At a time when there are talks of a slowdown in funding in the Asian region, Standard Chartered Private Equity, the private equity and venture capital arm of Standard Chartered PLC, has held its steady pace of investment. According to a report by Bain & Company, the deal value in the private equity investment in Southeast Asia slid to $4.2 billion in 2015 – about one-third of the five year average – delivering its worst showing since 2004, with the deal count declining to 43, compared to 59 in 2014.
In an interview with DEALSTREETASIA Bert Kwan, Managing Director and Head of ASEAN at Standard Chartered Private Equity, elaborated on how StanChart PE was bucking the trend. He cited flexibility of its investment mandate and the range of investments it can make – right from $25 million up to over $200 million- as the key advantages that StanChart has.
Bert also said the firm’s strategy involved approaching each ASEAN country as a separate investment opportunity. “I would say that one of the most vexing challenges for private equity investors targeting ASEAN is having a team that can properly originate and manage across so many discrete markets. Few of us can afford to field an office in every ASEAN country,” he explained.
He said StandChart PE was excited about the prospects of doing more deals in Vietnam, and pointed out that the privatization trend there may lead to increased private equity interest.
Yet, irrespective of the sectors or countries, the PE firm’s primary starting point in any investment centers around the management team, and also if the company has the potential to become a flagship business in its sector, Bert added. StanChart PE which specialises in mid-to-late stage companies, targets investments in companies whose principal operations and management are located in Asia, Africa or the Middle East. The firm prefers to acquire between 10 per cent and 49 per cent stake in its companies.
While acknowledging that e-commerce was attracting a lot of attention from PE players as penetration rates in ASEAN countries were much lower than that of China, the Managing Director and Head of ASEAN at Standard Chartered Private Equity also cautioned that infrastructure and logistics that were required to support a really robust e-commerce ecosystem in the region continued to remain a challenge. Edited excerpts
What is StanChart PE’s investment strategy/philosophy for this region?
Most importantly, we back strong management teams and entrepreneurs in minority, growth equity investments, as well as in control transactions. We target national champion or potential flagship franchises in a given country or sector. We have found that in Southeast Asia, as well as more broadly in the emerging private equity markets, there will be unanticipated headwinds and challenges, as well as unanticipated tailwinds and opportunities. Strong, dynamic and proactive management teams and entrepreneurs are more likely to benefit from those times to solidify or extend the competitive positioning of their businesses. As a result of our experience in these markets (SCPE’s business was founded in Southeast Asia in 2002), we are also comfortable – in fact, we probably prefer – investing in markets or sectors that may be viewed as “roads less travelled” for investors that may have a heritage from outside the region.
How is Standard Chartered PE structured?
We are the investor arm of the Standard Chartered Bank, and over the past 3 years, our average aggregate investment per year has been $1 billion across of all the emerging markets of Asia, Africa and the Middle East. We are structured a bit differently from most PE firms that have a defined frontline – we also manage quite a bit of capital on behalf of named brands and partners. We are a bit of a hybrid model – in that we do manage capital on behalf of limited partners, but to date all of the capital we have been investing in new investments have been from the bank’s balance sheet.
You are among the few PE firms that have done some unorthodox deals in Southeast Asia – you recently invested in Phoon Huat Pte Ltd, and a year earlier you had invested in another Singapore food and beverage player – Crystal Jade Group Holdings. In July, you also bought a stake in Vietnamese restaurant chain operator Golden Gate from Mekong Capital. How do you see the Food and beverage segment – is this a segment that established investors are missing out on?
Just to clarify, our investment in Golden Gate was completed in the summer of 2014. We do not have a propensity of targeting the food and beverage sector per se, though it is probably fair to say that our investment experience in the sector has afforded us an augmented ability to select and underwrite opportunities in the space. Hard to comment on how other established investors evaluate opportunities, but I would say that we firmly believe that we have backed the right teams and have underwritten a sound investment thesis in each of the aforementioned investments. That each happens to be in the food and beverage sector is more of an outcome of our investment selection process, as opposed to a driver of that process.
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Have food and beverage players in ASEAN reached requisite scale to try and become regional players? Or, do you think opportunities lie in expanding to more outlets within their respective countries?
