Bain & Co: Harnessing Southeast Asia’s PE potential

While China and India icreasingly exhibit signs of an economic slowdown, the outlook for private equity investors in Southeast Asia is looking up. Spanning 10 nations and home to 600 million increasingly affluent consumers, the region's GDP topped $2 trillion in 2011. Its six largest economies are expected to accelerate by between 4.5% and 6.7% annually through 2015, and the region's stock indexes have outpaced China and India since late 2009.

Interest in Southeast Asia has risen even higher since the global financial crisis. The region's economies have been resilient to the economic woes that have plagued developed markets. Opportunities have also increased largely as a by-product of the investment spotlight being trained on China and India. Valuations in these two markets have skyrocketed and now there is a desire to diversify. Southeast Asia is an obvious option.

Nevertheless, private equity in the region is still waiting for that the long-anticipated breakthrough industry analysts have been looking for. At $5.3 billion, deal-making was flat in 2011. Just 37 transactions were completed, and exit volumes totaled $4.2 billion, 30% below 2010 levels.

On the cusp

Results from a survey Bain & Company conducted with the Singapore Venture Capital & Private Equity Association, however, show clear signs that 2012 could be the start of a new era. Respondents expect deal activity to increase substantially, especially in the consumer, healthcare and energy sectors. The financial foundations for PE expansion look solid. Debt issuance is at record levels, M&A activity is buoyant, and Singapore's IPO pipeline is full.

Fundraising is also strengthening. Private equity funds focused exclusively on Southeast Asia attracted $1.6 billion in new capital in 2011 and the momentum remains. Altogether, 22 funds are currently on the road, aiming to raise an aggregate $6.4 billion. This is in addition to the capital that global and pan-Asian funds will deploy into the region.

The expected continued rise of regional- and country-focused vehicles speaks to the growing sophistication of private equity's competitive landscape. Both GPs and LPs rank Indonesia and Vietnam highest on their list of attractive investment destinations in the region. Three funds focusing exclusively on Indonesia investments and six smaller ones targeting Vietnam are looking to line up more than $2.5 billion.

Two-thirds of survey respondents cited increased competition as a major constraint to closing good deals going forward. About 70% said that they had seen more interest from global private equity firms in the region over the past 2-3 years, while more than 60% saw an uptick in competition from corporate buyers looking to make strategic deals.

Best practices

What will it take to succeed? Our survey respondents identified three key areas where they need to raise their game.

First, they are redoubling their efforts to identify and groom strong management teams. It is the overwhelming view that the strength of management teams is the most important quality to look for when appraising a potential deal. The role played by these people in enhancing value - and returns - post-acquisition is crucial.

Second, they are devoting more resources to flesh out concrete value-creation plans. The ability to spot a few key priorities and set a timeline for achieving them as soon as the deal is closed ranked second among survey participants.

Finally, they are forging ties that give them proprietary access to attractive deals. Forty-three percent of our survey respondents emphasized the importance of cultivating a network of advisors, industry insiders and locally connected partners. These relationships, they told us, enable their funds to be the first to size up the most promising target investments that are in line with their deal theses.

Southeast Asia's vibrant potential is a powerful magnet for PE funds. But funds that hope to capitalize on it must scramble to land good deals and bear down to create sustainable value in portfolio companies.

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• Topics
• Southeast Asia
• Fundraising
• Fundraising