KKR & Co. is seeking to invest more in Southeast Asia, where companies are poised to benefit from the U.S.-China trade dispute, according to the private equity firm’s co-founder Henry Kravis.
“The longer that the dispute with China and the U.S. goes on, I think you are going to see more opportunities” for investment in the Association of Southeast Asian Nations, Kravis said in an interview in Kuala Lumpur last week. The openings “come up where companies are saying: ‘I need to diversify my supply chain”’ as a result of the trade dispute, Kravis added.
The 10-economy Asean bloc is seen as a natural magnet for new factories, thanks to low production costs and improving infrastructure. The region was the top choice for about one-third of the more than 430 American companies in China that have moved or are considering moving production sites abroad amid the trade tensions, according to a recent survey.
KKR also sees opportunities in Asean as a result of the region’s favorable demographics, with growing wealth and migration from rural areas to the cities. The firm is especially keen on companies that address food safety issues, following successful investments in such firms in China, Kravis said. Last year, KKR put $250 million into Vietnamese condiment and instant noodle producer Masan Group, with $150 million allocated to its meat-producing business.
KKR played the food safety theme “very well in China and we expect to play the same thing here, and have been doing it with Masan in Vietnam,” Kravis said. “We plan to do that in other parts and are having conversations with different companies in the supply chain of food.”
KKR’s diversified operations allow the firm to find investment opportunities even in an environment where record Asian fund raisings have created the danger of too much capital chasing too few companies, according to Kravis. KKR raised $9.3 billion for its third Asia fund last year. Blackstone Group LP has about $15 billion to deploy to real estate, private equity and other opportunities in Asia.
“If we stay as a pure private equity, there’s a finite number of companies that might want to sell, there’s a finite number of non-core subsidiaries of large companies that parent companies might want to dispose of. But that’s not what private equity is today,” Kravis said.
Some 37 percent of KKR’s $190 billion of assets under management was invested in private equity at the end of March. Credit investments made up about 31 percent of the overall portfolio.
“We are in the position today to be able to invest anywhere in the capital structure,” Kravis said. “We are not a bank, but we can go out and raise money that mirrors what a bank would do, and we can provide senior long-term secured debt and anything below that like subordinated debt, high yield to distressed debt.”
Kravis said he’s not concerned for the moment about the effects on the U.S. of trade tensions with China, given the strength of the American economy. But the depreciation of the Chinese yuan and other Asian currencies may lead to inflation in the region, and higher tariffs will eventually hit the U.S. consumer, he said.
“The dollar won’t stay strong forever and if we don’t solve this problem, you are going to start to see some impact on the consumers” as prices rise, said Kravis.
Kravis said he supports fair and open trade and there is no reason why the spat between the nations cannot be resolved. The U.S. may be a strong country but “we cannot be isolated,” he said. “We need partners around the world.”