The private equity sector in South East Asia is confronted with a limited pool of attractive targets as well as fragmented markets that are characterised by volatility and intense competition. This was the overriding theme at a recent discussion at an event that was co-organised by the Singapore Venture Capital & Private Equity Association (SVCA) and Bain & Company.
While private equity firms are growing their social capital in the region, with broader and deeper networks among various industry verticals in ASEAN markets, the discussions highlighted the fragmented narratives found across the different ASEAN markets in which these firms are competing.
According to Bain & Co and SVCA, there were 121 funds looking for deals in Southeast Asia.
To interact effectively and maintain the portfolios of family groups and family-run conglomerates of the region who may become LPs (limited partners), investment professionals noted that portfolio engagement would require disciplines monitoring and management buy-in.
Singapore, which posted strong deal activity, despite intense competition and a small pool of targets, was credited by Suvir Varma, a partner with Bain, as a significant location amongst the ASEAN markets. Varma stated: “Singapore accounts for being an important locale, as many firms and asset management entities are based there. This is due to its legal infrastructure and business environment.”
However, the region, while relatively stable and with excellent growth prospects, may see positive momentum disrupted. The emergence of the Rohingya problem as well as inroads by ISIS into the region could serve to destabilise the relative stability of the region.
Conflicts with China over maritime territory in the South China Sea also raises the spectre of further destabilisation in the region as they seek to negotiate the issues brought by China’s belligerence in the South China Sea.
With the rise of ASEAN as a manufacturing destination and investments in the industrial goods sector growing amongst private equity investors, it was noted that investors would have to monitor geopolitical and macroeconomic conditions within ASEAN.
Commenting on the manufacturing sector, Varma said this segment operated on a continuum, with a value addition curve that saw countries shifting up the value chain as the developed, moving up the curve. He noted that while there was currently an emphasis on cost-focused manufacturing, with many industries shifting from China to Vietnam and Indonesia.
Jeff Chi, the chairman of SVCA, pointed out that with time, manufacturing would migrate to cheaper locations with quality, as coastal China was increasingly expensive. Chi predicted a shift of manufacturing to Western China over time, noting that Chinese industrialists and investors could be overbearing, in mining their exposure to risk.
Chi linked this to a shift of Japanese investment from China, due to a combination of both economic and political factors, as well as the growth prospects that ASEAN markets represented.
Varma concluded: “There’ll be greater exit momentum as the IPO market opens. As you play a longer game, less competitors will remain. A flight of quality will occur, alongside industry consolidation. It happened in the US, and it will happen in Asia.”
The Middle Income Problem
However, a major macroeconomic issue that has emerged is the long-term prospect of ASEAN economies falling into the middle income trap, an issue highlighted by the research of The Heritage Foundation in a 2014 report.
Since 2000, Southeast Asia has possessed some of the fastest growing economies globally. But Indonesia’s economy lacks sufficient infrastructure and its commodity dependence makes it vulnerable to commodity market shocks. Growth in the Philippines will be unsustainable without elevated domestic investment.
Meanwhile, Indochinese markets like Thailand have seen growth stagnate due to political turmoil and enter a current credit bubble. According to a report by FES-Asia, Thailand has been locked in a middle income trap for 20 years. Vietnam still generates impressive growth but faces problems with the banking sector, high inflation, and ubiquitous corruption.
Asked about the possibility of emerging markets in Southeast Asia falling into the middle income trap, Sebastien Lamy, a partner in Bain’s Singapore office, said: “With emerging markets like the Philippines, Indonesia and Vietnam, this is a possibility. If deal activity continues as it is now, we could see these countries caught in a middle income trap. For Thailand and Malaysia, they will have to shift to become a service economy over time.”