As a general matter, we have found that overseas expansion in any sector is much more easily said than done. I suspect that the experienced operators and entrepreneurs in the food and beverage sector that we have backed would concur with this broad proposition. The issue has less to do with scale, and more to do with complexities related to cross-border management, execution, and differences in local tastes. Fortunately, we believe that in some, if not most, of our markets, there is capacity for domestic growth in a given food and beverage investment. This said, we would be remiss if we did not evaluate closely with our management teams the prospect of exporting a model or a concept that works from one country to another.
In addition to Golden Gate, earlier this year, Standard Chartered PE also invested in M_Services JSC, operators of MoMo. What got you interested in this company?
We felt that we were backing a highly impressive management team and working alongside an experienced set of shareholders and stakeholders. It was fulfilling to fund a business model that supports financial inclusion and eases transaction friction in a country with demographics as favourable as those that persist in Vietnam.
Even prior to that, you’ve been investing in Vietnam, and you also have a minority stake in An Giang Plant Protection Joint Stock Company. How do you see Vietnam as an investment opportunity – what are the sectors there that you like? Also, will the planned acceleration of privatisation of companies there lead to more increased PE activity/interest?
Let me just say that we are extremely excited by the prospect of doing even more in Vietnam. The privatization /equitization trend may indeed lead to increased private equity interest. To reiterate, our starting point in any investment is with the management team and whether the investee company has the potential to become a flagship business in its sector.
Do you think that dealflow has weakened across much of Asean in the past 24 months? In this scenario, for many cash-rich regional private equity funds such as Stan Chart PE, what are the diversification strategies? Also, has this over-supply of “dry powder” resulted in inflated valuations and increased competition for targets?
I would challenge the notion that dealflow across ASEAN has weakened or that valuations are inflated as a result of too much capital chasing too few targets. We have a strong pipeline across each of the core ASEAN markets. One reason for this may be result of the relative flexibility of our investment mandate; unlike some other investors in the region, we are comfortable making minority investments, and the size of our equity check can vary from $25 million up to over $200 million. As a result, we feel that we can offer a “rightsized” private equity solution for a particular country or sector.
Just looking at data: Private equity investment in ASEAN declined to $4.2bn in 2015, from $7.5bn in 2014. Singapore and Indonesia accounted for 90 per cent of deal value, and 30 per cent was invested in ecommerce. So, how do you see PE investments in ASEAN this year?
We are very focused on our own portfolio and our pipeline. We are active in origination in Singapore and Indonesia, but those two countries represent less than 90 per cent of pipeline transaction value for whatever that is worth.
When PE firms look at ASEAN, what the red flags? Is it expensive valuations, is it a drop in headline growth and a corresponding rise in political uncertainty? Is it the hard reality that most funds have limited experience in most ASEAN markets? Can it also be that, apart from Singapore and Indonesia, there is a shortage of investable assets in the region?
We approach each country in ASEAN as its own investment destination, which is distinct from viewing ASEAN as a regional investment destination. Vietnam, for instance, presents a set of opportunities and challenges that are distinct from Singapore, which is distinct from Thailand and Indonesia. But each of those markets holds prospects for us as a private equity investor. If I were to try to paint a broad brush, I would say that one of the most vexing challenges for private equity investors targeting ASEAN is having a team that can properly originate and manage across so many discrete markets. Few of us can afford to field an office in every ASEAN country. At the same time, having local capabilities in a given market is an unadulterated advantage. Striking the proper balance is difficult and requires prioritization, which results in the potential for lost opportunities.
Southeast Asia is a thrilling frontier for the tech business, so it’s understandable that governments across the region are creating funds to invest in local startups, hoping to foster new tech hubs. When civil servants put money into companies, what are the risks?
It’s a great thing for the technology space in ASEAN for the governments to be so supportive. Singapore and other governments in the region provide for technology startups, as they try to build a cohort of not only leading regional tech players but also global players. Technology sector actually can drive innovation and provide lasting competitive benefits for the country and the region for generations. From a social standpoint, government support is excellent – but, it does make it a little more difficult for your typical private equity player to be able to find and underwrite attractive risk adjusted opportunity as a result of competing capital from the government sector.
Governments are not only providing support and capital, they are also providing a certain set of benefits to tech players, and we as a financial investor will provide a different set of benefits for that same tech player. I think that government support can co-exist and establish a symbiotic relationship with private equity.
Ticket sizes for the tech deals in this region are really small – so, it is mostly a VC play. Are these deals suited for PE? Or, will we see a scenario where PE players are also entering companies in the very early stages, which is not the traditional way the sector operates? Does PE have the capability to grow tech firms before they hit huge valuations?
