Feature: A rising star in private equity

This article first appeared in Wealth, The Edge Malaysia Weekly, on October 25, 2021 - October 31, 2021.

"Many people can predict the first bounce of the ball, but what people struggle with is predicting the second or even third bounce. To me, private equity is about successfully predicting and investing in the second, third or even fourth bounce.” - Johan

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Johan Rozali-Wathooth joined the financial services industry in 2002 as an accountant in London. His career had a bumpy start, as the industry was still reeling in the aftermath of the 9/11 terrorist attacks and the dotcom bubble burst.

For Johan, the turning point came in 2014, when he played an instrumental role in the merger and acquisition (M&A) involving Affin Holdings Bhd and Hwang-DBS Bhd. He joined Affin Hwang Asset Management (AHAM) as its deputy managing director and founded Bintang Capital Partners (Bintang), the private equity arm of AHAM, in 2016.

Five years later, Bintang has deployed RM150 million into four companies and recently yielded healthy returns for investors. It is also looking to raise RM300 million (US$72 million) for its new vehicle by Sept 30 this year. 

In an interview with Wealth, Johan, 42, who is also the executive director and managing partner of Bintang, says the firm has sold some shares in one of its investee companies after holding them for more than three years. The partial exit brought investors three times the return over their initial investment.

He does not disclose the company’s name, but the holding period indicates that it could be one of two companies: Bitsmedia Pte Ltd, which operates Muslim Pro, the Muslim prayer mobile application; or WatchBanQ Group Ltd, which runs WatchBox, an e-commerce portal for second-hand luxury watches.

“We were very happy for the partial exit and our investors were delighted with the return,” he says. 

Bintang is eyeing another exit, potentially by year-end or early next year — or even longer. “There could be further upside if we hold on to this investment until its IPO (initial public offering), which will probably be in the next two to three years. This could yield us a return of five to six times [over the initial investment amount] for a holding period of four to five years,” he adds. 

OneBerry Technologies Ptd Ltd, a Singapore-based security firm, and iHandal Energy Solutions Sdn Bhd, a turnkey provider of sustainable engineering solution, are two other investee companies under Bintang. The latter is a home-grown company listed on the Forbes Asia “100 to Watch” list in August, which highlights notable small companies and start-ups on the rise in the region. 

Johan is exploring other exit routes, including listing these companies in the Singapore market through a special-purpose acquisition vehicle (SPAC). 

SPACs, which are blank-cheque companies listed on the stock exchange to raise funds from investors to acquire another business, experienced a boom last year. According to Bain & Co’s “Global Private Equity Report 2021”, SPACs raised US$83 billion in fresh capital in 2020, more than four times the amount raised in 2019 and earlier. The Singapore Exchange also announced new rules in September that enabled SPACs to be listed on its Mainboard. 

Johan’s concern, however, is whether investors will support SPACs in the longer term or merely see it as an opportunity to speculate. This point is important because SPAC sponsors must subscribe to a certain percentage of the IPO shares and can sell them only after a given period, typically six months after the listing. Large swings in SPACs’ share price could harm the sponsors.

He also wants to see whether a SPAC can provide its investors with good returns over the long term and benefit the investee company. “There will be no point if it is an exit route that creates a lot of frustration and unhappiness for the team we leave behind at the [investee] company once we exit. 

“After all, the Southeast Asian PE (private equity) market is a relatively small community. If we act in a way that shows we care about only our returns and not our investee companies’ welfare in the longer run, deal flows may dry up for us in the future,” he says. 

Key investment lessons 

Johan attributes his success thus far to two decades’ experience in the financial services industry. He started his career as an accountant at Arthur Andersen LLP in 2002, one of the “Big Five” accounting firms, after graduating from the London School of Economics and Political Science. 

The Enron and WorldCom accounting scandals broke shortly after, however, with Arthur Andersen being the auditing firm of both companies. The two incidents, coupled with the 9/11 attack that year, dealt a blow to Johan’s morale. 

“I asked myself whether the start of my career had been cursed. It didn’t seem to be the most auspicious time to join the financial services industry,” he says.

Still, he dug in and worked hard as a member of the firm’s corporate restructuring team. He observed first-hand and learnt valuable lessons from how companies went into extremely distressed modes. 

“Those early lessons came in handy in the latter part of my career. I learnt what companies needed to do to avoid getting into a bad state. I developed an acute awareness of the red flags [that could get a company into serious trouble], and what had to be done to avoid them.”

The corporate restructuring practice of Arthur Andersen was acquired by Ernst & Young (EY) in 2002, which made Johan an employee of the latter. He quit his job at EY in 2004, and joined Babson Capital Management, a leveraged buyout firm that provides loans for borrowers to acquire below-investment-grade companies, as an investment executive. In 2007, he joined Highland Capital Management, an alternative asset management firm based in Dallas, Texas, as a portfolio manager.

