XXX story: Southeast Asia

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Private equity activity

in Asia began in this
region. Indonesia,
Thailand and
Singapore were the
first countries to see
private equity deals.

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October 2009 Issue 34

On the middle

October 2009 Issue 34

XXX story: Southeast Asia

Cover

ground

Sandwiched between
China and India, Southeast
Asia is fragmented, viewed as
risky and often bypassed in
favour of the more developed
private equity markets
of its enormous neighbours.
But for investors with the
right appetite, and managers
with the right skill-set, the
region presents a uniquely
compelling investment case.
Siddharth Poddar reports.

uttressed by Asian economic behemoths China and India

to the north and west respectively, Southeast Asia is often
overlooked in discussions on private equity in the Asia Pacific.
This could perhaps be due to the fact the region has not seen
the same spike in activity as other Asian markets such as China,
India or even Australia, in the past four to five years. But as Nick
Bloy, co-managing partner of Kuala Lumpur-headquartered Navis
Capital Partners, points out the number of deals getting done
in Southeast Asia is ultimately a function of how much capital
investors are willing to allocate to the region.
With the tremendous growth story taking place next door
in India and China, many investors focus has been on getting,
or building, exposure to these two economies. And while
Southeast Asia as a whole has a sizeable economy, the fact
remains that while it is one region, it is not one market: it is
instead an amalgamation of different economies, at varying
stages of development.
Much of the capital invested in Asian private equity comes
from Europe, North America or the Middle East, and many LPs
simply do not have the specialist knowledge to target Southeast
Asia. Instead, they tend to follow the law of large numbers and
make their first foray into Asia with commitments to funds
investing in India and China, because these are simpler and more
accessible markets to invest in.
Bruno Raschle, managing director of Switzerland-based fund
of funds manager Adveq, which is currently raising its second
Asia-focused fund of funds, says there are a few excellent fund

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October 2009 Issue 34

XXX story: Southeast Asia

Cover

managers in Southeast Asia, but adds that as an investor, one has

to decide how to make money. In Southeast Asia, the markets
are smaller and I think for the crowd of investors, it is just more
convenient to concentrate on India and China, he says.
It is only in the next phase of their investment in Asia that
western LPs might look to Southeast Asia, says Bloy, by which
time they might have developed a more granular understanding
of the region.
In his words, Southeast Asia does not lend itself to easy
categorisation. It is
a fair point: looking
around the region,
China and India stand
out as a growth
capital markets, and
the more mature
economies of Japan
and Australia as
buyout markets.
Southeast Asia,
however, which
you might expect
to fall into the
growth capital
Videt: Southeast Asias companies benefit
bracket, is a territory
from Chinas growth
of mixed approaches,
dominated mostly by
control investments (see box on page 17).
Alun Branigan, Singapore-based partner at Actis, sums it up,
saying the regions disparity poses challenges.
It is one of the reasons why private equity has not yet truly
taken off in Southeast Asia. Southeast Asia is much more complex
and nuanced it is far more difficult to understand than other
single markets.
That said, he and other managers point out that the difficulties
of the markets benefit those firms already investing in the region,
as the lack of fund managers targeting the area makes it easier
to get proprietary access to deals.
No zero-sum game
Although the fragmented markets of Southeast Asia remain
overshadowed by those of India and China, living in the
shadow of such relentless growth engines does not necessarily
detract from Southeast Asias growth prospects; in fact, it may
enhance them.
Pote Videt, a Bangkok-based managing director at Lombard
Investments, a Southeast Asia-focused firm which manages assets
of about $750 million across three funds, says that while people
seem to think Southeast Asia loses out to India and China, the
reality is it is far from a zero-sum game.
In his view, one of the theses behind investments in this region
is that its growth patterns are linked to China and its domestic