It’s hard to paint a broad brush. There are certain venture capital investors, particularly those out of Silicon Valley, which have very deep operating expertise and they have technology domain expertise. This is less common in traditional private equity firms that maybe more focused on operational value add and value creation initiatives – that would be more appropriate for a more mature business.
At Standard Chartered Private Equity we are more focused on later stage venture opportunities, where there is a bit more of a mature management team. The company may not necessarily be profitable or not have a lot of revenue, at least at a given point of time, but the business model and the strategy is reasonably well developed. In those instances, we’re comfortable making an investment – we are comfortable sitting on the board and helping the entrepreneur and the management team work through the inevitable changes in tactics and strategy that comes with operating in a dynamic environment.
Can PE firms grow tech startups – in some ways it raises the chicken or egg question. The mandate for most institutional PE investors would make it difficult to invest cheque sizes that are very small given the amount of capital that we would need to deploy in a given fund cycle. So as a result, its unlikely that they will do these small deals even if the PE firm had a partner or operations team that could add a lot of value to that very small fledging business. These smaller investments tend to fall into the hands of very qualified angel investors, former entrepreneurs themselves or early stage venture firms who might be taking a portfolio approach to a lot of these companies. The individual PE firms will be less qualified to help.
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Will StanChart PE look to do fintech deals, where the companies that you have invested in, can use the expertise and ride on Standard Chartered Bank. How high does fintech rank amongst your investments?
I would say we would be remiss if we didn’t try to take advantage of all the expertise of the StanChart platform and network. Not just in fintech but all our investments, we look across mixed platforms and networks – either for an additional angle in terms of how to do diligence or other viewpoints of where the market potential might be. We would speak with experts and ask around what the risks and opportunities might be in a particular company. So the affiliation with SCB is certainly helpful.
Fintech is a sector that we are very interested in for a number of reasons.
For PE, how challenging have exits been in ASEAN, because at some point every investor needs an exit – whether it is through a buyout, merger or an IPO. Listings have been poor in this region.
I would say that exits are probably harder than they look in PE generally, and not just in ASEAN. But when we look at potential investment opportunities, we are even more attracted to those investee companies, where If they were to achieve their business plan through a holding period, there would be strategic interests from that country or from overseas. So when we underwrite investments, we are looking for multiple exit options, which is no different from any other private equity investor. We have a phenomenal exit record in SEA. We’ve had several successful exits in this region, and I think we have a pretty positive outlook on each of the exit prospects for our companies. But if a Singapore listing is a primary path to exit, you’d be struggling.
The e-commerce sector accounts for a bulk of the PE investments. Do you see this changing with PE willing to look outside their traditional sectors, which also include infrastructure and real estate?
E-commerce draws a lot of PE interest because the penetration rates of e-commerce versus retail spending is generally very low in ASEAN, when compared to more developed markets. If you compare e-commerce penetration in say in most Asean countries – there are 10 different countries so its very hard to generalise – but in general, the penetration is much lower than China, and so private equity players are are looking for interesting opportunities in that space. We found that the infrastructure and logistics that are required to support a really robust e-commerce ecosystem is a little more challenging.
If you just look at Indonesia, Philippines – the way they are set up in terms of the number of islands – it is a logistical challenge. So there are structural reasons why it is difficult for companies to get scale on e-commerce value chain and make e-commerce PE investments look good . It’s an interesting sector, but I think its easier said than done to find opportunities where you can underwrite prospects over a typical PE holding period.
However, we are looking at a couple of very interesting investments related to e-commerce in areas like logistics in places like Philippines, Vietnam and Indonesia. I think it is a pretty interesting way for us to take advantage of the essential increase in e-commerce penetration over the next few years.
Even the logistics play for e-commerce is capital heavy. With the exception of Singapore and to some extent Malaysia, rest of ASEAN will still need supporting infrastructure for e-commerce to take off.
That is a major challenge – a lot of e-commerce players struggle with the question of their own logistics. This is because, third party logistics is under-scaled, it is weak and also expensive. We actually have direct e-commerce investments in the Middle East, and in China, and we are actively looking into logistics in India.
Some of the logistics players in China, which are benefiting from the e-commerce trend, and one of which we invested in – they don’t do any last mile logistics. The guy on the bike who delivers the product and takes the cash is a contractor. So all they are managing is effectively is the big transport. So they don’t own the ships but they’d be managing the freight coming into the country, running warehouses putting them on trucks but once you get to the little depots, somebody else does it.
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