SG’s Archipelago Capital eyes final close of $250m fund in six months

Singapore. Photo by Andrew Kow on Unsplash

Singapore-based private equity (PE) firm Archipelago Capital Partners has secured 75 per cent of its latest $250-million fund and expects to make the final close over the next five to six months, its CEO Jovasky Pang told DealStreetAsia.

“We were lucky to have the support of institutions that we know very well. We have done the first close and already started to invest. There are a few deals in the pipeline,” he said.

Earlier this month, Archipelago acquired Malaysian kiosk-based dessert and drink chain Coolblog, from the Malaysian government-backed private equity firm Ekuiti Nasional Bhd (Ekuinas), who divested its 60% stake, and other investors.

This marks the second fund for Archipelago Capital, which is currently scouting for opportunities in markets such as the Philippines, Indonesia and Malaysia. The firm invests in small and mid-market companies that focus on consumer goods and services, financial services and industrial and logistics sectors.

According to an earlier disclosure, the International Finance Corporation (IFC), a member of the World Bank Group, has proposed a $25 million equity investment into Archipelago’s Fund II.

LPs who committed to Archipelago’s maiden fund were Pavilion Capital, Sofina, Hanwha and NH – or Nonghyup, National Agricultural Cooperative Federation – according to a Singapore Venture Capital & Equity Association Quarterly July 2020 newsletter.

The firm was founded in 2015 by Pang, along with Kiat Chan, and Eng Khim Lim. Its first fund had a corpus of $75 million, according to an earlier media report.

Before setting up Archipelago Capital, Pang worked with Fullerton Financial Holdings, an investment arm of Temasek Holdings, while Chan and Lim were key members of the corporate finance practice in Southeast Asia at McKinsey & Company.

Pang explained that Archipelago’s acquisition of CoolBlog is a play on Malaysia’s young and urban population dynamics.

CoolBlog provides a range of beverages such as bubble tea, smoothies, ice-blended coffee, and flavoured tea, among others.

The bubble tea market alone, valued at $2.4 billion in 2019, is estimated to reach $4.3 billion by 2027, registering a CAGR of 7.8 per cent from 2020 to 2027, according to a report by Allied Market Research.

Headquartered in the southernmost city of Johor Bahru, which borders Singapore, Coolblog has 270 outlets across the country. With Archipelago’s backing, Coolblog plans to ramp up the number of outlets in the country and overseas.

“It has a good following in the second-tier cities and smaller towns. We plan to open 50 to 70 stores next year. There is a lot of room to grow in Peninsula Malaysia and East Malaysia,” Pang said. “We might also take it overseas as we have a footprint and food assets in the Philippines and Indonesia,” he said.

SE Asia’s growing F&B consumption

“For us, F&B is not just about restaurants and cafes. We look at the sector in a more holistic way,” said Pang. He pointed to changing lifestyles and family dynamics as factors driving growth in the industry.

“Investments in the food and beverage sector in Southeast Asia make a lot of sense because you have such a young, growing population (more than 650 million),” he said. “Increasing urbanisation rate also brings increasing consumption, income per capita.”

While the COVID-19 pandemic has had a negative impact on F&B businesses across Southeast Asian nations, Pang said there are segments that are doing well. These include certain chain restaurants, frozen food manufacturing, and baking ingredients.

Archipelago typically invests in companies which it has tracked for over a year, taking into consideration their sustainability, business models and products. Companies on its radar are those specialising in food packaging, ready-to-eat products, food processing, and ingredients.

Pang added that the firm selects businesses that are able to scale up and improve unit economics, as well as adopt technology, to create enough structural barriers to entry to ward off competition.

“COVID does provide some opportunities, but we don’t [invest] just because of COVID. We invest because [of the] longer-term trends in the market, such as the increasing use of technology, [and factors] related to consumer behaviour,” he said. “What COVID brings [out] is the quality of management, the sustainability of business models and the adaptability of the business.”

PE maturing in SE Asia

Archipelago seeks to make 7-10 investments in well-established small and mid-sized companies across Southeast Asia. The firm is eyeing the financial services, consumer and logistics sectors in the country, Pang said. Apart from the Philippines, Indonesia and Malaysia – which make up for its core markets – Archipelago also plans to tap opportunities in Thailand.

In its disclosure, IFC had earlier indicated that Archipelago’s second fund will deploy 40-50 per cent of its corpus in companies operating in the Philippines.

“The Philippines is a very interesting market. It is a high growth market with a very young population of 100 million people, highly energetic people,” Pang said.

Still, the Philippines has not been an easy market for PE players, he added.

“I don’t think it is due to a lack of opportunities. The Philippines is a market where you work very closely with local business families. We have good relationships with some of these business families that give us access to good opportunities,” he said.

Last year, the firm made headlines when its subsidiary, Osmanthus Investment Holdings completed its acquisition of a 15-per cent stake in One Network Bank Inc (ONB), the rural banking arm of the Philippines’ largest lender BDO Unibank.

Malaysia, on the other hand, has the right “hardware”, said Pang, where education level, wage level and electricity tariff are “quite decent”. This is despite the recent uncertainties in its political scene that can have an adverse impact on the investing environment in the third-largest economy in Southeast Asia.

“Malaysia is the market where you can make money in,” he said, adding that the rule of law, ease of hiring good managers, transport and infrastructure make the country attractive.

Sectors of interest are hardware and transport, he said. “Things work in Malaysia if you want to scale up an exporting business.”

The firm avoids cyclical businesses such as commodities and energy, as well as those that are exposed to political risks.

Pang expects to see a rise in secondary transactions, which in turn signals the maturity of the risk capital industry in the region.

“I think secondary opportunities come about because the market is getting more sophisticated,” he said. “In the past, whenever you asked managers what the forms of exit are, people would tell you it’s a trade sale or IPO.”

He noted that as the industry grows there are more managers with varying strategies – from growth, mid-cap, and pre-IPO funds to the buyout and large, international rollups.

“They have more strategies complementing each other within the market. The opportunities for secondaries increase,” he said. “In more developed markets, a company could go through three PE hands before it is available for a trade sale or IPO.”

Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.

Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.