It is no guesswork that private equity (PE) firms want in on the action in South East Asia ( SEA). They see potential in this relatively untapped region, with its growing middle class that point to an improving consumer spending and robust economies.
However, not all firms from the West are about to hop off the ship, armed with an investment committee to set up shop here. Some see equity swaps with local and regional firms as a viable means to gain a direct and immediate exposure to SEA where PE activities remain scant when compared to the US or European markets.
This trend, though not yet prevalent in SEA, has been taking place around Asia in the past few years.
“We have seen one notable collaboration – TPG collaborated with Northstar Group in Indonesia in 2011,” Creador chief executive officer Brahmal Vasudevan told DealStreetAsia through email.
Under the deal, the Indonesian group took a stake of less than 5% in TPG, which in turn got between 10% and 20% interest in Northstar.
Brahmal said some investors view this region as an appealing alternative to China and India.
“Substantial capital was raised and invested in China and India but generating expected returns has been a challenge. This has prompted investors to shift focus to the SEA economies in search for deals,” he said.
He added that there are a number of global investor groups that have already identified this potential and made inroads into the region – notably CVC and KKR who have entered directly but do not have local teams on-ground.
Fortress Capital Asset Management chief executive officer Thomas Yong said the trend of equity swaps into regional firms is happening and will continue to take place.
An example he shared was Abraaj Group, then Abraaj Capital, acquiring Aureos Capital in early 2012 for the latter’s footprint in Asia, Latin America and so on.
“With global names such as KKR, Blackstone, Carlyle, General Atlantic having offices in the region, we do see this trend continuing as their network grows,” he added.
Navis Capital Partners managing partner Nicholas Bloy, however, thought it was too narrow a scope to only view the growth of PE activities in SEA through the equity swap lens.
European PE firm CVC Capital Partners, for one, has made direct investments into Indonesia, the Philippines, Malaysia and Indonesia since 2011 without equity swaps. The deals CVC sealed in these countries included – the partial sale of Indonesia retailer Matahari Department Store and recently the partial sale of fixed broadband and cable TV operator Link Net, the $300 million acquisition of Filipino outsourcing business SPi Global Holdings Inc, and the privatisation of QSR Brands and KFC Holdings with Malaysia’s Employees Provident Fund and Johor Corp.
In May, the firm concluded its fourth Asian fund, at $3.5 billion.
Meanwhile, American firm KKR & Co LP’s most recent SEA deal was a year ago, investing $200 million in Malaysia’s Weststar Aviation Services which operates helicopters for the offshore oil & gas business.
Weststar marks KKR’s fourth investment in SEA since 2005. Its other deals include a minority stake in Tiga Pilar Sejahtera Food in Indonesia.
It recently closed $6 billion for its Asian II fund.
Both CVC and KKR have offices in Singapore.
Malaysia-based Creador has also taken the approach to set up strong local teams in markets it invests in.
Brahmal said Creador’s focus was on long-term investments in growth-oriented businesses in Indonesia, Malaysia, Singapore and India.
“While there are firms flying teams in and out of countries to source deals, we believe that a more sustainable model is to have strong local teams with deep market knowledge. Having these local teams also enables us to build deep networks and relationships in these markets and is key to sourcing and closing deals in this region,” he said.
Whether foreign PE firms move into an Asian market via equity swap or through a local team, Yong emphasised the importance of finding solidarity as the business and corporate market in Asia have traditionally been family-owned.
This meant that companies are more sensitive to control issues and in some countries, more concentrated within a smaller group of families.
Yong said, in this light, the equity swaps may be more efficient for foreign firms.
“Tapping into the local network of domestic or even regional PE firms will certainly help bridge the relationship gap that could otherwise take years to build,” he said.
Equity swaps, if taken seriously as a means of entering SEA markets, promises to develop regional PE, especially in the areas of growth and private investment in public equity (PIPE) capital.
“(This allows) promising companies and industries to tap capital raising opportunities otherwise historically available on a limited basis in the region and focused only in traditional core segments such as real estate. We do believe that over time, capital flows into PE from global sources will increase,” Yong added.
Sectors and markets: where is the capital going ?
Yong’s insights into the PE industry showed that the currently, the main focus was on the Asia consumption story – retail, consumer, healthcare and resource services.
This, he noted, was supported by the high valuations prescribed to such sectors in the public equity markets offering attractive opportunity for PE investments to be made between PE firms and companies.
Brahmal’s take on the industry was similar, citing fast-growing consumer spending and credit growth in SEA, as compared to other regions.
“By comparison, the BRIC economies have challenges to deal with – China’s growth is slowing down and it no longer records double-digit growth. India’s bull run has ended. Now, the growth stories are in Southeast Asia and the region itself is already attracting capital flow,” he said.
While he expects more foreign firms to seek local or regional collaborative partners to improve access to the “lucrative SEA market”, Brahmal said it will be a question of whether the collaboration would have strategic or economic synergy.
The temptation then would be to ask which country in SEA now holds the best potential for PE firms.
Bloy explained that there was no clear cut way to single out any SEA country as better performing than its peers.
“One cannot answer this in terms of winners and losers. The whole of the region is attractive given the age and income characteristics – young and rising population – of the region and its embracing of the concept of the Asean Economic Community,” he explained.
He pointed out that Singapore has generated more deals and deal values than others simply because its ecosystem is more developed than elsewhere.
Additionally, many Singaporean companies with regional footprints would still be headquartered in Singapore.
“The differences between countries lies in the maturity of their ecosystems and also their stage of economic development. There are a number of countries in Asean that I think are straightforwardly investable – Malaysia, Singapore and Thailand.
There is a second category, consisting of Indonesia, Philippines and Vietnam, which I think of as higher risk because they do not have a history of successful private equity investing, and the ecosystem is still immature. And then you have the frontier markets of Cambodia, Laos, Myanmar which are still unproven and therefore have a lot of unpredictability associated with them,” he said.
He added: It is not the case that one should not invest in these countries, but that firms should do so on the expectation of higher returns to justify the higher risk.
(Edited by Yamini Dhall)