<article>In Southeast Asia, Swedish investment firm EQT Partners is spending a lot of time in Vietnam and Indonesia, which are fast-growing markets in the region, said its partner Brian Chang.</article>

In Southeast Asia, Swedish investment firm EQT Partners is spending a lot of time in Vietnam and Indonesia, which are fast-growing markets in the region, said its partner Brian Chang.
&#8220;We’ve spent a lot of time in Singapore and Malaysia, which are the mature markets, as well as Indonesia and Vietnam where we have continued building our resources and deeper network. In Vietnam, the deal sizes may be pretty small now, but the market is growing so fast. A company that is small today may not be small in two years’ time and we want to be well positioned then.
&#8220;And when people think of Indonesia, normally the industry that comes to mind is consumer. One thing we think a lot about is disruption. For example, the retail sector is prone to disruption with e-commerce. If we were to look at this segment in Indonesia, then it would be a consideration,&#8221; he told DEALSTREETASIA.
Chang was <a href="https://www.dealstreetasia.com/stories/eqt-allianz-jsafra-sarasin-116732/">promoted to partner this January</a> and is responsible for mid-market deals in Asia. He was earlier a director at the firm. Prior to EQT, he was with Headland Capital Partners in Singapore, the Asian buyout firm spun out of HSBC Holdings.
EQT closed its latest Asian mid-market fund, <a href="https://www.dealstreetasia.com/stories/eqt-asia-mid-market-fund-97543/">EQT Mid Market Asia III, at $800 million</a> last May, which will make control or co-control investments in mid-market companies in Greater China and Southeast Asia.
So far, it has made eight investments via its third mid-market fund. Last month, it entered an agreement to <a href="https://www.dealstreetasia.com/stories/eqt-partners-to-acquire-10-stake-in-chinese-third-party-payment-firm-vbill-121391/">acquire a 10 per cent stake in Chinese third-party payment service provider VBill</a>. In total, EQT currently manages 13 investments in Asia. EQT Mid Market Asia III would look to focus on healthcare, business services, education, consumer and TMT investments.
In 2017, EQT Partners set up a joint venture with Temasek Holdings to scout for infrastructure deals where it will allocate funds from its EUR 4 bllion Infrastructure III closed in the same year. However, Chang declined to comment on the joint venture. As of last June, the joint venture has not concluded any deal, according to <a href="https://www.dealstreetasia.com/stories/our-focus-continues-to-be-greater-china-parts-of-southeast-asia-johan-bygge-eqt-99774/">EQT Asia Pacific chairman Johan Bygge</a>.
Earlier this week, EQT Partners also announced the <a href="https://www.dealstreetasia.com/stories/eqt-infra-fund-asia-125582/">final close of its fourth infrastructure fund</a> &#8211; EQT Infrastructure IV &#8211; at its hard cap of €9 billion ($10.2 billion), with plans to opportunistically explore opportunities in the Asia Pacific region.
The past year has seen several mid-market buyout firms in Asia close their funds. Hong Kong-based private equity firm ShawKwei &amp; Partners made a <a href="https://www.dealstreetasia.com/stories/shawkwei-fourth-asia-fund-close-108096/">final close of its fourth pan-Asia vehicle</a> &#8211; the Asia Value Fund 2017 &#8211; at $812 million. Also, Singapore-headquartered Southern Capital Group is also supposed to close its $500 million fourth fund by this year.
Interestingly, last October, Morgan Stanley Private Equity Asia has closed its North Haven Thai Private Equity and related funds at <a href="https://www.dealstreetasia.com/stories/asia-mid-market-morgan-stanley-chin-chou-109901/">$440 million to invest in mid-market deals in Thailand</a>. The fund was launched in partnership with Bangkok Bank which is an LP and co-GP for the fund.
The largest of such funds on the road is the eighth fund being raised by Malaysia-headquartered Navis Capital Partners. The PE firm is said to be seeking about $1.75 billion for the fund and expects a <a href="https://www.dealstreetasia.com/stories/navis-first-close-eighth-fund-123864/">first close at $1 billion</a> next month and a final close by this year.
