PRINT THIS PAGE Institutional Investor Profile: David G Pierce, CEO, Squadron Capital28/05/2008. Source: AltAssets. 
David Pierce on the rise of Asian private equity, on first-time funds, on the importance of local knowledge and on how the industry should deal with the immense growth it has seen over the past few years.  Hong Kong-based Squadron Capital constructs and manages portfolios of private equity funds, with aggregate assets under management well in excess of $1bn.
The firm is an affiliate of Search Investment Group, a private investment firm established in the mid-1970s by Robert W Miller, a co-founder of Duty Free Shoppers.
David Pierce first moved to Asia in 1982, initially working in a private legal practice. Since then he has been based at various times in Beijing, Hong Kong, Shanghai, Singapore, Taipei and Tokyo.
In addition to his role as CEO of Squadron Capital, he is also senior managing director of Search Investment Group, which he joined in 2001. Previously, he was president of China-focused private equity firm Richina Capital Partners.
Pierce is a member of the executive committee of the Hong Kong Venture Capital & Private Equity Association and also the limited partner advisory committees of a number of private equity funds. He serves as a director of Duty Free Shoppers and other private companies in which Search Investment Group has invested.
Are Asia's private equity markets becoming more significant on a global scale?
'The reason I came to live in Asia, back in 1982, was that I strongly believed that the region was going to grow. Unfortunate natural disasters aside, the years since then have been a tremendously exciting period for the region. I would agree with what many have said - that the rise of Asia, and in particular the re-emergence of China, is one of the most significant things to occur at the end of the 20th century, and indeed beyond. As Asian markets become more significant globally, so too does the private equity activity within those markets.'
Could you tell me more about Squadron Capital's activities in the region?
'We have been investing in Asia for Search Investment Group since the 1980s. In 2006 we raised our first Asia Pacific-focused fund of private equity funds from third-party investors, which exceeded its target of $300m. We invest in funds active at all stages, and our fund of funds is essentially defined by its geographical focus. We target growth capital in emerging markets and buy-outs in the more established countries.'
Who are your investors?
'Our investors comprise institutional investors from Europe, Asia, the US and the Middle East, specifically insurance companies, pensions, endowments, foundations, commercial banks and private banks. We also have some family offices, including our sponsor Search Investment Group. It has been really gratifying to secure the participation of institutional investors in our Asia Pacific fund of funds, which really served to validate our fundamentalist approach to manager selection.'
What is your typical bite size?
'The size needs to be meaningful but this can also be a function of the size of the portfolio fund. Some of the funds in the region are quite small and we typically would not invest more than ten per cent of the fund's aggregate capital. The fund, whatever its size, must have the ability, in our view, to be successful. Once we form a positive view on a fund, after extensive due diligence, we want to make a significant investment.'
What does your due diligence process involve?
'The private equity industry in the Asia Pacific region has seen enormous growth in a relatively short space of time, as have most of the economies in which we invest. We, of course, look deeply at return information, but it is important, especially in countries like China and India that have seen such rapid growth, to determine whether an investment involved true value creation by the general partner or is just a case of "the rising tide lifting all boats".
For us it is as much about how managers create value as it is about the figures on the page. We always go out and meet the investment teams in their markets. Talking to investee companies is also important, particularly when dealing with managers investing growth capital in emerging markets.
It is more than just cash and returns; it is about having a specific skill set, not just suited to private equity, but to the region also. We like to ask ourselves what differentiates these managers from their peers. We do not just look at private equity experience; we want people who have experience of actually running businesses, and doing it well.
Track record is very important for us, but the reality in Asia is that track records are often very brief. We also look at the quality of the team, the quality of the structure, their skill set and whether they conform to global best practice. Essentially, we look at whether their fund aligns the interests of the general partner, its team and the fund's investors.
We like to see how a team performs across a cycle. It is one thing to have a team operating well in a sympathetic market, but one often gets a very different perspective when seeing them working through an economic downturn.'
How important is regional experience?
'Local knowledge is very important, particularly in Asia. I am the only Westerner in the Squadron office. While I would not say that ethnicity is essential, I would say that local knowledge is and I have been in the region most of my adult life, since 1982. All of the rest of our team are from the region.'
Do you invest in first-time funds?
'We have done so in the past, but we distinguish first-time funds from first-time investors. We do not invest in the latter. For us to invest in a first-time fund, the professionals must have invested together before. With all this capital coming into the market, the concern is that currently a lot of people who have been able to raise funds are first-time investors. They are learning on the job and this is not what we are looking for.'
Do you invest in distressed debt?
'We make some investments in distressed debt funds. In early 2001 and 2002, we made quite a few in Japan and South Korea. That cycle has ended. There are currently a lot of non-performing loans in China, and some are buying these, but I am sceptical for a variety of reasons about the possibility of achieving private equity-style returns on such assets.'
What are areas of interest in the region going forward?
'India and China are obviously experiencing huge growth at the moment. On a smaller scale, Southeast Asia, specifically Vietnam, is also seeing significant growth.
It is important to understand, though, that macroeconomic growth does not always translate into a good environment for private equity. Despite its growth I would say that Vietnam, for example, is not yet ready for private equity investment on a large scale. Still, it will develop fast because it is able to learn from the example of China's growth in the 1980s and 1990s.
In Japan the pace of private equity investing has been somewhat disappointing, despite it being the world's second-largest economy; so being a large, developed economy and having an active private equity market do not always go hand in hand. This is not to say that there will not be massive opportunities in Japan. There are many interesting Japanese companies suitable for private equity investment. The market requires patience, an approach that involves company building and value creation within the framework of their particular business culture. There are many factors, such as a profound deference to seniority and an aversion to open conflict, that must be understood by an investor to succeed in Japan.
I think we are increasingly seeing Japanese business and government leaders conclude that private equity can be a very positive force for change. There is apprehension of "barbarians at the gate" almost, but that does not really happen in our markets, and greater acceptance is just a matter of time. With the growing competition Japan is seeing from China and South Korea, in areas where they have previously been dominant, the leaders of Japan are looking for ways to enhance their competitiveness, to focus more on what they are best at. I think they will increasingly see private equity as a useful component to business restructuring. Private equity activity in Japan may never reach Western levels in terms of percentage of GDP, but certainly has some way to go before it even comes close.'
What is the biggest issue facing private equity at the moment?
'The private equity industry needs to learn how to deal with the immense growth it has seen, particularly in the more mature markets of the US and Western Europe and increasingly now in Asia.
We are seeing a lot of new entrants, with lots of new investors attracted to private equity and the returns it can bring. There is significantly more money coming into private equity, and the asset class has to learn how to cope with large investors increasing allocations. With some of the largest, even an increase of a few per cent is still in the hundreds of millions. The industry needs to seek new markets in which to grow; Asia would be a good example. The issue is how to handle this growth and continue to make good investments.'
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