Distressed assets deliver most attractive returns, say 9Basil co-founders

Schwin Chiaravanont (left) and Dr. Kris Panijpan, co-founders and managing partners at 9Basil.

Thailand-based multi-family office Blueprint Forest is looking to tap assets that are not typically covered by private equity firms.

Blueprint Forest’s PE platform 9Basil made headlines earlier this month when it closed its maiden fund at $120 million, targeting businesses across Southeast Asia – with an emphasis on its home market. Besides, it is also scouting for opportunities in Indonesia, the Philippines and Myanmar.

Its portfolio companies in Thailand include financial services firm Alpha Capital Asset Management and micro-lending firm Ngern Tid Lor.

9Basil’s co-founders and managing partners Schwin Chiaravanont and Dr. Kris Panijpan told DealStreetAsia in an interaction that the firm plans to focus on investments in distressed assets, e-commerce support segments and crisis-resilient businesses.

The duo explicitly opines that distress is where they see higher returns – even in the wake of the current crisis.

9Basil does not define a sweet spot in terms of deal size. The investments it has made have so far been in the range of $30 million, while the smallest deal the firm is evaluating is $5 million. However, going forward, the deal size can even be higher if it ties up with co-investors.

Blueprint Forest manages capital for over 25 families from over nine countries, while 9Basil is powered by a number of established families across Southeast Asia.

Members of 9Basil’s Fund I advisory board include a slew of limited partners of the fund, such as Kachorn Chiaravanont, a member of the CP Group family, Petch Osathanugrah, a major shareholder in SET-listed FMCG producer Osotspa, and Prin Chirathivat, who is the deputy group CEO of Central Group.

Edited excerpts:

Family offices have typically kept a low profile. But now we are seeing more making direct investments. What is driving this movement? And what does it mean for the broader LP-GP dynamics?

Panijpan: We are seeing a trend towards multifamily offices where people are more open to joining. Part of it is because it is not easy to attract super high-calibre people into family offices as, I think, high-level professionals don’t feel that they want to be directly linked to only one family. And, there’s also a trend where family offices invest in funds in order to have more access to deals, with the understanding that in many circumstances, these funds tend to share the deals with their LPs as co-investors. So, what we’re seeing is that family offices want to invest in more things, and they want a wider access to deal flow.

Do you consider investing in general partners?

Panijpan: Probably our deals will be all direct investments. At the moment, there are a lot of interesting [direct investment] opportunities that we can access ourselves.

So, for direct investments, what are the sectors that you will be evaluating?

Panijpan: We are open to doing anything. But there are a couple of areas that we like such as distressed assets. At the moment, distressed options are opening very widely in virtually every sector of the economy. Our main criteria are first, our circle of competence – what we understand, and second, price.

The second bucket is in e-commerce support services such as logistics, warehousing and deliveries. The third one we like is resilient businesses that haven’t shifted much during COVID-19 or even have grown better during this time.

In terms of potential return and the level of margin of safety, we’re finding that the most attractive is actually the distressed base. When these assets are starting to come out, we’re able to go in at attractive valuations and turn into what are rather good businesses. Having said that, we are still looking at many situations that are not distressed.

What are the requirements to drive expected returns? There might be a lot of value creation or restructuring work.

Panijpan: A lot of it comes through our network. We have [a] reach into different sectors of Thailand as well as other countries in Southeast Asia. In terms of debt restructuring or talking to creditors, that has always been a core competence of ours, where our teams are close to a lot of capital providers in these countries. So, it’s a mixture of invested money and a lot of restructuring and financial expertise.

Has the COVID-19 pandemic created a lot more distress opportunities for you?

Panijpan: The quick answer is yes, although the real situation on the ground is a little bit more complex. One of our very first investments was into Alpha Capital Asset Management, a platform we use to manage NPLs bought from banks. Since COVID-19 hit, there have been more NPL portfolios out for sale. So, that has turned out to be quite a good investment we made. Beyond that, we have a theme where we look at distressed assets. With this situation, we’re seeing more and more opportunities coming out. Having said that, it’s actually surprising that in some sectors that are perhaps the most deeply affected by the COVID-19 crisis, such as hospitality, we’re seeing very few assets. The Bank of Thailand has encouraged Thai banks to give out debt reliefs to the most affected debtors. So, businesses that are not quite distressed but need some more capital are where we’re seeing the most opportunities.

What are the operating industries for your distressed asset investment?

Panijpan: There are a lot of buying opportunities at the moment in real estate, be it residential, commercial, and hospitality. It’s just about picking the right ones at the right price.

How about manufacturing and F&B?

Panijpan: We’re taking a very good look at F&B. The main problem with F&B in Thailand is that the valuation is absurdly high. That’s driven by the comparables and the public market. Even as the Thai stock index has come down, the valuation that the F&B sector expects is still very high.

Manufacturing is a lot tougher. It actually falls firmly into a category of a big gap between the present situation and what they would consider when things get normal.

What are the challenges in terms of looking for investments and doing deals around this time?

Panijpan: On the due diligence part, the real issue would come with offshore investments. We started out the fund with a Southeast Asian mandate, so we have deals in our pipeline in Indonesia, the Philippines and Myanmar, but these deals are on hold because we cannot travel to those countries. Diligence is not an issue in Thailand because we are still able to travel and access a lot of things here.

However, the valuation gap is still very real where a lot of people still have a pre-COVID-19 valuation benchmark in mind. And the debt reliefs are also playing a very big part. So, a lot of businesses are distressed companies, but they would rather have the banks help them out than sell off their assets.