It was in Babson Capital that Johan had the chance to meet some of the world’s best entrepreneurs, including Patrick Drahi, who had yet to be the billionaire he is today, but was already a visionary and passionate entrepreneur with a great team.

After meeting with Drahi, Johan’s task was to persuade Babson Capital's investment committee members to invest in Drahi’s company. It was his first deal with the firm and he was nervous and excited. 

“The company Drahi founded was Numericable. It acquired fibre optics and cable networks that enabled high-speed internet services across Europe. The European governments had put in a lot of money to build these [fibre-optic] cables under the ground. They ended up spending too much on something they didn’t know what to do with and wanted to sell them cheap. Drahi was buying.

“What Drahi envisioned was a triple-play strategy, which means people would eventually take internet, TV and mobile phone services from one source. Such a concept is commonplace today, but that was a pretty revolutionary concept in the early 2000s,” says Johan.

The firm invested €50 million in Numericable, which turned out to be a huge success. The incident taught him about the importance of investing in a company with a strong founder and team. He witnessed how, with the right vision and technology, a business could shape the world’s future.

Often, a good investor needs to make key decisions with a large amount of money at stake. While due diligence is essential, having the courage to make a conviction call is crucial. Johan learnt this when he assumed the role of group chief strategy officer at Affin Investment Bank Bhd (AIBB) from 2014 to 2017. 

That moment came when the Hwang family approached several entities, including AIBB, with an offer to acquire some businesses of HwangDBS Investment Bank Bhd. If it went through, the RM1.5 billion deal would be one of the largest ever acquisitions made by the Armed Forces Fund Board (LTAT), which controlled AIBB, says Johan.

Looking at Hwang-DBS’s valuable stockbroking and asset management business, he thought it was a golden opportunity to make AIBB a major player in the market. Once again, his task was to convince the shareholders and board members that it was an opportunity worth pursuing. 

He remembers a heated debate that broke out during a key board meeting chaired by Tan Sri Yaacob Mohd Zain, when he was tasked with helping board members arrive at a decision. 

“As the debate on the price tag got more heated, Tan Sri Yaacob stopped the debate and turned to me, point blank, and said, ‘Let’s ask Johan what he thinks?’

“I mustered up my courage and said: ‘Perhaps the question we should be asking ourselves is not whether we can afford this acquisition but whether we can afford not to do it.’ Our business was potentially on the verge of irrelevance. The re-framing of that question potentially helped turn the tide of the debate.”

Five years later, the M&A between the two investment banks proved to be a success. Most importantly, it was the Bintang team and support from AHAM that have helped the private equity firm grow healthily in the past five years, says Johan. Its partnership with Singapore-based private equity firm CMIA Capital Partners is another critical factor to its success. 

Riding the digital wave 

Looking ahead, Johan wants to raise RM300 million under the Penjana Kapital Sdn Bhd fund-of-funds programme, which is part of the Short-Term Economy Recovery Plan (Penjana) launched in June last year. 

Under the programme, the Malaysian government will match up to RM600 million, on a one-to-one basis, according to funds raised by selected local and foreign private equity and venture capital firms. The total fund size of RM1.2 billion would be deployed mainly in core sectors such as financial technology, educational technology, agricultural technology, mobility and artificial intelligence. 

Johan wants to explore companies with the right technology to disrupt traditional industries such as energy and healthcare. For instance, a firm that helps companies consume energy efficiently is a less obvious, but attractive, long-term play. As powerful semiconductor chips are being quickly developed and advanced technology deployed, the world is set to consume much more energy in the future. 

Healthcare is another sector that the firm favours, underpinned by the ageing trend that the world is experiencing. Consumer demands for healthcare services are also shifting as the world enters a new phase of the digital era because of the pandemic.

“Our lifestyles have drastically changed. I spend 14 hours a day staring at the screen having online meetings and working nowadays. Last year, my eyesight started to deteriorate. My joints hurt when I get up from my chair in the evening. One-and-a-half years of virtual working is taking its toll on everyone’s health. 

“We believe the demand for healthcare will be driven by these significant changes in lifestyle as a result of the digital revolution,” he says. 

Johan is scouting for longer-term investment opportunities that tend to be overlooked by others. Quoting the title of one of his favourite books about entrepreneurship, he is looking for “The Second Bounce of the Ball”.

“Many people can predict the first bounce of the ball, but what people struggle with is predicting the second or even third bounce. To me, private equity is about successfully predicting and investing in the second, third or even fourth bounce,” says Johan.