16

demand growth. Many Southeast Asian countries have a sizeable

trade surplus with China, he says. This is through the export
not just of raw materials and basics like food, but also
intermediate and end-products.
And while most Southeast Asian economies do not have
the same rates of growth as China, as long as Chinas growth
continues apace, their companies stand to benefit.
Branigan agrees that the regions location can be an advantage.
It sits right in between China and India and while trade flows
between those two economies are strong, trade and investment
flows are actually stronger between Southeast Asia and India and
China respectively, than they are between India and China,
he says.
No exit
However, while its neighbours might provide a boost to Southeast
Asia, there are other factors besides the areas heterogeneity and
complexity which play a significant role in limiting private equity activity
there.
A major factor curtailing private equity activity in Southeast Asia
has been the lack of exit opportunities, says Lachmi-Niwas Sadani,
a Singapore-based director at fund of funds manager AXA Private
Equity. He adds though that the Singapore Exchange is now getting
more liquid and, in some cases, it may be possible for companies to list
in Hong Kong.
Bloy has a different view. We dont feel that the stock exchanges
provide a suitable exit mechanism. Trying to sell a 100 percent interest
in companies on the stock market is difficult, especially in the small- to
mid-cap sector as the liquidity is not just there, he says, adding that
stock markets are unreliable in the best of times and impossible at a
time like now.
Despite this, he doesnt believe exits are a problem in the region.
Navis, which is focused on making control investments in Southeast
Asia and the Indian sub-continent, has made 15 exits, of which 12 have
been achieved through trade sales and two through sales to financial
sponsors.
Looking ahead, a number of practitioners say that exiting
businesses could become easier in the region. Many Chinese and
Indian multinational corporations are emerging as prospective buyers
as they look to expand in the region through the acquisition of assets.
It is a trend that will continue, most say.
Leaving exits aside, another hurdle facing the would-be private
equity investors in Southeast Asia is that the levels of transparency and
corporate governance found in more developed Asian markets cannot
be found. Neither is its banking system as developed either, says
AXAs Sadani. Though all this is improving, it will take between five
and 10 years for the region to reach the same level as, say, Australia,
he adds.
Don Lam, chief executive officer and co-founder of Vietnam-based
alternative investment firm VinaCapital, agrees. Besides Singapore, the
legal infrastructure in most other countries in the region is new, he
says, adding that in many markets in Southeast Asia, an emphasis on

October 2009 Issue 34

XXX story: Southeast Asia

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A major factor
curtailing private
equity activity in
Southeast Asia has
been the lack of exit
opportunities.

corporate governance is a new thing. One

other clear deterrent for many investors,
whether GPs or LPs, says Lam, is the
continuing political instability in large regional
economies such as Thailand and Indonesia.
With such intricacies to factor in,
breaking into this market has proven
difficult for larger private equity firms
because many of them do not have
offices on the ground. It is not an easy
proposition to do deals in Southeast Asia
on a fly-in and fly-out basis. There is a
need for permanent staff on the ground,
states Navis Bloy.
Fund managers also say that a lot
of the bigger firms are not as active
in Southeast Asia as in other markets
because the sizes of deals tend to be
smaller in this region, often not large
enough to draw the interest of larger
private equity firms.
They add that the importance of
local understanding and sensitivity
cannot be emphasised enough. A lot

of the best practices and ideas we

learned on Wall Street or the City of
London can be applied here, but you have
to be a part of the business fabric of these
local communities, Videt says.
Often, this is a very time-consuming
process. In Videts view, one of the biggest
challenges to investing in Southeast Asia
is the time taken to complete deals. On
average, it takes Lombard two years from
initially talking to a company to closing a
deal, even with its extensive local network,
he says.
As wealth grows, opportunity
grows
For those GPs already established in
Southeast Asia, and those now eying
the region, the complexities standing in
their way are easily outweighed by the
opportunities they see for private equity.
Besides opportunities emanating out of
increasing trade flow with China and India,

Control or minority investments?

One of the distinguishing characteristics of the Southeast Asian
private equity market is that it evades categorisation: most
investors will look at growth and buyout transactions, and there
are passionate advocates of both.
Buyouts are actually the more dominant deal type, accounting
for 60 percent to 70 percent of deals in the region, says Alun
Branigan, Singapore-based partner at Actis.
You can buy control here, and at reasonable valuations as
well, Branigan says. Actis has made five investments from the
$130 million Actis ASEAN Fund, four of which have been buyouts.
According to many professionals, it is easier to make buyout
investments in Southeast Asia. Nick Bloy, co-managing partner of
Kuala Lumpur-headquartered Navis Capital Partners, which makes
control investments, says: The propensity for a vendor to accept
change of control is certainly higher here than in India or in China.
He adds that owners in Southeast Asia do not have issues with
ceding control. There is a real acceptance that if someones willing
to pay a good price, then why not sell a business?
Furthermore, he says, there is very little government
intervention and they generally do not discourage control
transactions.
Lachmi-Niwas Sadani, a Singapore-based director at fund of
funds manager AXA Private Equity, suggests growth investments
are not as common as buyouts in the region primarily because
many investors are not comfortable taking minority stakes,

