Southeast Asia will continue to remain an attractive destination for both buyouts and minority investments, according to panellists speaking at DEALSTREETASIA’s Asia PE-VC Summit 2018 in Singapore on September 11.
“The key is where you choose to spend your time and knowing how much money is appropriate for the sector and your strategy,” according to Eugene Lai, Managing Director and Co-Managing Partner at private equity firm Southern Capital Group.
Lai, who was speaking at a session titled Size Matters – Will the Bias be Towards Buyouts or Mid-Market Deals, said, “Every investment size is different and that are private equity firms who go for control investments for various reasons and there are those who choose minority investments for a number of things.” Southern Capital focuses on control investments.
Incidentally, a survey conducted earlier by Coller Capital, a global investor in the private equity secondary market, showed that Southeast Asia was likely to become a more attractive market for buyouts in the next three years, with a quarter of LPs surveyed saying the attractiveness of Southeast Asia buyouts is growing fast.
Speaking on the drivers for control deals, Brian Lau, Managing Director & Partner, ShawKwei & Partners, said he prefers control investment for two reasons: first, the PE firm can control the exit and, second, it can make changes to the companies it is buying.
“For us, larger investments means we can do more. We are not following a founder’s vision but we want to take the company to the next level. Our focus is taking good Asian-run regional business and bringing it to international standards ideally for an exit strategy,” he said. ShawKwei is one of the oldest independent private equity firms in Asia.
In Southeast Asia, it is important to have control of a company to implement the investor’s growth plans, according to Southern Capital’s Lai. The PE firm has only made control investments – 51 per cent or more – since its inception.
“We still work with management teams but at least at the end of the day, they know you control and they know what your plan is. If you don’t have control, you are severely hampered in your exit because you are relying on the public markets,” Lai added.
Syed Yasir Arafat, Chief Executive Officer of Ekuiti Nasional Bhd (Ekuinas), a Malaysia government-linked PE fund management company, agreed with Lai, adding that taking majority interest gives investors a lot of control of the company, leverage over their investments, and flexibility when it comes to exit.
But Arafat warned of the challenges for investors operating in mid-market in Southeast Asia. One of the biggest issues is finding the right talent to replicate the “entrepreneurial spirit” that the founder may have, which he said is “not easy”.
Ekuinas is a sector agnostic PE firm, with 90 per cent of its deals involving buyouts.
Polaris Capital Group-backed Altair Capital, however, prefers smaller-sized deals – $50 million or less in value – according to Gary Ng, Partner at Altair Capital.
“The market below $50 million is a lot less sophisticated, the investment bankers are not involved, the big bosses are not involved. Big is nice but small can be beautiful,” Ng said, referring to the PE investment size.
The Singapore-headquartered firm said, it is targeting ticket sizes of $10-25 million, covering sectors such as consumer, education, healthcare, manufacturing, and services. The sectors are directly influenced by Altair’s connection to Japan’s Polaris Capital Group as its ASEAN affiliate.
In August, Altair Capital made a first close for its maiden ASEAN fund at a little below $100 million. The fund has a hard cap of $150 million and targets a final close by June 2019.
“We provide growth capital and hopefully do exits after a couple of years but we don’t really believe on IPO exits these days. Our angle is finding strategic partners who will allow us minority stake,” Ng said.
Tak Wai Chung, Head of Southeast Asia at Swedish buyout firm EQT Partners, said that while investment size matters, GPs need to realize where their strength is because investments is very much about the growth of the company and the returns.
“Whether you are 51 per cent or 49 per cent, for this market it is very much a partnership with founders, entrepreneurs, or management. You are looking for partnership with these people whether you are minority or majority investor,” he said.
Last February, EQT Partners raised EUR10.8 billion ($13.3 billion) for its largest-ever buyout fund, surpassing its own EUR8 billion ($9.3 billion) target. It is expanding its investment portfolio in the Asia-Pacific region by tapping opportunities in the mid-market and infrastructure spaces.
Does size really matter? Yes, larger investments do allow PE firms to do more. However, smaller deals in promising sectors deliver good exits.