Turnarounds in Thailand

The country saw deals worth a total of $53.9 million in 2010, according to AVCJ Research. Much like Vietnam and Malaysia, it has failed to recapture the pre-global financial crisis highs that saw investment reach $3.8 billion in 2006 and $543 million in 2007. But Thailand's deal flow last year was less than half that of Malaysia and less than one quarter of Vietnam.

Indonesia saw investment nearly double year-on-year to reach $1.25 billion in 2010.

Thailand falls into the category of Southeast Asian nations that offer growth opportunities in a less competitive conditions than China or India, says Toby Smith, managing director of Lombard Investments. But political uncertainty has tainted investors' perceptions of a market that is already challenging to penetrate.

"Access is difficult for investors new to the Thai landscape, especially those who don't have established on the ground capability and understanding," Smith says.

Strength in exits

However, a stream of exits across several sectors threatens to overturn these perceptions, positioning Thailand as a potential dark horse in the region.

In July, Lombard exited its stake in Thai auto parts manufacturer Somboon Advance Technology, earning a 3.5x return on its investment. That exit marked Lombard's third in Thailand over the last two years, including its 23% stake divestment in paper manufacturer S. Pack & Print to Japan's Oji Paper, also for a 3.5x return, in March. Also in July, Lombard, Actis Capital and Thailand Equity Fund (TEF) sold leading foreign-language books and magazine vendor Asia Books to Bangkok-based Berli Jucker Public Company.

Most private equity activity in 2011 appear to be exits, something Srisant Chitvaranund, a partner at Aureos Capital Thailand, puts down to higher valuations. "In local currency terms, if you know what you're doing you should be able to achieve at least 20% IRR from your investments," Chitvaranund tells AVCJ.

Private equity funds have made 11 exits via trade sales between 2008 and the present, amounting to $224.1 million, and three exits through IPOs, raising $115.7 million. In all 32 investment deals have been transacted, amounting to $213.6 million.

Lombard's Smith says the firm is playing both ends of the field, taking advantage of the exit opportunities while simultaneously looking for mid-size investments. This particular area, sources aver, holds the most promise for private equity. While some big-name deals have been completed - notably Thai Union Frozen's purchase of Trilantic Partners' MW Brands for $883 million - transaction sizes tend to be modest.

There appears to be a sweet spot for funds in the region of $20 million. Sources say that $50-100 million - which is the corpus of some Thai funds - is ambitious as this time.

In terms of investment appeal, there are three key sectors. First is healthcare. The sector is sophisticated compared to other emerging markets and has a strong reputation for value, endorsed by the more than 1.6 million medical tourists who arrive in the country each year. Aureos has invested in a Thai hospital that caters to this segment, and Temasek had held a 5.94% stake in Bumrungrad Hospital for five years before exiting its holding at 20% premium in January.

Second is the auto parts sector, where a growing number of auto brands are looking to use Thailand as a manufacturing hub. Lombard's successful public market exit from Somboon is testament to the potential investors see in the sector. Third is the restaurant and tourism space, though political instability and environmental factors have undermined investor sentiment.

Thailand has experienced a series of misfortunes in the last decade or so that have impaired economy growth, from the Asian financial crisis in 1997 to the Boxing Day tsunami in 2004 and political protests in the last two years. Although it could be argued that the market risks are no greater than elsewhere in the region, investors have been put off. Private equity deals dropped from $544 million in 2007 to $120 million in 2008, the year in which the latest bout of political unrest emerged. The affects of the economic crisis and, to a lesser extend, the political instability could be seen the following year, when investment bottomed at $18 million. Two years later, investment has only rebounded to $24 million for 2011 to date.

According to Chitvaranund, the impact of the protests was short-lived: People got on with their lives and businesses functioned as usual. "It spooked foreign investors because people talk about it and say, ‘Ah, they closed the airport,' but after it all cleared they started investing again," he says. "It's possible that this situation can crop up again, but it's a risk that any emerging market can see at any happen any time."

And confidence seems to have been bolstered by a peaceful election process that saw Yingluck Shinawatra appointed prime minister. Smith notes that markets remain at risk to short-term political shocks, but he sees positive trends emerging in the long term. "The dynamic rise of a new urban and provincial middle class will steadily buoy the economy to a higher level, and generate considerable profits for well-crafted private equity investments," Smith says.

Changes on the ground

The environment described is far removed from that of just a few years ago when private equity was greeted with suspicion in Thailand. The prevailing view was that outsiders were looking to snatch control of family-run companies that should be passed from generation to generation.

"One of the things I would ask before heading into a meeting was, ‘Is grandfather going to be sitting at the table with us?' I had to ask it because I've been thrown out of meetings," one Bangkok-based fund manager tells AVCJ, recalling experiences of more than a decade ago. "Meetings tend to go a lot smoother if it's a second-generation company owner we're speaking with."

A director of Bangkok-based Lakeshore Capital, a country-focused fund manager, says the Thai mentality has shifted with the rise of baby boomers. These professionals are often Western-educated and familiar with private equity.

Nevertheless, dealmakers warn that little can be accomplished without a well-connected team on the ground that understands the business culture and can identify potential targets within this context. There is only a limited number of private equity firms with a direct presence in the market, and so any foreign interest able to staff up should be well positioned.

But they must come armed with more than just a checkbook. "Thai sellers are always looking for value-add beyond financial capital," Lakeshore's director tells AVCJ. "Fund managers must be able to contribute strategic and operational value add to their investments, and this is the key to being successful in the lucrative mid-market."

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• Topics
• Southeast Asia
• Industrials
• Consumer
• Healthcare
• Exits
• Lombard Investments
• Aureos Advisers (Aureos Capital)
• Actis Capital
• Temasek Holdings