Ex Indonesia: Investing at SE Asia's edges

In February, CVC Capital Partners took part in the Philippines' largest ever buyout when it purchased an 80% stake in SPi Global Holdings, a business process outsourcing (BPO) unit of Philippine Long Distance Telephone Company (PLDT).

The deal, which valued SPi Global at more than $300 million, was significant in that it highlighted the growing opportunity to be found in Southeast Asia's less penetrated markets. SPi Global was CVC's second significant investment in the country - two years previously the firm had joined the International Finance Corporation in paying $163 million for a 22% stake in Rizal Commercial Banking Corp.

"By the time we had done our first deal in the Philippines, the country had posted 47 consecutive quarters of positive GDP growth. Post global financial crisis, not many countries can say that," says Brian Hong, senior managing director at CVC. "That is what caused us to take a deeper look."

The Philippines is not the only market of interest. Earlier this year KKR committed $200 million to Vietnamese noodle and fish sauce retailer Masan Consumer Corp, following an initial investment of $159 million in 2011. Warburg Pincus has also completed a sizeable deal in Vietnam, paying $200 million for a 20% stake in retail property platform of Vingroup.

Sebastian Lamy, a partner with consulting firm Bain and Co, sees a clear trend. "Within Southeast Asia there has been a little bit of shift towards some of these other countries," he says. "Indonesia is still a significant place of interest, with 90% GPs continuing to show interest in deploying capital there. However, what is striking this year is the increasing interest in other markets like Thailand, Vietnam and the Philippines."

The replacements

Many of the macroeconomic factors that are driving investment in Southeast Asia's emerging economies - robust GDP growth, evidence of a nascent middle class - are comparable to those that precipitated earlier private equity forays into India and China. As a result, the region is seen as an alternative to the big two.

"During the crisis, Southeast Asia was very resilient so it became a natural alternative for investment dollars," says KabirMathur, director with KKR in Southeast Asia. "Equally, from a global allocation perspective, China has slowed down - albeit from a very high bar - and other emerging markets have been historically tough for GPs to show consistent returns across the board."

But what happens when Indonesia is removed from the equation? Last year, the country was second only to Singapore in Southeast Asia in terms of deal flow with 25 transactions closed, and ranked third in terms of capital invested at $612 million. As more regional and global private equity firms open offices in Singapore, Indonesia is their first port of call - and the interest is now reflected in high valuations.

The question for those who are now looking to elsewhere in Southeast Asia is whether or not the likes of Vietnam, the Philippines and Thailand can satisfy investor demand. Despite headline transactions such as SPi Global, Masan and Vingroup, deal flow remains limited, particularly towards the larger end of the scale.

With a population of 242 million Indonesia is the runaway leader in terms of economic scale, with a GDP of $846 billion, larger than that of the other three nations combined. However, Thailand and the Philippines had the edge in growth last year, with GDP expanding 6.6% and 6.4%, respectively, to Indonesia's 6.2%. Thailand can also claim a larger GDP per capita, second in the region only to Malaysia over the past decade.

But these promising numbers don't necessarily correlate to a higher level of private equity activity. Vietnam trails its regional neighbors on several macroeconomic measures, yet thanks to the KKR and Warburg Pincus transactions the country saw investment totaling $430 million in the first half of 2013. PE firms have deployed less than three-quarters of this amount in Thailand in the last two-and-a-half years.

"It has been 20 years since Vietnam's opening and we are seeing sizable transactions - there are good companies to back out there," says Joseph Gagnon, managing director at Warburg Pincus. "There aren't dozens but in a few years there could be."

Meanwhile, there has been no shortage of smaller investments. Since 2008, transactions below $20 million have accounted for more the 65% of deals completed in Vietnam. It is a similar story elsewhere, with the proportion rising as high as 77% in Thailand.

Over the same period, there have been 40 transactions in excess of $200 million in Southeast Asia as a whole, and more than half were in Singapore and Indonesia. Indeed, Thailand has only seen a couple of deals cross the $100 million threshold; in the Philippines it is seven and in Vietnam it's five.

Needless to say, the dynamics driving mid-market deal flow can differ markedly in one country to the next.

"Macroeconomic growth will spur more entrepreneurial activity in Vietnam because it us not like the other economies in Southeast Asia," says Veronica John, senior advisor at Mekong Capital. "It isn't dominated by large family conglomerates are able to pursue an idea or opportunity on its own merits without running into competition from large families."

This is in direct contrast to Thailand, for example, where family conglomerates play a much more significant role in the economy.

Local players

In each of these countries, the active mid-market has spawned a selection of domestic GPs. Mekong, for example, claims to be Vietnam's first private equity fund and has being operating in the country since 2001. The firm is currently raising its third vehicle, which has a target of $150 million, three times the size of its 2006 vintage predecessor.

