40bn in global lost productivity due to SARS in 2003 and US$55bn during the 2009 H1N1 swine flu pandemic, both of which involved China. Those numbers could be dwarfed by this new virus –which could delay growth of hundreds of billions of dollars.

Global growth will resume as long as the coronavirus doesn’t last too long. Three lost months will be a big hit. Six lost months could mean some countries tip into recession. It is too early to assess how big the impact is, but we are impressed by a sense of calm and resilience by financial players.

Q1 profitability will be negatively impacted globally. M&A deals will slow down dramatically in the next couple of months. Valuations may drop in the short term but should bounce back sharply. Post-virus, there will be pent up demand, from delayed consumer discretionary spending, and delayed spending on consumer durables. We expect deals to rebound once the virus is contained. In the meantime, there will be good buying opportunities in China and beyond.

Download the full report

Contact the BDA Consumer & Retail team

Euan Rellie, Senior Managing Director, New York: erellie@bdapartners.com
Karen Cheung, Managing Director, Hong Kong: kcheung@bdapartners.com
Vivian Ren, Managing Director, Shanghai: vren@bdapartners.com