Next Stop, Southeast Asia

Posted on October 14, 2013


After writing recently that “Private Equity Investment in Vietnam sets a Record[1],” the question about how the rest of Southeast Asia is doing is a natural follow-on.  With the able assistance of Liming Xu, we took a look at the region as a whole to see if the trend evidenced in Vietnam is part of a wider phenomenon.  In addition to doing a bit of old-fashioned research, I also talked to a number of private equity, banking and legal firms that we work with in the region to get some on-the-ground feedback.  In my view this is the difference between talking about driving a car and processing the information the steering wheel feeds back to the driver into the conversation.

Flocking to Southeast Asia

Our research shows that robust, though not necessarily consistent, growth in Southeast Asia is drawing the interest of international private equity and corporates that wish to have or expand positions in the region. The region enjoys an abundance of resources and relatively stable, relatively open economies that require new investment to sustain their momentum.  This has the makings of a virtuous cycle.  Existing growth, the presence of resources, the presence of long-term favorable trends favoring growth and the existence of some infra-structure, drives the need for more investment which leads to more growth. Various industry sectors, such as natural resources, infrastructure, agriculture and manufacturing, are favored. The rise of the consumer is not just a Chinese phenomenon.  Demand for consumer goods increased in Southeast Asia as well due to a growing middle class in much of the region. With a combined nominal GDP of approximately USD2.3 trillion, according to consultancy Bain & Company, the region is on the track to rise from the world’s eighth-largest economy to fourth over the next two decades.[2]

After the financial crisis, global investors have been looking to increase their exposure to emerging markets to achieve diversification and find growth. Many have become a bit cautious in committing capital to markets such as India and China because competition is fierce.  While such caution is likely just a pause, it has led, unsurprisingly, to many investors looking for additional opportunities in the region.  Some are heading southward to seek opportunities, and their next stop is Southeast Asia.

Despite high expectations, 2012 was a mixed year for private equity in Southeast Asia. 2013 is still mixed though appearing markedly stronger.  Here are some numbers.  After several years of increased investment activity in region, total deal value fell by 16% in 2012 and local fund-raising also slowed[3]. In the year to August 2013, private equity deals in Asia-Pacific declined 19.7% year-over-year[4]. The overall negative trend appears to be slowing and showing signs of reversing.  Evidence for this can be found in the fact that Southeast Asia is strongly ahead in the value of PE-backed transactions in 2013. According to Private Equity International, the region has absorbed USD30 billion investment so far this year, compared to just USD25.4 billion the year before. Private equity firms invested 18% more in value terms in Southeast Asia during the first eight months of this year than during the same period last year.  All of this has put Southeast Asia on the map in financial centers in the region.  Conversations with bankers, accountancies and funds in Hong Kong, Singapore and elsewhere during recent road shows and other meetings seem to indicate a wider receptiveness to looking at opportunities in Southeast Asia.

The trend seems clear.  Investors are giving greater consideration to Southeast Asia.  In the last couple of years, major investors such as Kohlberg Kravis Roberts (KKR) arrived in Singapore, preceded by Blackstone and others. Capital from Middle Eastern investors, who historically have favored the U.S. and Europe, may also be starting to show interest in Southeast Asia. In recent meetings with investors in the Middle East, I have been able to confirm potential interest but also caution in thinking about Southeast Asia.  According to a recent Financial Times survey, most private equity practitioners in Southeast Asia expect that activity will be significantly expanded over the next few years.

From Singapore to Myanmar

Southeast Asia is a diverse region spanning from Singapore to Myanmar. Each country has its unique economic condition, legal system, language and culture. In terms of private equity activity, Singapore, Indonesia, Malaysia, Thailand, Vietnam and the Philippines account for virtually all investment. Prominent deals in 2012 include CVC Capital Partners buying for over USD300 million SPi Global, a business process outsourcing company owned by Philippine Long Distance Telephone Company, and investment by Warburg Pincus in Vincom, an operator of shopping malls in Vietnam, for USD200 million. There was also USD200 million invested by KKR in Masan, a Vietnamese maker of noodles.[5]

Singapore seems to have become somewhat of a regional hub for private equity. Since 2005, KKR has invested more than USD 1 billion in Southeast Asia through notable transactions involving Singapore-headquartered companies Avago, Unisteel and MMI.[6] Many global buyout funds, including KKR, TPG and CVC have opened local offices in Singapore. Global GPs establish their regional hubs in places like Singapore and Hong Kong because of the regulatory environment. Safeguards for investors and the overall ease of doing business act as incentives to drive deal activity.

Despite Challenges, Future Looks Bright

With a greater focus on Southeast Asia, unsurprisingly the result has been an increase in competition for deals. As shown by the graph below, more than 80% of the deals in the region had at least one competitive bidder in 2012, which inevitably leads to a rise of valuation. The influx of corporates further pressures pricing. The average age of private equity portfolios in Southeast Asia has grown to 4.3 years in 2012 from 3.6 years in 2010, and deals over five years old have nearly tripled to almost 45% of the total.[7]

 SE Asia Chart

According to Bain’s survey, investors are starting to adjust expectations for returns in Southeast Asia. Five years ago, more than 70% of investors were demanding returns of greater than 20%, while this year two-thirds of the respondents were looking for something closer to 16%.  Many have admitted difficulty recently in generating expected returns. The most cited challenges to closing new deals are finding attractive companies, seller price expectations, corporate governance issues and an uncertain economic environment.

A major concern according to Bain’s survey and my own experience is that issues such as management and control remain more difficult than in other places since the region is dominated by private family owned businesses.  The same is true for exits.  The IPO market remains volatile in the region, though I am working on a number of deals in the pipeline for so-called foreign IPOs, meaning IPOs of local companies on exchanges in a different country.  The trade exit route may continue to be the most widely used channel.

Investors should always look at Southeast Asian countries as individual markets and not at the region as a single entity. Each country represents a distinct market at a different stage of development

Overall, given the fundamentals and growing interest in the region, activity in Southeast Asia is on trend to continue to grow.  As Southeast Asia heats up, the winners will be those that find the best opportunities and build the companies that can deliver on their promise.  The exits will follow.

[1] The Macaluso Report, Private Equity Investment in Vietnam sets a Record, July 13, 2013

[2] Bain & Company, Bain Southeast Asia Private Equity Brief

[3] AVCJ Database February 5, 2013

[4] Data provided by Thomson Reuters

[5] Financial Times, SE Asia – A Hard Nut for Private Equity

[6] Ernst & Young, Asia-Pacific Private Equity Outlook 2013

[7] Bain & Company, Bain Southeast Asia Private Equity Brief