John notes how deal sizes have scaled up over the course of Mekong's funds, from $1-2 million through $3-5 million and now in the region of $8-15 million. The consumer sector, of which only 20% runs through formalized channels in Vietnam, continues to be a sweet spot. The firm has several consolidation plays under its belt, including Mobile World, a mobile phone retailer that had just seven outlets when Mekong invested $3.5 million in 2007. Today its network encompasses 240 retail points.

The PE firm made a partial exit to an unnamed regional private equity investor earlier this year, securing an 11x return. This wasn't Mekong's first secondary exit to a larger financial investor: having bought a minority stake in Masan Consumer Corp. - then known as Masan Food Corp. - in 2009, the firm sold out when KKR entered the company in 2011.

The Philippines offers a similar basket of opportunities but at a far more nascent stage. CVC's Hong admits that outside of the BPO segment - where the country has staked its claim as a global leader - there isn't a large export component to the economy. Industries tend to be domestic-facing.

"What we have been surprised by is that, below the large conglomerates and corporate groups, there is a relatively thriving and robust group of mid-tier, mid-cap businesses that are family-owned," Hong adds. "They have become very successful with limited capital investment catering to the rising middle class and growing household income."

While Mekong has been through two funds in Vietnam and has credible independent counterparts in the form of VinaCapital and Dragon Capital, the Philippines fundraising environment is practically non-existent. In the 1990s it was one of Asia's more active hubs, but there has been nothing beyond government-backed initiatives in recent times.

Angeon Advisors is trying to make the breakthrough, targeting $100 million for a fund that will consider investments of $5-15 million.

"We are looking at a broad variety of deals coming through our pipeline," says Gerald Baldivia, managing director at Angeon. "One company we are looking at is involved in consumer lending and wants to expand domestically. Another is a BPO outsourcer with a digital angle that is looking at M&A roll-ups as well as acquisitions in Indonesia and Thailand."

As with Mekong in Vietnam, the idea of a domestic player growing local companies with a view to exiting to larger investors is a compelling one in the Philippines.

This has already been demonstrated to a certain extent with SPi Global. Before the company entered CVC's hands, it went through several phases of PE investment. Hong Kong-based MBO Partners and Electra Partners Asia were the first entrants in 1998, followed by Crimson Ventures and AIG Investment before T.H. Lee Putnam Ventures and Government of Singapore Investment Corp bought the business in 2004.

With CVC's from PLDT, SPi Global has experienced the full gamut of private equity ownership, from venture capital to buyout to corporate control and then back into PE hands via a carve-out. It is not a fair reflection of the Philippines opportunity - BPO is more mature and international than anything else - but it is arguably a portent of things to come.

Integration effect

As more regional and global private equity firms scour Southeast Asia for buyouts, the pitch will almost certainly be how they can leverage their networks to deliver cross-border expansion opportunities.

Navis Capital Partners has scaled up several of its portfolio companies, taking then from their home markets and into neighboring countries. Alliance Cosmetics, a Malaysian beauty products player, is currently rolling out its Silky Girl brand in Indonesia; diaper manufacturer Drypers Asia used Malaysia and Singapore platform to enter Thailand and the Philippines, eventually becoming the leading player in Southeast Asia.

However, there are few examples of regional expansion from a Thailand, Vietnam or Philippines base. Certainly in the case of Vietnam and the Philippines, this might be explained by the relative immaturity of these countries' corporate sectors, with a premium placed on domestic consolidation rather than breaking into new markets.

KKR's Mathur suggests the appetite or expansion from these geographies is out there. "With a lot of the entrepreneurs we talk to, they have a good business and a great market opportunity but need somebody like KKR to help them with the operational expertise to access and manage growth in a sustainable manner," he says, "whether it's expanding their presence in the local market, moving into a new product segment or expanding internationally."

Mathur is less bullish about the prospects of raiding the portfolios of smaller private equity players, noting that the nascent state of the PE industry in these countries means the number of companies that could come up for secondary transactions has been relatively small.

At the same time, there are other industry participants who play down the regional expansion thesis completely, either because they see little commonality and many challenges in leveraging the dynamics of ASEAN integration, or because they are satisfied with the prospect of domestic growth.

Once again, it comes back to the GP's perspective, investment scope and familiarity with particular geographies. To certain extent, it is more an issue for LPs as they consider the opportunities presented by the region - the availability of deals of certain sizes, the sustainability of individual markets, and so on - and decide how their capital would be most effectively deployed.

Angeon‘s Baldivia, for his part, argues that Southeast Asia's less penetrated markets will remain that way without an on-the-ground presence.

"This is important not just in deal generation but also in monitoring and supervising deals," he says. "Many of the fly-in, fly-out regional and global funds that came here had a bad experience and they went away with the wrong impression of the Philippines."

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• Topics
• Southeast Asia
• Expansion
• Buyouts
• Investments
• Indonesia
• Malaysia
• Thailand
• Vietnam
• Philippines
• Growth capital
• buyout
• Southeast Asia