The window of exit opportunities for private equity firms investing in Southeast Asia has further narrowed in the aftermath of the pandemic, putting a bigger question mark on the attractiveness of the region for risk capital players.
Private equity exit value has slumped, from $18 billion in 2018 to $3 billion in 2020. The number of liquidity events also fell to 8 deals last year compared to an average of 26 deals during the 2015-19 period, according to data in Bain & Company’s May report on the Southeast Asia PE market.
Global PE exits, on the other hand, jumped roughly 40% to nearly $600 billion during the 12 months ending March 2021, according to EY’s 2021 Global Private Equity Divestment Study.
“Exits have become more difficult over the last six to nine months, as the predictability of earnings has been uncertain,” EY’s Asean PE leader Luke Pais says. He expects the average exit cycle to expand as investors focus on managing pandemic-induced challenges that impact the internal rate of return (IRR) for funds in the region.
Still, the exit landscape for PE investors in Southeast Asia has been challenging even before the pandemic, observers say. There are several factors, including diverse geographies, lack of scalable opportunities, an underperforming stock market, and a tepid secondaries market.
SE Asia: Not really one market
Southeast Asia is not homogeneous. To be present in each market of this region requires deep connection and structure protection [downside protection] that can give investors comfort, according to Schwin Chiaravanont, part of the Charoen Pokphand Group (CP Group) family.
“In Asia, it takes genuine skills to find something to buy,” said Chiaravanont, who is also the co-founder and managing partner of Thai PE firm 9Basil.
“If you’re looking for a good private deal, and you have an edge over the [local conglomerate] families – we are talking about a very small opportunity set,” he added.
9Basil is backed by local Thai majors including CP Group, Central Group and Osotspa, who have extensive networks across the region.
“Investors have been trying the thesis of a pan-Southeast Asia play, but it has not been easy to carry out in practice,” Bain’s Singapore-based partner Usman Akhtar told DealStreetAsia. Finding the right opportunities in Southeast Asia – especially in Thailand and the Philippines – is the toughest across the Asia-Pacific, the Bain report said.
The availability of assets in each country is very different. In the Philippines and Indonesia, for example, some interesting assets are held by large conglomerates who typically do not prefer divesting, Akhtar pointed out.
Investors also find that opportunities in many of these markets do not match their typical ticket sizes. For instance, Belgian investment firm Verlinvest sees few SE Asian consumer brands fitting its investment size criteria, which can range up to $200 million.
Size aside, executive director Raphael Thiolon at Verlinvest, which focuses on “impactful, category-defining global brands’, notes that such opportunities are limited in the region. He adds that investors on the ground have an advantage in access to deals over others who do not have a local presence.
Another factor that has added to the stretched exit timeline for PE investors is the unprecedented pandemic-induced impact on some industries.
A lot of the investments by funds that are approaching their liquidation timeline went to the traditional sectors such as manufacturing, energy, and services. These have “experienced a demand shock because of COVID-19, and how they come out of the pandemic is still a question mark,” Boston Consulting Group’s Singapore-based partner Archit Choudhary said.
The growth profiles of these industries are also not as strong as when they got invested, being disrupted by digital players, he added.
Exit timelines, returns vary
Due to the nascent development, Southeast Asia is still a “relatively shallow market,” Choudhary said, adding, “generally, the first set of funds in maturing geography are typically difficult to make money off.”
The market is also diverse in terms of the valuation of assets. For instance, Indonesia has been a market that general partners have raised concerns about expensive valuations for a few years straight, Akhtar from Bain added.
Echoed Creador’s founder and CEO Brahmal Vasudevan: “Investors are paying crazy valuations and that will affect their long-term returns. Realisations are very poor in markets like Indonesia for certain players.”
Several Indonesia-focused funds, managed by Northstar Group, scored returns in the region of 0.3-0.7x multiples for the University of Texas as of February 2021. Specifically, in terms of IRR, the 2011-vintage Northstar Equity Partners III generated a negative 2.55% return.
Indonesian investment firm Saratoga Investama, however, posted a 20% year-on-year increase in net profit IDR8.82 trillion ($614 million) in 2020, and a net asset value increase of 39% to IDR31.7 trillion at the end of last year.
