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<h4 style="text-align: justify;"><b>The global financial crisis of 2008 forced a series of business model transformations on investment firms in the USA and Europe. One unintended and positive consequence of this has been to position developed-market private equity and venture capital providers to be more effective in securing and managing investments in rapidly-emerging markets such as Indonesia.</b></h4>
<h5 style="text-align: justify;"><b>Emerging market investees need heavily-involved investors</b></h5>
<p style="text-align: justify;">The creation of a vibrant entrepreneurial culture in the Indonesian tech sector, characterized by the accelerating deal flow  in markets such as e-commerce, electronic payments and online advertising (see a full list of Indonesian tech investments <a title="The A to Z of Indonesian tech deals" href="http://redwingconsulting.com/investors/the-a-to-z-of-indonesian-tech-deals/" target="_blank">here</a>), is requiring investment firms to offer a broader approach to portfolio company development as they seek to sustain and grow the value of their asset holdings.</p>
<p style="text-align: justify;">In the emerging economies across Southeast Asia, local capabilities to manage startups and to scale new businesses rapidly are still relatively scarce and the ever-changing risk landscape requires new enterprises to be both agile and adaptive. However, the in-market eco-systems supporting these early stage ventures are immature and they remain capacity-constrained.</p>
<p style="text-align: justify;">In turn, these dynamics have caused investment firms to re-evaluate their fundamental business operating model and its impact on the relationships they have with their portfolio companies.</p>

<h5 style="text-align: justify;"><b>Investment firms are extending their reach into the portfolio companies</b></h5>
<p style="text-align: justify;">Leading investor groups are adopting new business models whereby PE and VC firms apply a sharper focus on the day-to-day performance and growth trajectory of their portfolio companies.</p>
<p style="text-align: justify;">The development of a more intimate, “hands-on” engagement with portfolio companies is intended to extend the reach of investment firms beyond the conventional financial governance and management disciplines employed by them prior to the global financial crash of 2008:</p>
<p style="text-align: justify;"><img class="alignnone size-full wp-image-2451" alt="Post - PE and VC delivery models picture 1" src="http://redwingconsulting.com/wp-content/uploads/Post-PE-and-VC-delivery-models-picture-1.jpg" width="457" height="301" /></p>
<p style="text-align: justify;" align="center"></p>
<p style="text-align: justify;">The new areas of focus have two primary objectives:</p>

<ul>
	<li>Driving productivity gains within the core operations of the business e.g. organizational design, supply chain management, process re-engineering etc.</li>
	<li>Identifying and leveraging growth acceleration opportunities e.g. customer experience management, strategic business partnerships, product and service innovation, distribution channel optimization etc.</li>
</ul>
<h5 style="text-align: justify;"><b>The global financial crisis of 2008 precipitated major changes in the investment community</b></h5>
<p style="text-align: justify;">At the height of the private equity boom in 2006 and 2007 investment firms were able to exit quickly and profitably from deals that they had typically secured just two to three years earlier.</p>
<p style="text-align: justify;">However, the game changed quickly and dramatically following the global financial crisis:</p>

<ul>
	<li>Investment holding cycles became extended well beyond historically-established norms, due to the collapse in market sentiment.</li>
	<li>With increasing competition for the reduced deal flow post-2008, acquisition prices drifted upwards and investment firms were forced to compete on the breadth and depth of their entire services proposition rather than relying primarily on deal pricing.</li>
	<li>Increasing regulatory and compliance rules caused the investment community to become more embedded in the operations of their portfolio companies in order to ensure greater end-to-end transparency.</li>
</ul>
<h5 style="text-align: justify;"><b>The large investment firms have led the way for the industry</b></h5>
<p style="text-align: justify;">The leading investment fund groups have established dedicated internal capabilities focused on enhancing the value of their portfolio companies.</p>
<p style="text-align: justify;">The industry exemplar among the PE firms is KKR Capstone, which has built a global team of 60 operational specialists with the primary role of working alongside the investee management teams to drive enterprise-wide performance improvements. Among the VCs, Andreessen Horowitz has set a new standard for services to startups, bringing specialized experts in different areas to leverage performance through their professional staff.</p>
<p style="text-align: justify;">Historically, the typical source of investment fund recruits has been investment banking, i.e. individuals attuned to deal-making environments. Today, it is far more common for a fund to employ individuals with proven operational management or business consulting skills.</p>
<p style="text-align: justify;">There are three approaches to developing these capabilities:</p>
<p style="text-align: justify;"><img class="alignnone size-full wp-image-2452" alt="Post - PE and VC delivery models picture 2" src="http://redwingconsulting.com/wp-content/uploads/Post-PE-and-VC-delivery-models-picture-2.jpg" width="847" height="231" /></p>
<p style="text-align: justify;">On the one hand, there is a significant investment in time and cost associated with creating and running a fully-integrated in-company team. However, an investment firm that chooses to outsource these operational functions may ultimately compromise its long term competitive positioning through the lack of a captive internal competency base.</p>

<h5 style="text-align: justify;"><b>Early stage companies in emerging markets need continuous operational support</b></h5>
<p style="text-align: justify;">The shift in emphasis from governing portfolio companies from a purely financial perspective towards enhancing their business performance and driving revenue growth means investment firms have built capabilities that are highly desirable in emerging markets.</p>
<p style="text-align: justify;">Not only does it enable investors to drive growth and performance, it also has given funds a longer-term, market-centric perspective which ultimately favours portfolio companies operating in business environments with high degrees of risk and uncertainty.</p>
<p style="text-align: justify;">These portfolio operations arms closely mirror the hands-on approach of many tech incubators in emerging markets. Close management of portfolio companies is essential to provide the management expertise and operations skills necessary to support early stage, hyper-growth ventures at critical points in their development.</p>

<h5 style="text-align: justify;"><b>The funds’ operations arms will need growth-focused capabilities</b></h5>
<p style="text-align: justify;">We believe the focus of the funds’ operations arms will continue to evolve. Emerging markets are typically high-growth markets, and portfolio companies need to channel growth funding towards the expansive, market-facing competencies that are needed most to stimulate profitable business expansion.</p>
<p style="text-align: justify;">The aim will be to drive market share and top line revenue growth, rather than enhancing operating margins.</p>
<p style="text-align: justify;">The PE funds in particular will need to adapt. Their prior focus has typically been capabilities that address operational efficiencies and cost reduction opportunities in portfolio companies namely pricing strategy, yield optimisation, sales channel productivity and supply chain management. However, cost containment is not the foundation for executing an accelerated growth strategy.</p>
<p style="text-align: justify;">The development of value-generating initiatives such as entering new markets, launching new products and services, creating more compelling customer value propositions require a different type of support from the investment funds.</p>
<p style="text-align: justify;">The specialist business functions that underpin these business objectives - i.e. market segmentation, product management, brand build, marketing communications, customer experience management and predictive data analytics - will move the investment funds yet further away from their traditional base of expertise.</p>
<p style="text-align: justify;">The extent to which the funds integrate these skills into their investment teams will significantly affect their competitive edge and their attractiveness to tech companies in Southeast Asia.</p>
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