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Q.: Even as private equity contracted at the height of credit market crisis, the share of deals in Asia-Pacific more than doubled. How did your team take advantage of the opportunities in Asia during this time frame?
Mr. Baxter: In our segment of the market, the financial crisis created opportunities as less-experienced firms were distracted with challenges in their portfolios and had weak support from bankers, who became more cautious of lending. In many countries, captive GPs of bank groups and less-experienced GPs stopped their investment programs and began orderly exits. So we now have far less competition and markets that have rapidly healed and are now expanding, except for Japan, which accounts for less than 20% of our program.

Finally, no pan-Asian competitor that we know focuses on the small end of the market. Typically we find our competition to be either strategics or small country-specific funds that cannot as readily evidence success at opening up new addressable markets in foreign markets.
Q.: What are your thoughts on the future of private equity investing in light of the devastating tragedy in Japan?
Mr. Baxter: The vast majority of Japan's GDP and productive capacity was not in the region where the terrible devastation occurred. We believe that in several months there will be normalization for those firms not directly affected and so it is not changing our interest in continuing to seek quality investments in Japan. Developing investment teams and a brand in Japan takes years and years, so this tragic event will not deter us from keeping our office active. However, Japan will likely only account for less than 20% of our pan-Asian fund, so if it takes a bit longer for our teams to get back to a full stride in Japan, then we will have them staff deals in other parts of the region.
Q.: How has the tragedy in Japan affected your operations?
Mr. Baxter: As it relates to what we are seeing on the ground are short-term disruption due to interruptions of logistics chains and a general "freezing up" of some retail activity as people stay indoors and as an instinctive reaction to the terrible events. It has indeed affected our portfolio but we believe it will be a 60-90 day disruption and then we are expecting activities for our investments to normalize. Long-term we don't see a major effect on our activities one way or the other. We are also continuing with our deal sourcing work and are one of a few active investors in our segment of the market.
Q.: Which regions are most attractive in your Asia-Pacific fund Investment criteria?
Mr. Baxter: Presently our deal flow comes out of the mature industrial markets of Asia: Australia, Singapore, Hong Kong, South Korea and Japan. These markets have lots of privately owned businesses, aged demographic owners who are willing to sell control positions (a requirement for us typically), and strong financial, legal and business services infrastructure to support full transparency. We find that these types of macro variables are fundamental to ensuring the necessary deal flow and post acquisition environments that are conducive to business-development activities.
Q.: What is your investment model for spotting deals in the local Asian markets?
Mr. Baxter: We believe having small local teams in each of the markets allows us to navigate the critical issues of culture and deal development; that is we are not"flying in to do deals" because we are connected to these local nationals. Capital flows to the best deals in the region and we are very selective, comparing the best deals against one another, and honestly relative to other deals around the world. Our investment professionals can be moved around the region to focus on the best opportunities as they occur. Such a model outcomes in consistent activity and provides investors with a diversified selection and higher returns.
Q.: In the broader context, how does your team sourcing deals in the region?
Mr. Baxter: At the Riverside Company, we are specialized by function. So in each country, in the long term, we have someone who does nothing but focuses on deal sourcing. This executive typically develops and continually communicates and responds to all intermediary relationships, visits bankers, attorneys, founders, corporate development offices, industry conferences, etc. The origination management has a whole slate of metrics by which they monitor and manage their performance.
Q.: What are the primary evaluative criteria and operating process?
Mr. Baxter: As a standard practice, we carefully consider the sustainability of a company's earnings and cash flow because we base valuations on those, and we look at where future growth is going to come from. Since we have acquired over 250 businesses, we of course have established routines and processes. We typically staff deals with at least three people and, in situations where there are time limitations or geographical challenges, 4-5 people. We also supplement our teams with input and time from our in-house operators or outside board members with specific industrial expertise.
Q.: As specialists, can you shed light on getting due diligence right in the SME and family owned business?
Mr. Baxter: Obviously we want to understand the financial history of the business at a highly granular level. Then, for future growth, we need to do our own research on the promise in the specific market segment, the core skill sets of the management team that is going to carry the business forward, the competitive landscape, pricing power, sustainability of margins and their points of differentiation, what kind of working capital requirements are needed in the business, and list goes on and on.

