Amid a surge of deals backed by private equity money and a barrage of capital flowing to Southeast Asia from China, small- to mid-market deals with valuations below $200 million, which may have been under the radar earlier, are now attracting interest among local and regional private equity funds, law firm Dentons Rodyk has said.
Dentons Rodyk is one of Singapore’s oldest legal firms with practices covering capital markets, PE and venture capital.
“There are still a lot of small to mid-market deals that are there and still are under the radar and people do not think of. That is a segment where funds are starting to get interested,” Hsu Li Chuan, Senior Partner, Dentons Rodyk, told DEALSTREETASIA in an interaction recently.
Noting that a large part of the firm’s deals has been mid-market for the past three years, Li Chuan said that a lot of these deals involve not only local companies but also regional firms from countries like Indonesia and Malaysia.
Asia Pacific, in fact, has seen a growing interest in mid-market deals contributing to more than half the deal count from 2011 to 2016, when compared to the global total of 32 per cent by volume and 13 per cent by value. In 2016 till October, mid-market deals accounted for 58 per cent of Asia Pacific deal volume and 22 per cent of overall value, a report from Baker Tilly International said.
Meanwhile, law firm Dentons is also bullish on the cryptocurrency and fintech spaces.
Dentons recently announced that it will combine with leading law firms in Indonesia, Malaysia, Kenya, Mauritius, the Caribbean, one based in the west in the Cayman Islands and another based in Barbados with coverage across the Eastern Caribbean. The world’s largest law firm will combine with Hanafiah Ponggawa & Partners (HPRP) in Indonesia and Zain & Co. in Malaysia. In a statement, Dentons had said that developments in Southeast Asia followed similar combinations with firms in Singapore and Myanmar earlier.
In a detailed interaction with the portal, Denton Rodyk Global Vice Chair and ASEAN Region CEO Philip Jeyaratnam and Senior Partner Li Chuan discuss the capital coming in from China into the region, the interest among family offices to make investments into Asean and how the region may not be just one large destination with 600 million people but one at varied levels of development and legal philosophy.
Tell us something about the latest partnerships and the law firms?
Jeyaretnam: Last year we opened an office in Yangon, Myanmar. Dentons has a very strong presence in China so Myanmar-China flow is of interest and we will be doing some other deals and some French investment into Myanmar and so forth. But these two combinations in Malaysia and Indonesia follow the way Dentons does things — look for leading elite law firms which are strong in their own right and are highly regarded in their own community.
The structure of legal profession is very local so we build it locally and try to build on it. We have strong roots in Singapore and we are the oldest law firm here. (With these combinations), we are able to benefit from deal flows around the world and help clients to do better when they are investing or doing deals in more than one jurisdiction.
How big is the M&A and Private Equity practice for the law firm in Asia Pacific?
Jeyaretnam: Both of them are significant. In the past decade, the role of PE has grown hugely for various reasons — for the amount of money available in PE in the US and Europe and the desire to re-deploy that into Asia. By contrast, certainly some of the previous investments by banks and their relative position has been reduced. In Singapore, PE deals are quite dominant in relation to M&A transactions. There are public listed clients who are engaged in transactions too.
Li Chuan: In terms of IPOs, the Singapore capital market has not been very exciting. So, a number of deals that we see are lower and secondary fundraising from PE. I see a lot of money coming from China for the last two years or so. A lot of PE firms from China have been coming into Singapore making significant investments into listed companies and taking strategic stakes and becoming a notable voice in the management of that company.
We also see professionals coming in and setting up family offices for Chinese investors in Singapore. Increasingly, Hong Kong is being seen more and more integrated with China. Singapore is seen as more independent and we see all the funds coming to SG. We are seeing a lot more activity coming here. They like to invest in Singapore and also use Singapore as a platform to invest in the rest of Southeast Asia.
Some sectors, we have seen quite a lot of interest like education sector in Singapore, using Singapore’s platform to invest in infrastructure the rest of Southeast Asia after the belt and road initiative. Also, a lot of interest has been in Singapore technology projects like fintech, e-commerce projects. A bit related to that is that cryptocurrency has been growing here and Singapore is getting a lot of attention.
