Talking Top Quartile With Toby Smith of Lombard Investments

Toby Smith, managing director, Lombard Investments Inc

In 2007, fund raising for our third Asia fund was challenging due to offshore perceptions of Southeast Asian political risks and a market bias in favor of China and India. Fortunately, a good number of our prior fund investors recommitted, attracted by our performance and style consistency, local experience and the stability of the professional team.What they are pleased with now is not only IRR, but the fact that we’ve realized in cash about $350 million in exits. Liquidity hasn’t been a problem.

Did Lombard Investments need to do any deals from early on in the fund to convince investors to sign on? How much money did you eventually raise and what was your first deal?

No, our first investment was made following the final closing at $234 million.


How did you navigate the financial crisis with the fund?

We can’t say we saw it coming, and so we made a series of investments before the storm. However, even these investments produced decent exit multiples, notwithstanding the timing. In retrospect, the global financial crisis became an opportunity for us; valuations dropped and financial capacity attenuated. We thought the offshore concerns overblown, since Asia had learned from the 1997 crisis and its improved governance rebalanced the macroeconomic framework and strengthened banking and the financial system in general. Nonetheless, several of our large LPs expressed concerns about new investments we made during the 2008-9 period; fortunately, these deals proved highly rewarding.


Lombard has made more than 90 minority growth and control investments in Asia and North America since it was founded in 1985. Are you able to do any buyouts in China, or only minority deals from Fund III? Any North American investments?

While the majority of our PE deals are minority growth, we complete a few control deals in each fund. In China, for example, LAIII made a control investment in a restaurant chain with more than 100 outlets.


Were investors more enthusiastic about Asia investing back in 2007 or now?

The answer depends upon where and with whom an LP invested. Firms that exhibit consistent exit ability, returning cash and profits, get attention. Those that don’t, don’t. We’ve focused on market leaders, companies with great prospects, healthy balance sheets and experienced management; this focus has been rewarding.


Take us through any of the best exits from Lombard Asia III and could you share any return multiple figures?

Our recent LAIII exits have ranged from 1.3x capital to over 8x. To achieve the higher end of this scale, we negotiated attractive entry valuations and engineered meaningful growth such that a small cap might have grown to a mid cap, or a mid cap crossed over into the large cap category.  As you know, increased size can warrant multiple expansion, recognized in a robust IPO market and/or by strategic investors looking for market entry. 


You recently closed Fund IV. Any changes there in the size of deals or strategy?  

We’ve generally concentrated on sectors linked to rising middle class consumption. This has included retailers, shopping malls operators, hospitality, food and consumer finance. The middle class consumer remains our focus for Lombard Asia IV, however, the sector valuations have become more challenging, creating a need for more creativity and more value-added. Asian regional integration and enhanced connectivity are changing how we evaluate potential growth and a few years ago, led us to invest in a low-cost Asian airline which recently launched a very successful IPO.   


What are the most exciting places you’re seeing now with investment potential? Vietnam?

Myanmar is arguably the last great frontier, excluding North Korea.  In the near term, frontier excitement may not translate into profits.  Someday.   


Other private equity firms (Carlyle Group and others) have been raising big Asia funds. What’s your secret sauce to maintain your edge?

We’ve concentrated on the mid-market which does not attract the largest Asia funds and, arguably, is less competitive.  The key for us has been to stay embedded in the local business community – we’ve been “local” in Asia for 15 years. The better deals almost always stay home.