I would say, though, that the valuation gap in many senses is narrowing. We’re starting to understand what it takes to get a deal done in this environment. Four to five months ago, in the very depth of COVID-19, we thought it would be easy buying things cheap. It’s actually not the case. The deal structures that are working the best for us are those where we’re giving invested businesses a chance, meaning if we have a deal with them, we would agree that if things improve, then the deal will look a certain way; or if things don’t improve, the deal will look another certain way.

Does this also apply to businesses with good fundamentals? Have the valuation assumptions changed?

Panijpan: Let’s separate into two different categories. There are businesses that have done better under COVID-19, companies such as Alpha Capital, or e-commerce and e-commerce support businesses. For those businesses, we’re seeing that the valuations remain strong. In fact, in many cases, the valuations improved because they’re showing that even in the worst situation, they can still outperform.

But in terms of the other category, fundamentals have more or less shifted. Those businesses believe that once things calm down, they’ll come back to normal very quickly because there’s no real fundamental problem with the business. Let’s say in travel, companies are saying ‘As things normalise, my revenues will go up to the normal level within a month’ – that’s where it’s hard to get a deal done.

Given the volatile market, what is your risk mitigation strategy? Would you look at taking control of a business to reduce risk?

Panijpan: We don’t like control deals. We tend not to invest in businesses where we have to go in and turn around the business or replace the management team. It’s not that we can’t take control, but we would prefer that we don’t need to revamp management. When you talk about risk mitigation, the most important thing for us is again the price and the margin of safety. We tend to look at businesses where we believe we can provide a lot of synergies for them with our network.

You said in the October 15 announcement that the platform aims to help businesses in an environment that has generally been constrained by dominant business and political groups. Can you elaborate on that statement?

Panijpan: I like to say that we’re a new choice for businesses. In Asia, particularly in Southeast Asia, businesses have tended to develop out of large conglomerates or from the government. We have nothing against government-backed or conglomerate-backed businesses. But from time to time, we meet entrepreneurs who say: ‘We don’t want to link ourselves to the big conglomerates or the government, but we still want to grow’. And we want to present an alternative to them. And at the moment in Southeast Asia, probably with the exception of Singapore, there are not many private equity groups that can move resources to a scale that can make businesses reach the next level.

Chiaravanont: We are completely independently run. There is a very high level of certainty that independence enables the underlying businesses that we invest in, to allow them to be independent, and therefore be able to work with everyone as opposed to select political parties or large conglomerates that in the past they had to align themselves with.

Is Ngern Tid Lor working on an IPO? How is it doing?

Panijpan: Ngern Tid Lor has been a wonderful performer in the loan business. It has invested a lot in technology and built up a very good data platform. The company is showing very impressive growth over the last few years. This year, as Ngern Tid Lor began to lend to the mass population, we had expected COVID-19 would affect it in a severe way. But it’s actually turning out that the company is doing relatively well. In terms of the IPO plan, Ngern Tid Lor has been contemplating an IPO for a while, but the exact timing will depend a lot on what we believe the appropriate market timing to be. This year is not a great year to do IPOs in general.

How do IPOs look as an exit option in Southeast Asia? What are other viable exit options in the region?

Panijpan: Obviously, we’re looking at a few different options, but that is more of an exploratory phase. The base case scenario is an IPO. In terms of an IPO exit, if we were to do it, it will almost certainly be in Thailand, where our brand recognition translates into the most value for us.

In the West, it’s very common for a PE fund to exit by selling to another PE fund. That is rare here, simply because there aren’t that many PE funds around. But I think the public markets here are actually not too bad. If you’re talking about countries like Cambodia, Myanmar, or even Indonesia, it might be a little challenging for a public market exit. But Singapore, Thai and Vietnamese markets are actually starting to become quite decent.

But part of the reason that makes it hard to have exits is because you need to get to a point where these companies are cleaned up and upgraded with advanced systems so that can they can catch the eye of a multinational company.

How do you compare the returns of the public market versus private equity?

Panijpan: Returns in the Thai stock market have not been really great over the last two to three years, while PE funds are actually posting quite solid returns in Thailand. We’re seeing quite a large illiquidity discount for private companies. I would expect PE [firms] in Thailand to have significantly better returns than the public markets.

Do you think that the Thai PE market is underserved?

Panijpan: I think the market is underserved. But I must caveat that one problem PE funds have in Thailand is that there are only a few international private funds who will send people in every quarter or every half year, and they have had a difficult time getting deals done. Part of the reason is the language gap. But the other problem is there’s a genuine opaqueness of information here, where you would have to be extremely hyperlocal to understand what is going on in each segment of the Thai economy.

One complaint I often hear from people is that there are too few PE deals in Thailand, or that anytime a good deal comes up, it is taken by one of the conglomerates. Opportunities in Thailand are abundant, but they’re not going to come to you. You’re going to need a lot of information that is not easily available and you need a certain lens to understand it.

One of the themes that investors have recently picked up a lot is ESG investing or sustainable investing. How do you leverage that within your firm?

Chiaravanont: We believe that sustainability is the natural driver for the success of businesses. Within our portfolio, we spent a lot of time with Ngern Tid Lor, which is in the business of reducing financial vulnerability to serve the lower mass income population of Thailand. The impacts a business is creating and seeking high returns actually go hand in hand.

What is the outlook for the Southeast Asia market in 2021? Which sectors do you think will recover the fastest?

Panijpan: I think if COVID-19 starts to die down or a vaccine truly does come out, we would expect to see a very sharp rebound in exports and hospitality. Having said that, we don’t have any real visibility on how any of that is going to happen. So, we continue to have a very strong focus on the sectors we mentioned earlier. We’re not really taking a view as to who will bounce back or bounce back the fastest. We’re keeping our eyes on the areas we think will continue to be interesting situations, even if COVID goes on longer than we’d like it to.

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.