Global Private Equity firm Warburg Pincus has been in the news off late in this region, the latest being a potential bid, as part of a consortium, to take over Global Logistics Properties (GLP), even as the pan-Asian logistics real estate developer, owner and operator ESR (e-Shang Redwood) that it backs, recently acquired 80 per cent in the manager of Cambridge Industrial Trust, prior to which it was involved with the buyout of ARA Asset Management.
Amidst the slew to deals and announcement, Warburg Pincus, appears to be working on a larger strategy for the region, part of which involves replicating its success in India and China here, combined with bringing its global best practices to the region like building platforms rather than buying assets, explains Jeffrey Perlman, Managing Director and Head of Southeast Asia, for the firm.
This is best illustrated by some of the firm’s recent deals. Last year, Warburg had set up a hospitality platform with Vietnam’s Vina Capital, and Perlman points that this business would expand to the region, and would eventually be targeted at its 650 million people. The platform concept was at play again when Warburg, in November last year, teamed up with the founder of ARA Asset Management Ltd, which manages S$30 billion ($21.7 billion) in Asian property assets, to buy out the real estate fund manager.
“What we want to do is to eventually turn what may be an asset heavy business into more of an asset light, funds management business which can ultimately drive value above and beyond the underlying value of the real estate. That is the long-term objective of most of the real estate platforms that we invest in,” explains Perlman.
For Warburg-backed ESR, the acquisition of Cambridge Industrial Trust, marks firm’s foray into the region. ESR, that had been focused on North Asia, China, Japan and Korea, and is among the largest developer in each of those markets, sees huge opportunities in the region, especially in the likes of Indonesia.
“In Southeast Asia, it is very much a blank canvas and early days there. Now that you are starting to see the rise of e-commerce in countries like Indonesia, it is early days for logistics and the need in terms of government support for infrastructure process is significant. We need to bring down logistics cost as a percentage of GDP to make things much more efficient. The way to do that is ultimately, you need modern warehouses and third party logistics providers who can create more value for their clients,” Perlman added in an interaction with the portal.
Perhaps the standout deal for Warburg in the region has been motorbike taxi service Go-Jek, where it teamed up with private equity firm KKR and jointly invested about $550 million in the Indonesian startup. Beyond investing in a promising startup, Perlman shares the opinion that deal is part of the firm’s outlook to tap into the emergence of the middle class in this region. Besides, he also said that Go-Jek was more than just a ride sharing platform, and called it a full-fledged consumer platform.
“This is the ultimate integrated platform. They (Go-Jek) has crowd-sourced motorbikes but if you look at some of the highest frequency activities that they are doing it is ride sharing and food delivery. And then based on the high frequency use case of people transport and food delivery, they developed an e-wallet, the mobile payment business. I think you have probably seen Go-Jek launch Go-Pay on the back of this high frequency activity and the fact that a significant majority of the population is unbanked today. A significant majority do not have access to a credit card. This is the conduit to bring them into the banking system. In the case of Go-Jek, they have a 150,000 drivers and in Jakarta that is 150,000 mobile ATMs. This feeds into the pent-up demand for access into the banking system.That is the emergence of middle class,” he added. Edited Excerpts.
You have been in the region since July last year. How has the region been so far – how has Asean been for you ?
It has been productive and busy. For us the move to Singapore did not start when we opened an office in July. This is a region where I started spending time since 2012. Taking the knowledge and the expertise that we had developed in markets like China and India, taking a lot of investment themes and using them to look at Southeast Asia. We were looking at the low hanging fruit in terms of opportunities where we had done well in other markets, so that we could apply them to Southeast Asia. Some of these markets are going to be different, and they are going to grow in a different way but there is going to be commonality as well.
We started with retail as we had done a lot of retail in China. We had done Intime Retail which is one of the largest department chains in China and Red Star Macalline Group which was largest furniture mall, developer, owner and operator which we listed about 12-18 months ago in Hong Kong. We tried to leverage that knowledge and use it in markets like Vietnam and Indonesia where we initially wanted to spend time. In Indonesia we have set up a platform which is focused on delivering need-based retail to 2nd and 3rd tier cities across the country in a venture with Nirvana. We are really expanding this now and have close to 15 projects. The projects span locations from greater Jakarta across Java and Kalimantan and Sumatra as well. It is one of the few national developers in Indonesia today.