Fund performance as of February 2021, per University of Texas’s investments:
|Baring Asia Private Equity Fund IV||With SE Asia allocation||2008||1.6x||8.85%|
|GGV Capital V||With SE Asia allocation||2014||0.79||31.82%|
|GGV Capital VII||With SE Asia allocation||2018||0||2.97%|
|GGV Capital VII Plus||With SE Asia allocation||2018||0||12.77%|
|Gobi Fund II||With SE Asia allocation||2008||1.11||4.76%|
|Northstar Equity Partners II||SE Asia-focused||2010||0.68||0.35%|
|Northstar Equity Partners III||SE Asia-focused||2011||0.31||-2.55%|
|Northstar Equity Partners IV||SE Asia-focused||2015||0.55||11.34%|
Vietnam, Southeast Asia’s fastest-growing and resilient economy, has “always been an easy market to exit deals,” according to Chris Freund, founding partner of Mekong Capital.
The Vietnam-focused PE firm has made a total of 27 exits since 2008, although Freund said he had struggled with six of them. “In all of those cases, we weren’t getting the cooperation we needed from other key shareholders,” he said.
Mekong Enterprise Fund II, launched in 2006, was fully divested in 2018 and delivered a 4.6x multiple and a net IRR of 22.7%. Mekong Capital’s 2007 vintage Vietnam Azalea Fund generated a gross return multiple of 1.8x and a gross IRR of 10.5%, even as the firm admitted it sold some assets too early.
Akhtar reasons, “for the ones who have done well in exits, I think it comes down to the quality of those deals.”
In Malaysia, meanwhile, Navis Capital Partners has been seeking to exit from some of its assets for quite some time including Vietnam-based Hanoi French Hospital, Singapore logistics firm Eng Kong Holdings and regional fitness group Evolution Wellness.
Its recent exits include the sale of MBO Cinemas, which is undergoing a voluntary winding up in the hands of creditors, to Malaysian conglomerate PPB Group’s cinema arm Golden Screen Cinemas.
Navis also exited Malaysian ICT firm Strateq in July last year and received 137 million ringgits ($33 million) for its stake with a further 30 million ringgit payable based on Strateq’s performance in 2021, on an initial investment of 61.5 million ringgit.
Some markets show IPO promise
As the market matures, more and more PE firms are looking at IPO as a suitable exit alternative. For example, even for a small stock market like Vietnam, Freund is positive about IPO exits.
“I think the exit environment in Vietnam will continue to be robust. If anything, the relative attractiveness of listing on Vietnam’s stock market has improved, so I would expect to see more listings by companies with PE investors over the coming years.”
Mekong Capital’s most successful exit was a 57x return on its investment in retailer MobileWorld, which was listed in 2014. It sold the last tranche of its investment in MobileWorld to Creador in 2018.
In Malaysia, Creador, which is preparing for a partial exit from credit reporting agency CTOS Digital through a proposed July IPO, is not worried about the overall worsening returns for PE investment in the region.
“Returns for the region have been quite poor but we have managed to differentiate ourselves with our value-add strategy, including Creador+,” Vasudevan said. Creador+ is the firm’s internal strategy and operational consulting team that supports its investments.
If the CTOS Digital IPO goes through, Creador could gain about five times its investment in the business, DealStreetAsia has learnt.
CTOS Digital IPO will follow Creador’s partial exit last October through the listing of retail portfolio Mr D.I.Y. Group that raised 1.5 billion ringgit in Malaysia’s biggest IPO in the last three years.
Choudhry predicts an increase in SPAC listings and trade sales thanks to the growing interest by global multinational companies to expand in the region.
“A lot of assets from the 2012-2015 vintage are being chased after by principal investors and operating companies coming into the region,” he added.
Long-term, patient capital play
The tough exit landscape has, however, not dampened investor appetite as more funds ready dry powder to be deployed into the region.
“Southeast Asia is still on the radar for a lot of investors. Investors in Asia have historically been more exposed to China, but quite a number of them are now starting to diversify to SE Asia,” commented Vincent Ng, a partner at global placement agent Atlantic-Pacific Capital.
The region has billions of dry powder for investment, and fundraising will come back once the pandemic dissipates, Ng predicted.
Investor bullishness on the region is largely riding on macro fundamentals such as demographics, digital adoption and rising income levels.
“It’s just a question of being long term and having the chance to be flexible on your exit window,” Thiolon said, about the attractiveness of the market.