The COVID-19 crisis could create opportunities for consolidation as businesses adopt various measures to mitigate the risks created by it.
Smaller players across sectors could be the first to face financial challenges and become potential acquisition targets for well-capitalized market leaders, said Tan Choon Hong, co-chief investment officer at Southeast Asian private equity firm Northstar Group.
While a slew of institutional investors is already reviewing their portfolios, several companies are gearing up to sell their non-core assets to rake in the capital.
Northstar, on its part, is scouting for such opportunities to fund the acquisition plans of market leaders.
“Consolidation should improve the profitability of surviving companies,” said Tan.
Established in 2003, Northstar Group has witnessed a spate of changes in terms of investments in Southeast Asia.
When the PE behemoth made its debut in Indonesia a decade ago, investments in commodity-related sectors such as gold were somewhat common. These sectors continue to evince investor interest but to a lesser degree, said Northstar Group’s co-chief investment officer Sunata Tjiterosampurno.
Today, digitization has caught the fancy of investors in the archipelago and countries across Southeast Asia. Digital investments have gained momentum over the past three years, so this space has become a big part of the universe for investment managers, including Northstar Group.
The contours of digital sectors in areas such as e-groceries, edtech or e-commerce have changed and in the future, they are expected to create more opportunities in the market.
The pandemic, too, has created a demand for these sectors, Tan added. Over the past few months, the consumption pattern has seen a makeover as people have increasingly embraced the online medium for their daily requirements.
Northstar is currently betting big on the burgeoning e-commerce sector. Having started to invest in the digital space in 2014 through its venture capital fund NSI Ventures (which now operates independently as Openspace Ventures), its other portfolio companies in the sector include Zenius, an edtech firm; eFishery, an aquaculture startup; and traditional lender Bank Jago that is also using its platform to capture the digital wave.
Northstar plans to clock investments in the range of $30-40 million in digital startups.
The objective is to get in early, get to know the management team, and carefully track performance to be able to act fast in subsequent rounds of fundraising, Tjiterosampurno added.
A case in point is Indonesian ride-hailing major Gojek, in which Northstar has made investments in since 2014 as the decacorn carved out its expansion plans.
This early investment approach is helping the PE firm create a broader ecosystem and get a better perspective so that it can decide which company to invest in when an opportunity comes up, Tjiterosampurno added.
Apart from the digital space, Northstar also invests in consumer and financial services sectors. The firm’s current investments in traditional sectors include Indonesian minimarket chain Indomaret, consumer product maker Kino Indonesia, and Bank Jago.
However, these traditional sectors are also increasingly adopting digitization in the mode of payment gateway, sales channels, or even point of delivery for logistics.
Road ahead: Advantage SEA
While sectors that have thrived on the pandemic such as edtech and healthtech are likely to see growth momentum, companies in other sectors could witness restructuring, Tjiterosampurno said.
Meanwhile, the China-US trade war is also expected to benefit Southeast Asia with manufacturers looking at options to diversify their business operations.
The two pacesetters in the region could be Indonesia and Vietnam where growth is being driven by a slew of factors such as growing middle-class coupled with a rising ‘netizen’ population in the backdrop of strong domestic consumption.
Besides, the new foreign investment regulation in Indonesia could help it emerge as a more attractive destination for manufacturing.
Despite focusing on the Indonesia market, Northstar has expanded its team to invest in other countries such as Thailand and Singapore.
Going forward, Northstar is also scouting for opportunities in the Philippines. It does not have an office in Vietnam yet.
Fundraising amid COVID
Currently, there is a slowdown in fundraising, said Tan. This is partly due to restrictions on travel, which has made it difficult for investors to meet fund managers and undertake due diligence, he added.
As reported earlier this year, Northstar is in the process of raising its fifth fund – Northstar Equity Partners V Limited – with a target corpus of $800 million that it plans to deploy over the next 3-5 years. The firm made its first close in April 2020, after raising a third of its total target.
The firm claims to be in the initial stages of discussions to get the target right, and internal discussions are currently underway to extend the timeline, Tan said.
Northstar is not yet using its fifth fund for investments as it is in the process of exhausting its fourth fund.