From Warburg Pincus’ perspective, we are very thesis based. We identify a thesis and in this case, we are of the view that retail often tends to consolidate around one or two landlords in a given market. Look at the Philippines, it is SM Group, Central Group in Thailand, Westfield in Australia, even Capita Land here in Singapore. In Indonesia you have Lippo which is obviously a large landlord but they have their own captive retailers. It is not a truly independent landlord so we thought, we could build that on the back of our firm’s retail expertise. In essence, that is how we started and we have spent a lot of time in these markets – in Vietnam and Indonesia. That obviously made us think that there is a bigger opportunity that is beyond these initial investments that we had made, and we decided to set up an office last year.
What are the other markets that you are interested in as the ticket sizes in these markets are not perhaps the ones that would interest you as much as in other markets where you have been present?
From our perspective, we still have a region that has 650 million people so there are opportunities that may be regional – which would allow us to avoid direct exposure and making one bet on just say a Thailand or a Cambodia. For example, our hospitality platform that we recently set up with Vina Capital and Don Lam – initially the seed assets are in Vietnam. But that is a business that will need to expand across the region giving us exposure to all 650 million people and the outbound tourists who are going to come from North Asia into SEA. So I think that is an important point.
When you say you formed a hospitality platform with Vina Capital which will look into the region, do you see the JV expanding into Thailand or other countries?
There are two points – one is that sometimes in some of these markets the deal size is too small and we feel that to make a larger commitment, it has to be to a regional platform. That may be the case in a market like Vietnam and certain individual projects that we do there — these may be too small in the context of the overall WP fund, but not in terms of the overall platform. So, by focusingon investing in a platform, it allows us to deploy a meaningful amount of capital over time to invest in opportunities in which we have a strong conviction.
Is there a commitment from your side for the platform with Vina Capital ?
The collective commitment is upwards of $300 million. We would be putting in a largershare of the amount as we are the largestshareholder. We will be starting in Vietnam and we want to build up a footprint there. That is essentially a destination in the backyard of outbound tourism coming from China, though, it is very fragmented and underdeveloped in terms of a resort and tourism perspective. From there, we want to expand into other tourist destinations in Southeast Asia that includes Indonesia, Thailand and some other countries.
Where do you see this platform expanding to first?
It is hard to say at this stage. In Vietnam, we have a great local partner in Vina Capital and Don Lam, and a real pipeline that is quite sizable. We have already committed to another project on top of the initial projectsthat closed at the end of the year. It is a project based in Ho Chi Minh. We think we will continue to deploy capital over the next twelve months and specially with that we are going to selectively think of expanding that platform in other countries in Southeast Asia. Indonesia is obviously a very large market where we will look to expand the platform into.
With regard to Singapore, where ticket sizes are comparable to other countries, esp in real estate – but when you move to other countries in this region, the ticket sizes may be too small for a Warburg.
If you are talking about individual projects and assets, then (Singapore) is very much a mature market in terms of pricing. But there are businesses which are headquartered here like our hospitality platform – we are headquartered in Singapore because as a regional platform it is a great launching pad to cover those other markets and great way to retain talent. The desire for most of the employees is to be able to live and reside in Singapore. That is one key aspect, but there are companies that are listed here and have business outside Singapore. ARA is one that has business across Asia, and its business is headquartered and listed here. There are opportunities that we see being in Singapore – but that does not mean that the business is entirely Singapore centric.
What are you doing with ARA Asset Management ?
We have known John (ARA Group’s CEO and founder John Lim) for upwards of 10 years and have obviously admired his business – what he has created in terms of capturing the shift towards private capital investing in real estate in Asia. Private capital is trying to find home in quality real estate. They have built a brand in doing that and that general funds management thesis is very central to our own real estate investing strategy.
