In a market like Myanmar that contributes a marginal portion to Southeast Asia’s private equity (PE) deal value and volume, one of the nation’s few PE firms Delta Capital has deployed its first vehicle fully and is well on its way to raise $50 million for the second one by July — an indication that PE investment activity is slowly but surely picking up in the country.
The 2013-founded firm has fully invested in five companies out of its first fund, a $50 million Myanmar Opportunities Fund 1 that started investing in 2014. Later, the success with its first vehicle led the firm to double the size for its second vehicle, Fund II, to raise $100 million. For the firm, the ticket size for the each investment ranges between $5 million to $20 million.
“We expect to have commitments of over $50 million by the end of July (for Fund 2) which will bring our Assets Under Management (AUM) at Delta Capital to over $100 million. We will then be looking to add a further $50 million to Fund II by the end of November,” the firm’s founder and Managing Partner Nick Powell told DEALSTREETASIA.
The five investments through Myanmar Opportunities Fund I were in oil and gas, alcoholic beverage manufacturing, an Internet service provider, in a local business conglomerate and in a domestic bottle manufacturer. Meanwhile, for the second fund there are anchor investments in the consumer and ICT sectors that the firm is looking to close shortly.
In 2013, Powell founded Delta Capital as a partnership between Hong Kong based assets management company, SMC Capital and Serge Pun & Associates, a leading local conglomerate. Powell has more than a decade-long connection with the firm’s founding group Simon Murray & Company (SMC) where he is also a director. SMC is a pan-Asian company focusing on direct investment, fund management and investment advisory.
Powell feels that Myanmar is “not a deep pond that we are fishing in.” The reason: Myanmar contributes a very small fraction of deal values and volume when compared to the neighborhood of Southeast Asia that clocked deals worth $7.8 billion in 2016. The nation is far from dominant markets like Indonesia, which saw 33 deals closed for a value of $1.47 billion in 2016 and has even created the country’s first unicorn.
Delta Capital has another seven years to run the Fund I and the firm has already demonstrated a partial exit in one of their investments — a diversified business conglomerate. However, having a long-term commitment in the said business, Delta is still holding 80 per cent of the business.
“The portfolio is still young but we have completed a partial exit from one of our investments at 3x cost and returned monies to our investors,” he said. Even though, he used to be skeptic about what the country could bring, the team had seen real opportunities after going through since day one. “This market is not leverage return. This market is growth,” said Powell who has been working in Asian PE sector for the last 18 years.
The fund raising for the second fund has garnered interest from the European family offices, wealthy Asian families and for the sponsors, Delta Capital is looking into being the first Myanmar-focused Fund to get investments from Development Finance Institutions (DFIs). This participation from DFIs would allow the firm to build business that complies with the strict rules of such institutions that are in the areas including the environmental, social impact, governance and integrity.
“I think it is the right money because it is big money and it is mandated for the development of Myanmar. That is a change of our investment base,” he said.
For some other PE firms, raising a fund focused on Myanmar can be a challenge due to unclear Myanmar’s economic policies and its directions, together with a need to have a successful track record of the Fund. “Funnily enough it was in many ways easier to raise a Myanmar Fund back then (2013, 2014) when you were selling ‘hope’ rather than today where there is so much more focus,” Powell said.
Even though, Myanmar is the fastest growing economy in ASEAN, infrastructure challenges still remain including a lack of reliable electricity supply, having transport infrastructure deficit with more of the developmental needs required for different sectors. “We’re seeing some of the business is having amazing growth but challenges remain as margins are much harder. The cost of doing business is higher — logistics, distribution, electricity,” he said.
Also, Myanmar has a traditional financing system which comes through friends, families and local banks and it could be tough to attract the businesses to share a stake. However, for newer companies, PE firms like Delta Capital is one of the few sources of equity investment. Unfazed by the challenges, Delta Capital is hoping to tap into larger deals and will be looking at larger single investments (up to $20 million per ticket) for investments out of the Fund 2.
This time, the firm will still look into spaces like consumer, ICT and finance but not on energy. “Energy is a difficult market and trickier market,” Powell explained.
While telecom, being a new sector having been granted an operations license to foreign firms in 2014, the firm hopes to see opportunities in the ICT space and businesses fulfilling the growing demand of data usage. With a focus on basic infrastructure in the telecom, linked to the Fiber side, the firm will also explore any opportunities around the whole bandwidth to the Fintech companies.
Moving on, for the financial service space, the firm currently engages in traditional financial services from banking to leasing and has an eye on the online digital opportunities.
As an early mover establishing PE fund in Myanmar, Powell said having a strong local partner to set up a fund as well as for the deals being forged is important. “I would say that the idea of copying business models and companies from abroad and thinking of just applying it here is probably a mistake. Myanmar has a very strong culture, a very strong different way of doing things,” he noted.
Some of the larger PE deals that were seen in the country happened in 2014 and 2015 when US based TPG Capital made investments in Myanmar Distillery Company and in Apollo Tower, both worth about $200 million. AIM-listed Myanmar Investment International (MIL) made investments in Myanmar Finance International Ltd, Apollo Towers and in early 2017, set up two ventures, one in the pharmaceutical, healthcare and person care sector and the other with a local tour operator and travel agency.
Among other active PE players are Singapore based Credera Group which in March 2017 said it has received $50 million in commitments for a $100 million Myanmar focused fund and finally Golden Rock Capital, another Myanmar focused PE firm planning to close $100 million fund.