particularly in countries seen as being more risky, such as

Indonesia. A buyout investment is more reassuring to an investor.
However, not everyone agrees the region predominately
lends itself to being a buyout market. Pote Videt, a Bangkok-based
managing director at Lombard Investments, has a different view
entirely. Southeast Asia is definitely a growth equity market,
he says. While Lombard has done a few buyouts, most of its
transactions have been minority investments. In contrast to Bloy,
he says wresting control from the families that still control most
businesses in Southeast Asia is not an easy task at all.
Videt acknowledges the challenges of making minority
investments, saying deals have to be structured to protect the
investors interests as a large minority investor. But in the last eight
to nine years, he says Lombard has seen more openness to valueadded influence by active minority investors.
While much has been made of the difficulty of having a say in
companies in which investors have only minority stakes, in Videts
view, the primary challenge to overcome is the obtaining of the
vendors trust. Once that is obtained, structuring a deal and the
negotiation of terms and conditions is less difficult.
Making growth investments allows you to get into leading
industry franchises in other words, market leaders that are
fundamentally well run but may have some other problems, Videt
says. It allows an investor to get significant exposure to industry
leaders with above-average growth in Southeast Asia.

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XXX story: Southeast Asia

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October 2009 Issue 34

Investment flows are actually

stronger between Southeast
Asia and India and China
respectively, than they are
between India and China.
Southeast Asia has plenty going for it on its own. The region has
great supporting demographics and macroeconomic dynamics
stripped to very basic terms, a huge population of about 580
million with rising incomes. That makes this region
a great consumer
story, Branigan
says. He adds that
anything
that plays to the
theme of rising
wealth in the region
be it consumer
goods, healthcare
services, or even
financial services
has the potential to
do well.
Raschle agrees,
adding that sectors
Branigan: demographics make Southeast
that have to do
Asia a great consumer story
with servicing
infrastructure, distribution systems, communications, healthcare,
logistics and consumer-related, make
for attractive investment options.
We have focused a lot on the domestic demand sector,
says Videt. However, he adds that in Southeast Asia, it is very
hard to find good consumer companies, so the firm has had to
find proxies such as retailing, food service and middle-income
housing. There are other factors affecting domestic demand that
are not highlighted often, he adds. For instance, one of the hidden
drivers in the Philippines is remittances from abroad, which didnt
really slow down much during the crisis, he adds.
In Vietnam too, rapid urbanisation and a growing middle class
are creating a new culture of consumerism, says Lam. His firm is
focused on investments in services and products that address this
new market financial and business services, education, healthcare
and particularly residential real estate developments.
Furthermore, in a market like Vietnam, many companies need
capital for expansion, Lam says. He adds that there is a lot of deal
flow in the country originating from the privatisation of stateowned enterprises. The firm had made seven investments and
three exits across private equity, real estate and infrastructure
by July this year.

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The only problem with the consumer-related sector is that

it is more likely to be negatively affected in a downturn than other
sectors. However, managers agree that if a five- to eight-year time
horizon is considered, the consumer story remains attractive.
The abundance of natural resources in the region also presents
interesting opportunities. Firms can either invest directly in natural
resources or in companies that lie in supporting sectors. Branigan
says many companies that support the natural resources sector in
the region are looking to expand into other areas such as West
Africa and Brazil. These are ambitious regional companies, but
they need help from private equity firms to go global.
Managers also talk about attractive valuations in the region.
Videt, for instance, says that the difference between Southeast Asia
and other Asian markets is you can get similar growth at lower
valuations which is where you can achieve superior returns.
Bloy agrees, saying that while it is always hard to pin down
pricing, he has heard anecdotally that companies with steady,
maintainable earnings are being transacted in the 4 to 5 times
EBITDA range, numbers which are reminiscent of the pricing
range seen during the Asian economic crisis in the late 1990s.
You dont see such attractive valuations in India, he says.
Good prospects for private equity
With the worst of the downturn seemingly behind us, fund
managers investing in Southeast Asia expect increased activity
in the months to come. In recent months, there has been a drop
in deal activity, fund managers say. Now there is less capital in
the market and entrepreneurs cannot get credit easily to fund
their businesses. Branigan expects private equity to become an
important source of capital for companies in the region.
The IPO markets are not in great shape yet, so that is good
for private equity buyers in general, Bloy says, adding that the
public markets can have a crowding out effect on private equity.
More importantly, perhaps, the region is still growing and
maturing. As corporate governance and the banking system in
Southeast Asia improve further, the likelihood of investments
increasing is greater as well.
Governments such as Malaysias are also taking initiatives that
reflect the increasing acceptance of the asset class in the region,
Bloy says. In July, the Malaysian government announced
the formation of Ekuiti Nasional Berhad (Ekuinas), a private
equity firm that will manage RM10 billion ($2.9 billion; 2 billion)