In terms of our Warburg Pincus perspective, we think of real estate quite differently than that of our peers. Many of them look directly to invest at the asset level, and they want to buy buildings. For us, it is very much a focus of investing at the platform and the entity level. What we want to do is to eventually turn what may be an asset heavy business into more of an asset light, funds management business which can ultimately drive value above and beyond the underlying value of the real estate. That is the long term objective of most of the real estate platforms that we invest in.
Coming to ESR, they are closing the Japan fund. Are you one of the investors in that fund ?
From a Warburg Pincus approach, we do not invest in other funds. We are the largest shareholders of ESR itself – so we have substantial exposure to that vehicle and to the credit ESR as a whole, they have assembled a great base of LPs that want to continue to grow with the platform. Some of them went public like APG, CPPIB and there are other brand names who have committed substantial capital to the business.
After having a focus in China and Japan, how do you see ESR in this region. What it is that they can bring in this region. It will be operating in a much different and much larger market ?
ESR has been much more focused on North Asia, China, Japan and Korea. It is now the largest developer in each of those markets. In Southeast Asia, it is very much a blank canvas and early days there. Now that you are starting to see the rise of e-commerce in markets like Indonesia – while it is still early and it needs a lot more in terms of government support for infrastructure, we need to bring down logistics cost as a percentage of GDP to make things much more efficient. The way to do that is ultimately, you need modern warehouses and third-party logistics providers who can create more value for their clients.
How big is the opportunity here in SEA ?
If you take Indonesia alone there are 250 million people. It has GDP growing north of 5 per cent and a pretty sizable economy again with no existing modern stock of warehouses- so we think that opportunity over time is in the billions in terms of project cost. That is over a 10 years horizon – but we want to build long term businesses.
We want to build sustainable businesses. Singapore obviously is a bit of a different market, in the sense that it is very institutionalized. Over time we have an opportunity to leverage the strength of the ESR platform to look at opportunities – to look at Singapore and outside Singapore. And separately from an ESR perspective, we now have a kind of a gateway (via Cambridge) to look at taking these opportunities across Southeast Asia.
India is obviously a franchise that we have had for twenty years. The way we have built our business in India is same way we want to build our practice in Southeast Asia. The way we did it in China and India, which is that we build local teams and we have been one of the most successful investors because of that. You have to be local and build relationships with the entrepreneurs because that is the foundation of what we do.
We want to directly go to entrepreneurs to provide a solution to help them grow their business and I think that avoids an inter-mediation process with other bankers, brokers etc. We tend to be proprietary and focus on developing our thesis.
In India and China over the years you have build a localised team. What is the way forward for South east Asia ?
First it starts here in Singapore. The goal here is to bring the firm’s culture here and to develop the team that grows here and has worked in the region. That is something we see as very important. We try to leverage our own consultants in geographies like Indonesia and Vietnam – these are people on the ground there – everyday they are in touch with our partners – so we are further trying to localise ourselves.
This is not just in trying to source opportunities. In SEA, there is not much understanding of what private equity is, and all they hear are terms like “buyout” and “control investments”. But, actually it is quite different, our business is growth equity and trying to explain to entrepreneurs that this works for both sides and trying to tap into our network is what we have to do.
Mainly the businesses in SEA may be at an earlier stage than some of the markets that we are in like the US, China and India. Some of them are looking for capital, but most of them are also looking for knowledge and expertise to help them accelerate the growth in their business.
How ready is the average entrepreneur in the region to accept PE. The region may not be ready, they may have issues with control and other things ?
I think some of the challenges that you are describing is the nature of investing in emerging markets. There is a subset of companies and entrepreneurs that are open minded and there are subsets who would be interested if they were told what we are trying to achieve from a private equity perspective and then there are others which are very tightly controlled potentially family owned businesses.
We focus on the first two groups. Some of the focus that our larger peers face is that they come from a historical buyout background and are looking for control. I think in this region it is very very difficult. Our experience in China and India lends us the right perspective to look at SEA. These entrepreneurs are either first time entrepreneurs or they are family owned businesses which have never had a partner before.