The best deals are those that involve a seller who has been well represented and has their "house all in order." Unfortunately, in too many deals you are digging through boxes trying to find basic information. The chief concern often boils down to the big picture questions: Do you have the right management members? What are the trends in the particular segment and what will that landscape look like five years out?
Q.: The Asia-Pacific Fund, vintage 1 has invested in five companies in three unique markets--Japan, Korea and Australia. Is the fund fully deployed or are you looking to make additional investments?
Mr. Baxter: RAF I has been fully deployed but we are also investing Partner's capital and out of other pockets at Riverside. Because we are seeing robust deal flow, we are now planning our successor funds for RAF II. As we raise larger funds for the region, we may begin transacting in a few more interesting markets where we are seeing deal flow: for instance Singapore, Hong Kong and Taiwan.
Q.: So, why is Singapore, Hong Kong and Taiwan interesting to you?
Mr. Baxter: These markets have evidenced high growth and have large numbers of business owners who have learned how to leverage the opportunities in China and India. We believe we can"play the emerging market story" by investing in control buyouts of platforms in these economies; you get superior legal environments with more developed IP, banking and service infrastructures. I would argue that ultimately our risk-adjusted returns, by investing in these markets, are higher than if we would invest directly in the emerging markets with minority investments.
Q.: In working with family owned companies, what management attributes is relevant?
Mr. Baxter: For the SME segment, you have to prepare to serve up a wide spectrum of management support. In some cases, founders say, "I am leaving Day One and it is your problem to address who runs the business." At the other end of the spectrum, you have founders who say, "Come in and be my partner and help me scale this baby up." So we have to be astute on calibrating what level of contribution the deal actually needs. Some teams want and need a great deal of involvement others want you to let them run with the ball. Ultimately, our job is to ensure, that under either scenario, we have experienced talent setting strategy and operating the businesses.
Q.: Is there an example of how Riverside helped "scale this baby up"?
Mr. Baxter: In Asia we have half a dozen investments that are presently being expanded. Examples include companies like Boost in Australia, where we have worked with management to expand their international extensions of product lines, expanded their store counts in their new fresh-mex concept and are presently working on three acquisitions in complementary lines of business. Another example is our parking business, Shinsouki-Maos, in Tokyo where we have done a consolidation play of small privately held operators of coin-operated parking companies.
Q.: In your experience, does the "management approach" vary between the Asian and American SME's?
Mr. Baxter: Interesting enough, I would say the issues we talk about are very, very similar. We are typically the first institutional owner, so we are helping founders of privately owned businesses or corporate orphans begin that process of becoming independent standalone institutions. Increasingly, we are also buying portfolio investments from other private equity firms and continuing their good work to expand the companies.

Certainly different cultures require us to tactically handle value creation work differently. This is why we value having local nationals running each office to navigate these differences. However, the issues confronting small businesses in the U.S., Europe and Asia are very similar. There are common strategic themes (opening up new addressable markets and leveraging your IP into new territories), operational actions (new management information systems, lean operational systems, strategic marketing and pricing analysis), establishing strategic plans, etc. that you will find that most these businesses need to focus on.
Q.: Having worked in Eastern Europe, how would you characterize the value drivers between Eastern Europe and Asia?
Mr. Baxter: Actually, I have not found many differences. Whether you are in Prague, Czech Republic, or Provo, Utah in the U.S. or Niigata, Japan, when you are dealing with small SMEs the challenges and strategies for building value are really quite similar. We always have local teams doing the execution work in order to navigate the cultural differences, but often the areas of focus are the same. Yet, there are not wildly different needs or skill sets required to thoughtfully invest and create value. Importantly, we find our business model transports very well across all our geographies of: picking special "little leaders," making sure you have an appropriately compensated management team and then surrounding them with our global operational resource teams in order to enable them to properly prioritize their opportunities.
Q.: Any unique stylistic differences in the CEO/leadership level?
Mr. Baxter: I would say there is not really a national "style" that you can ascribe to any one country; basically you are looking for CEOs who are decisive, transparent, secure in their own style, work well with a variety of different constituencies (investors, employees, lenders, etc.), that can navigate multiple disciplines, and can build a team of high functioning executives. These are a rare mix of talents, which in any culture are difficult to identify in people. Great leaders are rare and you need to identify them and hold on to them.
Q.: What is your holding timeframe and exit plans for the Asian portfolio companies?
Mr. Baxter: We typically hold our firms between 5-6 years. Because the mid market private equity shops tend to be hungry for deals in all our markets, they have always been aggressive buyers of our well-managed and nicely delivered little jewels. When the trade buyers have good liquidity and strong share prices, then it only enhances the valuations and provides more robust auctions. We rarely buy from or sell into the public securities markets.
Q.: What is the dynamics of sale to other private equity firms or a strategic buyer?
Mr. Baxter: We are often the first delectable minnow in the food chain for other private equity firms and we are delighted to play this role. We typically instruct our sale advisor to solicit offers from private equity firms as part of our exit process. Many private equity firms have experience in the segments we operate, and in those cases, often can be decisive and offer compelling values.

Since private equity buyers understand the key contractual issues which we all focus on, one can often arrive at a deal quickly and diligence can proceed efficiently. The risk is that a private equity firm does not have relevant experience and as they do their diligence they become less enamored with the deal and the market characteristics. So it is a matter of managing the sale process carefully and having transparent discussions about issues of concern. In some cases a strategic buyer can bring a more compelling value to the table because of merger synergies. So one cannot ever really predict who will be a better owner until you engage an exit process.
Q.: How does investments in Asia fit into Riverside's investment thesis and return expectations?
Mr. Baxter: Riverside is a generalist investor but has global industry specializations and deep experience in healthcare, education, franchising, and clean technologies (energy efficient devices). So these are categories where we have done dozens of deals and have built up internal expertise. When one looks at all of our 62 realizations to date, our Gross IRR is 53% and our cash-on-cash return is 3.4x. As of year-end our consolidated investment portfolio in has delivered net IRRs in the mid 20 percent range. We feel there is tremendous upside as we have a number of great performers in our Asia portfolio.
Q.: In closing, what book are you currently reading?
Mr. Baxter: I only have time on weekends to read new deal books from our originations teams, the Financial Times and the Economist Magazine; those three essential responsibilities consume my free time.

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