Edited excerpts: &#8211;
EQT Mid Market Asia III Fund is earmarked for China and Southeast Asia-based investments. Is there a specific allocation for the region and China?
Currently, investments are mainly made by the EQT Mid Market Asia III fund. Out of that fund, seven investments have been made and we’ve just announced another one, so altogether would be eight. In total EQT currently manages 13 investments in Asia.
We don’t actually have a hard split between the Greater China / SEA geographies. If we find a good quality company in Asia where EQT has a value creation potential, then we will invest. If anything, there’s been a number of cases where the investment thesis has been to build a more regional or global business, like In.Corp, BBS and Clinical Innovations.
And of course, there are also plans to bring some of these Chinese companies over to Southeast Asia.
So there are opportunities to bring potentially Chinese companies to this part of the world. For example, take German-based automation solutions provider BBS, who has a presence in Europe, US and China as well as Malaysia. So what we do is helping them to make connections within the region of Southeast Asia.
What sectors do you look to focus for your mid-market deals?
We’ve done healthcare, business services, education, consumer and TMT.
Are you also looking at a platform approach for ILA Vietnam?
Not necessarily. I think the platform approach is a case-by-case basis and it also depends on the business model. For In.Corp, the platform works because of the stickiness of the customers, the fragmented market and additional value add to the customers with a fuller suite and integrated service offering that comes with a larger platform.
Whereas where with an education business, I think the value proposition from ELT (English Learning Training centre) to ELT is different. The price points and methodology can be different. And parents are also very sensitive to where their kids would study. So if we were to take a platform or M&amp;A approach we would have to be extra careful and only make acquisitions that are complementary and not dilutive to ILA’s brand.
How do valuations compare between China and Southeast Asia?
We can still manage to find deals where the valuations are reasonable. And those are where we’ve managed to secure a proprietary angle. Whether it’s for the network and value creation potentials that EQT offers, we’ve been able to secure the investments without really going through a formal process. Where valuations have been high, I think buyers who buy the businesses at a high price will need to have strong business plans for the companies.
If EQT was to make such decision, we have value creation tools and a global network of 500 industrial advisors &#8211; ex-CEOs and founders in the relevant sector &#8211; who sit on the board of portfolio companies to mentor, support, provide knowledge and network to the management teams of the businesses that EQT invests in. Without that additional edge, it makes it quite hard to justify the high valuation.
As a whole, valuation in Southeast Asia has probably increased over the last few years. However, there is still a lot of potential with the companies that we see. And as mentioned earlier – a criteria is whether there is an opportunity to create value with the company that EQT invests into.
What about your thoughts on a country-focussed fund?
The EQT Mid Market Asia III Fund’s focus is mainly on Southeast Asia and China. That’s a good diversification as opposed to a country-focused fund. The way that EQT operates is through a platform, which allows us to offer global reach and at the same time, a local approach and network. EQT is a truly global firm with its global network as well as local offices. That’s what locals-with locals means for us. If you look at the mid-market private equity space, I think this combination is quite unique.
Mid-market businesses are mostly held by families. Has their perception of private equity changed much?
Families now are more knowledgeable of private equity and the difference between a private equity partner and a strategic buyer. But more work still has to be done in educating the families on how private equity firms are different from each other, for instance in how they add value, the expertise they bring and the approach they apply. For this, we want to educate more business owners and hopefully they will be able to see that there are a few private equity firms, such as EQT, who are very differentiated from the rest.
There’s a typically a catalyst for bringing in a new shareholder and it varies from one family to another. Sometimes they don’t have a succession plan in place or would like to professionalize their business, and this is where EQT can be really helpful. Also, sometimes there is a generation gap &#8211; an investor can then come in to bridge that gap. If a private equity investor comes in with the objective to take over the business or completely change the company culture – that’s probably not the right approach.
Our approach is rather the contrary &#8211; we see it as a partnership and that with EQT as an investor, there is an aligned strategy to strengthen or make the company even better. Our reputation is very important for us and a crucial part of this is being transparent and open as a partner. Before EQT makes an investment, we lay out what we think would help the business to grow and try to get the buy-in from the management team before the deal is closed. Setting up achievable goals are also very important.
