Fund managers ramp up focus on SE Asia’s frontier markets, eye mid-market deals

Fundraising activity in Southeast Asia’s frontier markets is increasingly gathering steam with limited partners or LPs betting big on the region, looking to ramp up investments in private equity/venture capital funds.

Take Myanmar for instance. Ascent Myanmar Growth Fund is seeking $100 million for its maiden fund, which could be the largest country-focused fund in the Burmese market, after Delta Capital raised $70 million for its second vehicle. In Thailand, the North Haven Thai Private Equity Fund managed by Morgan Stanley Investment Management was closed at $440 million, exceeding its initial target of $300 million.

In the business side, a spate of technology companies have bagged funding from private equity firms, such as Oway, Myanmar Institute of Business, aCommerce and Mediaload, signaling an increased demand for mid-market deals in the region.

Among Indochinese countries, Vietnam is increasingly gaining prominence as an attractive market in the Southeast Asian region.

“Vietnam already meets most of MSCI’s quantitative requirements for emerging market index inclusion, including market size, sufficient number of large-cap stocks with sufficient daily trading liquidity, and other metrics,” Michael Kokalari, chief economist of VinaCapital, wrote in a note.

Its peers, including Thailand, Myanmar, Laos and Cambodia, trail behind, but also exhibit to investors that they can offer compelling opportunities.

“While the region as a whole has great promise, each market has a unique set of opportunities and challenges,” said Joshua Morris, CEO of Emerging Markets Investment Advisers (EMIA), a PE firm focused on Myanmar, Laos and Cambodia.

“These frontier markets within the region are ready for investment,” he added.

Key fundamentals

Unsurprisingly, factors such as the burgeoning middle-class and improving infrastructure have been the primary drivers for investor appetite in frontier markets. Each country has its own success stories as the premise for attracting more capital.

Since the transition happened to a civilian-led government in Myanmar in 2011, the country has witnessed an influx of investment with quite a few country-specific funds mushrooming.

Private equity funds focusing on Myanmar. Source: INSEAD, DealStreetAsia.

Global investment firm TPG, an early player in Myanmar, had invested in Apollo Towers and Myanmar Distillery, thereby cashing out profitably from the latter.

Other exits by in the market include that of Yoma Strategic Holding and Delta Capital which sold their stake in Seagram MM Holdings to Pernod Ricard. Similarly, Samena Capital exited SM Asset Holdings reaping $41 million.

However, exits are still rare in the market, because most of the deals were clinched in 2016, while a typical PE investment horizon is for about seven years.

Thailand, buoyed by the strengthening local currency that has gained around 10 per cent in 2019, is another country to watch out for. Money here is flowing in from foreigners trying to diversify from the weakening US dollar, according to a local PE investment manager.

The executive added that because the Thai stock market has become subdued, and the IPO window may not be open, businesses will opt for other sources of capital like bank financing or equity invest.

Thailand also yielded good exits in the past, with examples such as Golden Foods Siam deal selling its stake to Brazil’s BRF SA by Malaysia-based Navis Capital Partners for such $360 million.

Meanwhile, EMIA’s Morris asserted that there was an ample investment opportunity in Cambodia in particular.

“The economy has been growing rapidly for the last 20 years and has a strong set of entrepreneurs and businesses that are ready and well-positioned to effectively utilise growth capital,” he said.

According to his own experience, the investment framework in Cambodia is well-advanced compared to other frontier markets and provides the foundation for effective investments.

The firm has invested in the country’s microfinance, insurance, agriculture, hospitality, retail and education sectors.

Investment strategies

“Sectors such as education, health care, financial services, insurance and F&B are clearly interesting across all three of our focused markets,” Morris continued.

However, he added that opportunities will present robustly to locally-based investors who are looking at the $5-15 million check size. “Laos, given its size, will likely remain a niche PE market and remain smaller vis-à-vis the other markets in Indochina.”

Despite being Southeast Asia’s second-largest economy, PE investment in Thailand has been quite underpenetrated. An aging society, Thailand is seeing slowing domestic consumption, but people are spending more on healthcare.

“Sectors that have to do with the shift in the demographics in Thailand will be interesting,” said a Thailand-based investment manager on condition of anonymity.

He said his firm’s investment approach was to acquire significant shares in the businesses so that it can executive added values to spur growth. “Therefore, our sweet spot is the $50-100 million range.”

Several firms such as North Haven and Lakeshore Capital are targeting smaller check sizes.

Deal-making in Thailand is unique in the sense that it is dominated by a lot of strategic investments by conglomerates. Jirapong Sriwat and Apinya Sarntikasem from Japanese law firm Nishimura & Asahi opined that the target industries of private equity transactions in Thailand have been relatively scattered. However, investors are more focusing on industries such as renewable energy, branded consumer goods, real estate and healthcare, they wrote in an Asia private equity report.

Challenges

Most of the locally-based firms are bullish on Southeast Asia’s frontier markets. That said, bigger investors still see the region immature.

“Even today, most entrepreneurs have not worked with a PE firm yet, whereas in China we have already partnered with several entrepreneurs at least three times already.  The depth of capital still remains quite thin for Southeast Asia,” Warburg Pincus’ regional head Jeffrey Pearlman wrote in an email.

“I believe it’s been both a combination of the lack of experience fund managers as well as a relatively small realm of investable companies,” Alex Odom, CIO of Belt Road Capital Management, commented on the early stage of PE in the lower Mekong region.

There is still a significant gap in funding for SMEs in the region, even as investor interest has increased over the past few years.

The total funding gap for micro-businesses and SMEs in the five countries of Vietnam, Thailand, Myanmar, Laos and Cambodia are nearly $85 billion, according to the SME Finance Forum, a programme managed by International Finance Corporation.

Most of the funding coming to frontier markets has been funneled by foreign corporates or development financial institutions. Janette Hall, director of investment funds and special initiatives at the Asia Development Bank’s private sector operations department, asserted that private equity funding is a relatively new concept to Myanmar businesses. ADB is an limited partner in Ascent Myanmar Growth Fund.

“As private equity funds play a critical role in the funding life cycle of private businesses, it is important to increase the understanding of private equity funds among Myanmar businesses. On the other hand, they also need to understand the international requirements of these private equity funds before funding can be provided, such as transparency, proper book-keeping and robust corporate governance,” she said.

Meanwhile, major challenges in primary supply chains, infrastructure costs and trade facilitation administration and working capital constraints will continue to pose obstacles that require careful consideration when looking at investments in this region, said Morris.

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.