XXX story: Southeast Asia

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October 2009 Issue 34

For the crowd of

investors, it is just
more convenient to
concentrate on India
and China.
for investment in domestic companies. It has also liberalised
foreign ownership rules in the country, which in Bloys opinion,
is a step in the right direction for foreign investment in general.
In Sadanis view, private equity firms between them can
comfortably deploy between $500 million and $1 billion annually
in Southeast Asia. He expects to see a fairly vibrant private equity

market blossom in the region, and says he would be surprised

if assets under management in Southeast Asia did not rise above
$20 billion in the next five years.
Stuck in the middle of two growth giants Southeast Asia
may be, but that doesnt mean it doesnt have its own giant
growth ambitions. l

From local to regional: the growth of private equity

Private equity is not new to Southeast Asia, as Lachmi-Niwas
Sadani, a Singapore-based director at fund of funds manager AXA
Private Equity,
explains: Private
equity activity in
Asia began in this
region. Indonesia,
Thailand and
Singapore were
the first countries
to see private
equity deals in the
mid-1990s.
However,
activity in the
region quickly
stalled, primarily
due to the Asian
financial crisis of
1997, which began
Bloy: country-specific funds will start to look
with
the collapse
at Southeast Asia as a regional block
of the Thai Baht.
Other Southeast Asian economies proved not to be immune
to events that transpired in Thailand and were soon engulfed in
the crisis. The currencies went haywire and people lost a lot of
money, says Sadani.
With the near-collapse of regional economies came the
realisation that the balance sheets of both countries and
companies were not as strong as had been imagined.
Governments in the region cleaned up their balance sheets and
government debt to GDP began declining. They allowed currencies
to depreciate, assisting the regions exporters, and foreign reserves
began increasing again. Simultaneously there was political change in
a few countries, leading to greater political stability in the region.

Since then, Southeast Asia has been competing for capital with
other single economies in the region. Now, most managers feel,
more capital will start to flow into the region as investors gather
more experience of investing in Asia. Lower valuations in the
region provide an incentive as well, they say.
In recent years, the region has seen the growth of a few
country-specific managers, the likes of Quvat Management,
Saratoga Capital and Northstar Pacific Partners in Indonesia,
Leopard Capital, which currently invests in Cambodia, and Mekong
Capital in Vietnam. The fact that there are more local managers
than regional ones only goes to highlight the differences that exist
between the various markets here.
Don Lam, chief executive officer and co-founder of Vietnamfocused alternative investment firm VinaCapital, says that countryfocused funds are better positioned to invest in local markets as
they have local teams. He says that many pan-Asian firms want
to work with local firms to benefit from their experience in local
markets.
However, as country-focused private equity groups look to
expand investment remits, they will start to look at Southeast Asia
as a regional block, predicts Nick Bloy, co-managing partner of
Kuala Lumpur-headquartered Navis Capital Partners. It is all part
of the maturation process and I think thats underway, he adds.
He also underlines the importance of firms knowing how to
develop companies in adjacent economies, a need emanating from
the ASEAN* Free Trade Agreement. The need to add value to
domestic companies will take local firms to different markets in the
region, Bloy says. As barriers between various regional economies
recede further and the economies become more integrated, the
expansion of local firms operations is to be expected.
*ASEAN (The Association of Southeast Asian Nations) is comprised of
Brunei Darussalam, Cambodia, Indonesia, Laos, Malaysia, Myanmar,
the Philippines, Singapore, Thailand and Vietnam.

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