Actually we see (being a minority investor) as a positive way to invest, it creates a great alignment of interest where your partner owns more and that means they are going to be super focused on that business and likely will avoid doing things outside of that vehicle. For us, as long as we have a path to liquidity in the future and a way to realise fair value for our investment, it tends to be quite a dynamic partnership. You know the other constraint for some of our peers may be the size.
The line of equity approach to investing that we tend to utilize is one where we will make an overall commitment to invest with the entrepreneur into that business so as and when capital is needed in that business we will draw down on that line. So it allows them to avoid taking on too much cash early because that tends to create its own issues as well.
If the business is at an early stage and has too much cash then they feel compelled to invest it prematurely. This allows us two things: from a risk management perspective, we are able to try and put in that capital when we need to (as opposed to all at once) and from an IRR perspective it allows us to bring down the weighted average life of investment thereby increasing the return.
There could be business cycles that are short and compressed but the overall long term is quite positive. So we need to have a long enough time horizon with these investments so you can realize the eventual upside. So with that from an IRR perspective, it is great to phase in the capital so the weighted average life ends of being shorter because of that. So we think it works for both sides. Being flexible in terms of size and structure and ultimately having a longer term investment horizon.
Coming back to ESR, you have a strong portfolio in North Asia. Unlike ESR, why have your many of the portfolio companies not expanded into SEA. What I mean is that, have done well in India and China but why not look at SEA which is a 600 million people market ?
Some of these markets are so large that we don’t want them necessarily to be distracted outside because if they can win that market and the sector within their market then we can have a very outsized outcome.
Also, I think some sectors are more conducive to expansion overseas than others. Ones that are very regulatory driven in that market and they understand it really well, probably it is going to mean they are going to stay more local. Others are very transferable across markets.
Logistics is a great example. One of the great benefits of ESR being a regional business as opposed to a China business is two-fold. One is one the tenant side, most of our tenants operate in more than one geography and if you are supporting H&M and they are operating in China, Korea, Japan, etc then you can make their life easier by being a go-to partner to them in various geographies as they typically make their logistics decisions at a regional level.
The second is on the capital side, we talked about the funds management business. When you are a large institutional investor, you want to underwrite an overall platform. In the case of APG, they underwrote ESR as a platform and have now invested with the company in multiple geographies. For most institutional investors, it is a smaller team and they want to deploy for a meaningful amount of capital.
I think you are going to see more on the Technology Media and Telecommunications (TMT) side of these businesses and even investors are starting to come from North Asia to SEA. You have seen more recently with Alibaba, JD and others that are now coming and more and more will be coming in the future. It is a region of 650 million people, it is a large and untapped market and a lot of this will be driven by the smartphone.
The large and rapid rise and penetration of the smart phone has transformed the market and allows people to access the internet for the first time. There are many businesses that ride on the back of that like e-commerce, and that is why a lot of e-commerce companies are starting to come down from North Asia. This includes the service e-commerce side where we invested in Go-Jek last year.
Talking about Go-Jek, for the first time are we seeing PE capital in the TMT or technology sector rather in the region. Do you think finally this is picking up in SEA ?
The sectors that you are referencing are all around the emergence of the middle class in SEA. We talked of real estate being so large because one of best ways to play emerging consumption and scale is through real estate. That is the urbanisation of the cities and for the first time people having the income to take their families to shopping malls for entertainment and food.
Ultimately you have seen investments in Indonesia in the cinema sector and that is obviously on the back of the broader consumption pattern. When we think of Go-Jek it is more than a ride sharing platform, it is a consumer business. This is the ultimate integrated platform. They have a crowd-sourced motorbikes but if you look at some of the highest frequency activities that they are doing it is ride sharing and food delivery. And then based on the high frequency use case of people transport and food delivery, they developed an e-wallet, the mobile payment business. I think you have probably seen Go-Jek launch Go-Pay on the back of this high frequency activity and the fact that a significant majority of the population is unbanked today. A significant majority do not have access to a credit card. This is the conduit to bring them into the banking system. In the case of Go-Jek, they have a 150,000 drivers and in Jakarta that is 150,000 mobile ATMs. This feeds into the pent-up demand for access into the banking system.That is the emergence of middle class.
