For Sebastiaan van den Berg, chief investment officer and head of principal investments at Sun Hung Kai & Co., flexibility is key to differentiating itself from its peers.
In an interview with FinanceAsia, van den Berg discusses how the Hong Kong-listed group can help in China's outbound M&A story, discusses key themes for private equity and his company's relationship with Chinese state-owned financial services group Everbright.
Sun Hung Kai & Co. owns and operates various financial businesses, including consumer finance unit UA Finance, which was bought by Sun Hung Kai in 2006. In 2015, the company sold a 70% stake in its brokerage and wealth management unit, Sun Hung Kai Financial, to Everbright Securities in a $4.1 billion deal. While it shares historical roots with leading Hong Kong developer Sun Hung Kai Properties, the two businesses are no longer connected.
Before taking the job with Sun Hung Kai & Co in 2016, van den Berg spent 10 years with HarbourVest Partners, a US private equity firm. Before that, he worked for AlpInvest Partners and Goldman Sachs.
The following interview transcript has been edited for brevity and clarity.
Q: What’s the investment objective at Sun Hung Kai & Co.?
A: Our principal investment has more than $2 billion of assets, investing in public and private stocks and bonds, as well as commercial and property projects worldwide, mainly in continental Europe and the UK. Existing investments include Sofitel Hotel in Paris and Generator, a high-end operator of youth hostels across Europe.
Besides [the] financial returns, we look to put our money in companies [that have] operating synergies with companies in our portfolio. For example, we would invest in companies associated with our consumer finance unit UA Finance and SHK Credit, a mortgage lender, as well as in the brokerage and wealth management company, Everbright SHK Financial, in which [we still have] a 30% stake.
Given our heritage and history in Hong Kong, our investments are strongly tied to Asia and China. In our portfolio, we have exposure to China, Australia, as well as developed western countries.
At some point in time we are open to taking external money as the valuation and size of a transaction has gone up significantly. In today’s market, size has become a more important factor to woo interesting deals as well.
Q: How do you differentiate your business model?
A: As a family office, a quick decision-making process allows us to win deals in this competitive environment. Unlike many of my western counterparts, our investment decisions can be made much faster.
Unlike most private equity firms with a five-year mandate, we have a higher tolerance of the investment cycle, because we are investing through our own balance sheet rather than taking risk on behalf of the limited partners.
Our flexibility in investment size and instruments also help differentiate ourselves. We can invest in debt or equity, depending on each specific situation. We can do convertible loans as well, ensuring the return [on] our investment, while protecting ourselves from the downside of being a pure equity investor.
Due to increasing regulations after the 2008 financial crisis, some of the wealthiest families in Asia set up their own investment funds, impinging on the business of investment banking and private equity.
Q: What’s the theme for private equity investors this year?
A: Chinese companies’ desire to acquire overseas assets is one of the themes for us. For SHK, we can provide the money they need offshore, while having their overseas assets as collateral. In case of any late payment issues, we can take their offshore assets, which is easy and straightforward for us.
Historically, [the] size of the total loan book is roughly about HK$2.5 billion to HK$4 billion, with about 20 loans for most of the time. The return on [these financings] is lucrative for us, paying a 15% to 20% of coupon. It is almost like equity returns with the benefit of downsize protection.
Q: What’s your assessment of risk, valuation and liquidity in the private equity universe? How does the wealth of liquidity impact your investment decision process?
A: We’re certainly aware of the rich valuation of risky assets [from] stocks to bonds. There is a lot of liquidity in the market in the private equity firms and many of them have prepared their chequebooks to deploy capital after raising fresh rounds last year.
Clearly we need to be cautious of the liquidity-driven market. [At] SHK we need to identify an investment opportunity where we think there is a unique angle. For example, we would like to have exclusive access and relationships with the management, staying away from the crowd.
Besides financial services, we’re active in the global healthcare sector, such as retirement village operators and elderly care services.
Q: Besides healthcare, you are an investor in China’s online lender PPDai. What are the prospects for the online finance sector in China?
A: Our investment in PPDai can connect with our UA Finance business in China, with the latter being the offline channel for the online lender. We’re continuing to look for other investments in the online finance space with a focus on wealth management platforms.
I think the Chinese government is not trying to kill the entire industry, but to put more emphasis on oversight. Overall the government wants to remove the bad practice in the industry and warn investors not to chase after abnormal returns provided by some online lenders.
Q: With Everbright as a major shareholder in your brokerage and wealth-management arm, how does it impact your investment process?
A: Everbright and us are co-investors in a number of private equity deals overseas, including investments in advanced engineering companies in US and Europe.
Q: In the low-yield environment globally, do you use any leverage to bolster your investment return?
A: We do leverage for our public equity and debt businesses, mainly through credit provided by our prime brokers. As a private equity investor we are also involved in leveraged buyout transactions, normally taking a minor stake in such situations. Our style is not to take a controlling stake or be the sole controlling shareholder of the target company.
For example, we were part of an investor consortium [when] buying the Canadian consumer finance business of Citi in 2016, in a buyout deal in which we partnered with US private equity firms J. C. Flowers & Co. and Värde Partners.