For somebody engaged with deals, data points towards massive amounts of dry powder. Are there enough deal flows in the region to cater to that amount of dry powder. Does that also lead to a situation where there is so much money chasing very few deals in this region and that pushes valuations?
Li Chuan: That does happen in fact. We don’t see that kind of unicorns in Southeast Asia as compared to US or China. Sometimes one wonders about the valuations they give to the unicorns on in – are they really substantiated? But, there are still a lot of small to mid-market deals that are there and still are under the radar and people do not think of. That is a segment where funds are starting to get interested. Small funds especially. Deal-flow wise, I would say there is no lack of deals. That said though, we have been caught in few situations where we have seen a few funds bidding for the same deal.
How big is the mid-market deal space for you. Many exchanges in the region have a concern over the liquidity and so how big is the private equity deal space in the mid market segment in this region?
Li Chuan: Opportunities are far greater. We are quite flexible, we do the large deals but a large part of our deals has been the mid-market deals (below $200 million in valuation) for the past three years. There are quite a lot of these deals that are very popular. A lot of these are not only local companies but also regional like Indonesia and Malaysia as well.
Capital markets, big picture do think there is a concern as exchanges here do not offer the valuation?
Hsu Li Chuan: Definitely, the people come here to list, apart from the valuation is the safety of the region and transparency of regulations as well as reputation of the Singapore exchange. Chinese companies also which come to list here, they do not come here for valuations. They know they might get higher valuations in Hong Kong or even higher in China. Moreover, they might not want to be a small fish in a big pond in Hong Kong or China. Here in Singapore, they might get more noticed and especially if they want to expand in the region they would want to come here. We even have state-owned enterprises in China coming here trying to list to grow their global reputation.
We talked of a group of funds going after the same deal. Have you seen that kind of activity in the PE and Venture Capital space where the lines are blurring?
Li Chuan: Not for me. The mandates for both are quite clear. The deals are still quite clear and there is still that imaginary line. The funds or fund of funds still have that mandates. Though, what we have seen is that PE funds are considering moving into the Venture Capital (VC) space. VCs are still very clear about their space, we have not seen them moving into the more established PE space. Individually, the people running these funds are considering going into VC. They are setting up funds to go into the space.
Is that also because the VC funds in the region, unlike China or India, are much smaller?
Li Chuan: I do think that is definitely the case. The bigger ones would be the likes of Northstar and others. The larger ones would go for a six-digit funding unlike what we see in China and India.
How do you see Indonesia emerging as it has been emerging for a while but a lot of regulatory concerns remain the same?
Jeyaretnam: My sense of Indonesia is that it is steady but slow progress. It is not somewhere where you could expect a big bang approach. So, not just over the last ten years but most of my professional life, Indonesia continues to be more significant.
Li Chuan: Indonesia remains a big chunk of our practice and that is the reason we combined with this firm …… It has remained consistently there because it is the same sectors and the same commodities. I still see the same mining deals and now we see a lot of cross-jurisdiction deals. Australian and Chinese investors combining to buy into a mine in Indonesia. The only nexus they have in Singapore is the fact that they trust the Singapore legal system and we are on the job.
But at the same time, I am seeing a lot of fintech deals coming from Indonesia with a young generation of educated and internet savvy tech guys who know that technology is border-less. They set up shops in Singapore and even though the funding may come a lot from Indonesia and my understanding is that the funding may increase after the tax amnesty. That is a very big area. The valuations of the fintech companies are quite high.
In terms of strategy are you also seeing a lot of co-investments, Limited Partners (LPs) and General Partners (GPs) coming together or multiple GPs coming in together in the region?
Li Chuan: I would not say a lot more but yes they have increased. There may be co-investments where they partner with the local partners that is what we have seen quite a bit. On the related note, one of the areas we have seen are deals in the professional services, M&As in the professional services. PE funds are quite a lot interested.