And you seek control in all your investments?
Not necessarily. EQT does both control and co-control investments. Co-control deals are where we take up a significant minority stake but look for having access to governance rights and being able to help the business. EQT doesn’t want to be a passive investor and hence, we’re looking to help make improvements in a business that make a positive difference. And again, as partners!
Which markets in Southeast Asia that you spend a lot of time on?
We’ve spent a lot of time in Singapore and Malaysia, which are the mature markets, as well as Indonesia and Vietnam where we have continued building our resources and deeper network. We see a lot of opportunities and are selective on the investments that we make because there must be a strong sustainable thesis and value creation potential.
In Vietnam, the deal sizes may be pretty small now, but the market is growing so fast. A company that is small today may not be small in two years’ time and we want to be well positioned then. And when people think of Indonesia, normally the industry that comes to mind is consumer.
So if we’d like to invest in consumer businesses, it’s about finding the right company. One thing we think a lot about is disruption. For example, the retail sector is prone to disruption with e-commerce. If we were to look at this segment in Indonesia, then it would be a consideration.
There is a venture arm in EQT Partners that looks at Europe and US-based startups. Is there any plan to extend its mandate to Asia or Southeast Asia?
The whole EQT platform works together with the venture arm because understanding technology and disruption is very important for all businesses – digitalization is hitting all verticals. In terms of whether we will see venture investments here, current focus does not include Asia.
We look at tech investments via EQT’s Mid Market Asia III Fund very selectively. The core is still investing in companies that are generating positive cashflow and are profitable. We use EQT’s inhouse skills to inject technology to digitize the business further &#8211; that’s how we benefit from the growth in tech.
Over the past few years, EQT has built a team of in-house tech experts and their role is to help digitize the portfolio companies which the various EQT funds invest in. Say that EQT invests in a brick-and-mortar type of traditional business – as stated, all verticals will be hit by technology change and here, we can help the companies with their digital transformation.
How do you view the Australian market?
If a good investment opportunity arises that meets our quality requirements and we have a value creation angle, then yes. EQT’s primary mandate in the Mid Market Asia III Fund is Southeast Asia and Greater China. If something interesting and relevant does come up in Australia, we will pursue that. As a reference, similar to how EQT invested in I-MED in Australia out of the earlier EQT Mid Market Fund.
Are LPs pressuring the fund to exit?
Right now, seven investments have been made by the EQT Mid Market Asia III fund and the older investments are roughly 2.5 to 3 years old. So in general, there is no pressure to exit but when the opportunity arises and the time is right for the business, we will look at exit routes. The current investments are relatively new and there is still much development potential.
The companies in the prior funds are developing alright and according to plan, and will obviously be exited at some point.
EQT has been deploying capital well and at a relevant pace. So is there a pressure to make investments? Probably not. But are we driven to make investments? Yes, we are always seeking for investment opportunities. We search for good quality companies and we see a good pipeline. In China, for example, where you hear a lot of news about the trade war, EQT has done two deals recently and there is a strong pipeline of growing companies. Same for Southeast Asia, the pipeline is still strong. We’re conscious of the trade war but we also look at micro-themes and not all businesses are affected directly by the trade war.
So since you’re looking at China, is there any near future plan to establish an RMB-denominated fund?
Right now, it’s the regional Asia mandate, and a USD fund works well. At the moment, no RMB fund in sight, but I guess one should never say never.
Also read:
<a style="color: #ff0000;" href="https://www.dealstreetasia.com/stories/eqt-infra-fund-asia-125582/">EQT to opportunistically explore Asia opportunities with $10.2b infra fund</a>
<a style="color: #ff0000;" href="https://www.dealstreetasia.com/stories/navis-first-close-eighth-fund-123864/">Navis Capital set to hit first close of eighth fund next month</a>

EQT closed latest Asian mid-market fund at $800 million last May, which will make control or co-control investments in mid-market companies in Greater China and SE Asia.

Indonesia, Vietnam fast-growing markets for EQT, says partner Brian Chang

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