Novo Tellus Capital Partners, an investor in industrial technology assets across the Indo-Pacific region, is eyeing more control transactions after closing its third fund on USD 510m.

“We are expanding our cheque size. In Fund I, we had opportunities to take control – especially in one instance – and we just didn’t have enough capital. We put in USD 40m, but we could have got control with USD 70m,” said Wai San Loke, a co-founder and managing partner at the firm.

Established in 2011, Novo Tellus raised USD 25m for its debut fund, although co-investment took overall deployment to USD 200m across five transactions. Fund II closed on USD 250m in late 2020, beating a target of USD 175m. There have been nine investments, and in four cases, the firm has control or joint control.

Fund III launched in October 2022 and a first close of USD 375m – the same as the overall target – took place less than 12 months later. The hard cap was set at USD 500m, but the fund still came in oversubscribed. Having already cut some investors back, a small increase was negotiated, Loke said.

All the institutional investors in Fund II re-upped and the LP base is very much US-centric, featuring more pension funds and endowments than in the previous vintage. Singapore-based Temasek Holdings remains an investor. UBS Private Funds Group served as the placement agent for Fund III.

Fundraising conditions are currently challenging. With USD 53.6bn committed to managers in the region so far this year, excluding renminbi-denominated funds, Asia looks set for its lowest annual total in more than a decade. The 2022 total was USD 108.7bn.

Asked why Novo Tellus appears to have bucked this trend, Loke offered two explanations. First, the firm hasn’t deviated from its specific investment remit focused on B2B supply chains and industrial technology. Second, it has made sparing use of leverage, promising management teams that capital will be made available to invest in growth.

“Leveraging a company over 2x EBITDA doesn’t leave much room for investment. This approach wasn’t popular in a zero-interest-rate environment, but folks realise we have been able to deliver top decile returns without leverage,” Loke said. “As they evaluated how we compound value over time through that strategy, this resonated with them.”

Fund II has yet to see any exits, but Fund I is now fully realised with a 3.9x net return. Key exits included MFS Technology, a printed circuit board manufacturer Novo Tellus backed with Navis Capital Partners, and AEM Holdings, a listed semiconductor testing company. These investments generated returns of 3x and 17x, respectively, Loke said.

Novo Tellus believes industrial technology in the Indo-Pacific region is being shaped by three key forces: technology companies expanding from downstream manufacturing into upstream innovation; an expanding domestic consumption base; and geopolitics-driven supply chain diversification as multinationals look to ease their dependence on China.

Fund III will follow the pattern set by its predecessors, backing industrial technology businesses from manufacturers to ancillary service providers. Typical targets are family-owned and headquartered in Singapore, sometimes with a manufacturing footprint that extends well beyond the region.

“They want larger wallet share, and you can do that by expanding programmes and bringing down costs or by moving up the technology stack – maybe through an acquisition that makes you more relevant to your customer,” Loke said. “That vision of creating margin expansion not just from cost reduction but by increasing the value offered is something they need help with.”

Active portfolio companies include semiconductor industry suppliers Atomica, Novoflex, and Tessolve Semiconductor, contract electronics manufacturer SP Manufacturing, precision parts manufacturers Grand Venture Technology and Sunningdale Tech, and ISDN Holdings, a provider of in-house engineering and automation solutions.

Novo Tellus currently has about 10 investment professionals based in Singapore plus one operating partner in Hong Kong and another in the US. Half the team have backgrounds in R&D. Following the Fund III close, the firm plans to add to its junior ranks in anticipation of more deal flow.

“We have been focused on Southeast Asia for the past 12 years, in part because we see China slowing down,” Loke added. “One of the reasons we were able to attract investors is that desire for diversification outside of China. But this has been in our strategy the whole time, not just because it recently became thematic.”