Jeyaretnam: Professional services firms in Singapore that are growing regionally or globally including engineering services, architectural services and so forth are doing it.
In terms of fund formations, since you do interact with LPs, are there any particular expectations that you have seen fron LPs from this part of the world?
Li Chuan: I am not the funds partner but what I do understand is that they are more demanding in terms of the expectations. They also seem to be more concerned on the exits or when they can get out of an investment strategy.
Is it because exits have been a pain point in the region ?
Jeyaretnam: Obviously, exits have been a space where the litigators come in. That is typically when the disputes arise and the enforceability has been also quite an issue in places like India. Call and put options have been considered unenforceable and so on so forth. Also because of the delay issues, there is a life of a fund and you would want to be able to liquidate and quantify the fund life comes to an end. To do that you have to build that early on because otherwise you are left unhappy in the end as investors.
As a law firm, as the companies grow, do you see Asean as one big market as opposed to a fragmented region with its own stages of growth?
Jeyaretnam: Asean is not as harmonized as the EU or as countries that may share a common legal structure. The cultures and legal traditions are very diverse but at the same time there are efforts being made to bring some degree of harmonization for regulators to work together. It is still work in progress where some countries are much closer to one another in terms of a wider periphery. In Singapore, we have a great deal of influence in terms of regulatory philosophy in Brunei. We can see in Myanmar for many of the commercial aspects of reforms they look to Singapore. And possibly Malaysia and Singapore are also quite similar. But on a broader level of harmonization, it is going to take time. It is not a single market of 600 million people but the Asean Economic Community holds some promise in terms of bringing down some barriers and we hope in the services side there will be some changes as well.
In terms of increasing amounts of capital coming in from China, where do you see it as compared to capital from other parts of the world like US or Europe. Which way do you think it is headed?
Li Chuan: It is only going to increase. Past five years, we have seen only an increase in Chinese capital. Firstly, we saw the One Belt One Road (OBOR) initiative and there were a whole lot of corporates trying to ride on that wave. After that there were capital outflow restrictions in China and it became more formalized. Especially with the OBOR, we see more infrastructure and other projects in Singapore as it has been a great area to operate HQ from or to even to raise further debt funding from to invest into these areas. Not only from traditionally SOEs but other wealth funds too.
In terms of US and Europe, I see a lot more interest from the European funds coming in but not in the traditional areas but the fintech and other areas. Most of them are in those areas.
Jeyaretnam: What we have seen is the family offices which used to be focused, have diversified and opened offices and operations in Singapore and are certainly looking for opportunities in Southeast Asia. That has grown quote a bit in last five years. If you ask about the US, there was a great deal of movement of funds in past ten years and since everybody is anticipating that money is moving back in the last few months, particularly of China if we talk of China in three years time China would be more significant that it is today.
China’s controls on capital, do you think that impacted the deal flow in the region?
Hsu Li Chuan: I think it did slow down a bit but that has made it much clear. A lot of these Chinese entities have their funds outside China so we see a lot of funding coming in from the outside funds. There is some decrease but not significant.
As a law firm as Asian family offices mature and become bigger, do you see that source of business for you and also a significant source of capital?
Li Chuan: I see that a definitely more in past few years. Earlier it was just individuals but now there are more of these family offices and a lot of the fund managers leaving their jobs are starting offices. The increase has been 2-3 times.
The legal profession has seen a disruption in the form of legal tech. Do you see some of them emerging as competitors, or partners and how much scope do you think legal tech has?
Jeyaretnam: This is a very interesting thing about how technology can help and substitute with human delivery of legal services and particularly in ancillary areas where we see outside people coming in. Not in the actual delivery of advice but discovery. Now there are so many documents that you have an AI to pull out substance and find a pattern. Definitely that is a development that is happening. For us we are involved in two different ways, through our global combination. Dentons has invested in some ventures which either develop legal tech or are investing in pieces of that technology. Secondly, we are also involved with (FLIP) Future Legal Innovation Programme where Singapore law firms work on this together.