Growing opportunities in Asia come with challenges in due diligence, say investors at SVCA conference

The flags of Association of Southeast Asia Nations (ASEAN) member states. Credit:Wikimedia Commons

Private equity players are growing in Asia despite challenges in conducting due diligence in various markets in the region, said a panel of experienced investors at an event organised by the Singapore Venture Capital & Private Equity Association (SVCA).

A December 2012 report by the Boston Consulting Group noted that with its rise as a dealmaking hotspot over the past decade, the region has seen an influx of PE firms from the US and Europe, many of whom are keen to capitalise on opportunities in the region. A rapidly expanding middle class, abundant natural resources, and rapidly developing business sectors render it a compelling investment destination.

Asia, with markets like China and India, are booming and have evolved significantly since 2010.

According to an EY report, as of June 2015, dry powder — or funds available to invest — across Asia is in excess of US$100 billion, with Southeast Asia a key target geography. This has resulted in increasing pressure on PE houses to invest capital, resulting in considerable competition for prize assets.

Professional insights

In a panel discussion at the 2nd SEA Private Equity Conference 2016, organized by SVCA and held in Singapore, a panel consisting of veteran PE professionals shared their experience on due diligence and conducting turnaround of difficult portfolios.

The panel consisted of moderator Gary Ng, Managing Director of Private Equity, CLSA Capital Partners; Christopher Leahy, Founding Partner, Blackpeak Group; Atiff Gill, Managing Director, CVC Asia Pacific; Jean-Christophe Marti, Senior Partner, Navis Capital Partners, and Ng Wai King, Joint Managing Partner at Wong Partnership, discussed the challenges various stakeholders face when making deals in the region.

A core part of the discussion was due diligence, a subject especially challenging for deals in Southeast Asia. This is  due to a combination of factors; the legal & judicial systems and traditions of various states, differing economic regulations and the ability to conduct enforcement actions being amongst the issues cropping up in the due diligence process.

Historically, PE firms not native to Southeast Asia have maintained a mixed perception of the region, associating it with economic and political volatility, which is a legacy of the 1997 Asian financial crisis and the political volatility of middle powers in the region like Thailand, which is balancing its relationships between the US, its traditional strategic partner, and the ascendant China, a crucial trade partner and investor.

Competition for deals is intensifying, with the region emerging as the third largest emerging market bloc after China and India, in terms of both its economic size and population. This has led to the largest number of PE funds and managers being focused on the region.

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Due diligence & risk

Launching the discussion, Leahy said that his firm would usually try to “build up a picture”, by looking at the backgrounds of the promoters of the deal, the sort of business it was set up as, and the sort of ownership it has today.

He shared the case of a manufacturing firm in Indonesia that looked healthy but whose professional management team were discovered to be fraudulent inviduals team had defrauded investors by moving from one company to another. These people had multiple identities, he said, noting that the main promoter must have had six names that his company identified. “His ex-wife had four, his brother-in-law had four,” added Leahy.

Wong, who runs a law firm, also recalled one incident where the client had set up a call with a major supplier to find out more about the company his firm was looking at signing a deal with. The conversation with the major supplier went well. However, as the client forgot to ask a question and wanted to do so later that afternoon, he called the same number. The person on the other side of the phone, however, insisted that he had not spoken to Wong and his client. “There’s no way they (client) would invest in that scenario,” he said.

Sometimes, challenges can also come in the form of needing regulators to give the green light. “That is not always straightforward,” said Wong. For example, some of the target companies may say that they do not need to comply with certain rules or hand in various documents, citing personal relationships with regulators or gatekeepers as a reason. “Do you take the relationship for what it is now? What happens three years down the road when they exit?” he asked.

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Commercial disputes

Often, these commercial disputes can result in the loss of assets, particularly outside of Singapore and other jurisdictions with established regulations and judicial infrastructure. In these cases, the simplest method for PE funds to adopt in resolving the dispute is a buyout.

Ng of WongPartnership discussed deal certainty and counterparty risk, observing that regulatory frameworks had evolving in Southeast Asia and that there was a need to find out and seek the appropriate approvals from the various counterparts, as approval for transactions is granted at the regulators’ discretion.

Consulting firm AT Kearney has noted that commercial and operational due diligence are critical to evaluating the qualities of a target investment. This is essential in safeguarding an investor, in terms of predicting performance over the short and long term.

Appropriate due diligence can enhance a target’s operational performance, as well as increase the potential for a successful acquisition and subsequent payout for PE investors. A failure to conduct operational due diligence, such as client due diligence with relation to answering uncertainty over suppliers and vendors, can damage acquisition targets.

Atiff Gill’s perspective was more focused on the importance of building and maintaining relationships, especially as compliance increases in complexity in the region. He noted that good due diligence not only covered operational and commercial domains, but now extended to the legal and information technology domains, as well as individual background checks.

In order to perform good due diligence, executives are required to become experts in the business in a short amount of time, added Gill. For instance, he said that his knowledge about the nappy business is relatively limited. So, when faced with a potential deal, the company had to make sure that it is able to assess the risks and complexities found in that particular industry in mere weeks.

With more competition in the region, Gill has also found that boutique firms are a lot more aggressive, and sometimes offer target companies “ludicrous valuations”. However, instead of saying yes and matching these valuations, Gill said that it is better to stick to their guns and wait it out.

Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.

Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.