In terms of how we think about broader TMT within SEA inevitably with the smart phone now there is going to be a lot more activity. You are starting to see continued activity in TMT. One of the issues is in larger investors and sometimes there are early stage, seed investor and B stage investor in TMT and you have got some of the larger PE firms. Some of the larger PE firms there is still not a lot of these businesses of the size and scale that can absorb that kind of capital that some of the ride sharing businesses can. That is going to take time. You will continue to see the size of the capital raises in the goods commerce and this kind of service or mobile commerce. But I think for some of the other business models, it is going to take probably some time before you start to see that amount of capital being absorbed by these businesses.
If you look at your peers, a lot of them have come with Asia specific funds. Is there a scope for that kind of Asean fund ?
Our primary investment vehicle continues to be our global fund. At the same time the amount of activity in Asia continues to grow and we are seeing continued attractive risk adjusted opportunities in Asia. In a market like China, we are trying to maintain a diversification with the China Fund we have recently raised, which will invest 50:50 alongside the global main fund. There is also an opportunity within that pool of capital to invest in Southeast Asia.
Others have obviously focused on a lot of broader country specific vehicle or dedicated regional vehicle. For Warburg Pincus, we want to continue to allocate meaningful capital to the best suggested opportunities. For a globally diversified vehicle, whether the best opportunities are in India, China, SEA, the US or South America, there is no allocation pressure, and we can deploy that capital as we see fit. Obviously we want to keep it as a dedicated and diversified fund, but there is no pressure of investing in a certain time-frame or a specific region. We like our model of having different companion funds (as needed), and we would like to keep it open on that end.
Unlike China, when it comes to India and SEA, private equity exits have been a concern. They have not happened. How does this impact investments and what has been your view of that ?
Investments get all the spotlights but ultimately it is the meaningful exit that matters. I think we have been able to find good pathways to exit. In China, we have been one of the few to take out more money than we have invested. In China we have invested money worth $7 billion and we have taken out well in excess of that.
These include some of those IPOs, both domestic and abroad, so you have the flexibility to exit via all the capital markets. We are starting to see there is somewhat a bit of a less reliance on IPOs. For some institutional investors, insurance companies and pension funds They now want to directly own some of these great businesses in the longer term which allows to exit without us having to take that market risk post the IPO.
The benefit of real estate is that you have the ability to get liquidity at the asset level. There are times when entrepreneurs want to retain the business over the longer term. What is critical is that you have to take multiple steps to exit and that is what happened in China and in India. In SEA you have a more nascent capital market, which we are very mindful of, but the key is whether you can invest and create businesses that are impactful – businesses large and meaningful enough in a given sector that both the capital markets and other strategic and institutional investors are going to care about. Sectors that we are looking at include logistics, retail, TMT, and healthcare; they are well understood industries and they have viable benchmarks. This in itself means that you can exit at the time you want, while others have struggled to find their way out of an exit which may have led to a detrimental impact to the IRR, given that extra 2-3 year hold period. We prioritize the pathway to exit when we are making an investment, because if we do not have the multiple exit options you can get stuck in an investment.
We are suddenly seeing a scenario, where sovereign wealth funds and even pension funds are chasing deals in the region. In such a scenario looking at Asia is there too much money chasing too little quality deals ?
Honestly, you can say this almost about every market globally. There is the largest amount of dry powder today than there has ever been for private equity. The way we run our business – sourcing proprietary deals, going direct to entrepreneurs, and building the businesses together with entrepreneurs — is what enables us to grow with them. Other than capital, it is the value that we can bring to the table. When it comes to exits, there is a lot of capital out there that are very comfortable buying from private equity. In a way, more capital is going to facilitate more exits in the industry, while at the same time we are going to see more competitive and brokered deal processes.We are going to the entrepreneurs directly and with a thesis that has been tested in other geographies.