Flag to merge Squadron fund, market joint strategy

Flag Capital is expected to combine an existing Asia-focused strategy with the latest offering from Squadron Capital, the Hong Kong-based private-equity investment firm it is acquiring.

From there, the management is likely to continue marketing the combined fund, according to people familiar with the deal.

Executives at Flag in the US and Squadron in Hong Kong declined to comment on any plans regarding asset-raising or marketing. They do, however, say the funds will merge their most recent respective Asia strategies.

Peter Denious, a partner at Flag in Stamford, Connecticut, who is responsible for the firm’s investment strategy outside of the US, says Asia assets at the firm amount to about $200 million, committed to 25 fund partnerships.

Both firms run fund-of-funds strategies that invest in PE managers. Squadron Capital was founded as the PE arm of family office Search Group and manages nearly $900 million dedicated to investing in Asia PE portfolios, through FoF vehicles as well as segregated accounts. Its first two funds are already fully invested.

Both firms tend to prefer small or mid-sized, single-country-focused PE managers, although Flag may be able to bring its VC expertise to the combined Asia operation; venture has not been a traditional area of investment at Squadron.

Denious says the similarity in business structure, philosophy and operations was a driving factor behind the acquisition, which was announced two weeks ago.

Without commenting on future plans, Denious says: “Size is the enemy of returns.” Too much scale threatens to turn an allocator into “an index fund of private equity in Asia”.

However, people involved in the deal say Flag’s third Asia fund and Squadron’s current third fund, both of which have only soft-closed, will be merged into something resembling a $400 million vehicle. Additional fundraising may begin afterwards.

Of Squadron’s existing 11 investment professionals, only one is expected to leave the firm in the wake of the takeover. Flag opened a small office in Hong Kong in 2010, and has two investment officials there, led by Tina Wei.

She will join the combined team, bringing it to 12. The Asia business will be led by three partners: David Pierce, Squadron’s CEO, as well as Wen Tan, senior managing director, and Jacob Chiu. They will work alongside Denious to drive the Asia business, with Denious involved at the investment committee level.

Robert Miller, the Hong Kong-based entrepreneur who founded Search Group, is not taking a stake in Flag Capital, but will remain an investor. He will also initiate investments in Flag’s US and European strategies.

The genesis of the deal was not Miller’s desire to monetise Squadron. It emerged quickly following a tragedy: Flag had set up its Hong Kong arm out of a desire to grow an Asia business organically. The person sent from the US to run that effort died in 2011, which threw the original plan into the air. Flag’s partners then decided to approach Miller regarding Squadron; Denious has known David Pierce for a number of years.

Flag did speak to a few other potential acquirees, but Denious knew there was a similar outlook on how to invest and generate returns between Flag and Squadron. “Their Asia team has a depth and longevity that is unrivalled,” Denious says.

“There was a real desire to transact together,” adds Wen Tan. From Search Group’s perspective, the deal creates a larger platform that will help grow the combined business.