Private equity seeks Southeast Asia consumer plays

The likes of Indonesia, Malaysia, Vietnam and the Philippines are popular destinations, and the potential targets range from instant noodle makers to mobile phone retailers.

As AVCJ went to print, The Carlyle Group looked set to emerge victorious in its battle with Japanese beverage firm Suntory for a stake in GarudaFood, a leading instant food and snacks producer in Indonesia. The US private equity giant has reportedly agreed to pay $200 million for a 25% stake in GarudaFood. It would be Carlyle’s first direct investment in Indonesia – and further evidence that the global buyout firms in particular are developing an appetite for Southeast Asia that stretches beyond commodities.

“Post global financial crisis, investors realized that economies in the region are generally very resilient, that there is a large and growing consumer market,” says Sigit Prasetya, a partner at CVC. “And people are now more familiar with private equity because they see transactions getting done.”
Indeed, Indonesia’s economy grew 4.9% in 2009, the fastest in the G20 after China and India. The pace of expansion picked up to 6% last year and HSBC projects GDP growth of 6.4% in 2011 and 6.3% in 2012. Malaysia, the Philippines and Vietnam can’t match their regional neighbour in terms of population size, and therefore consumer market scale. But they are still growing at a fast clip, even though Vietnam is struggling to control inflation. In all these nations, urbanization, per capita incomes, and private consumption – which by some estimates accounts for 70% of GDP – are rising.

Much talk, little action

Yet for all the positive vibes, few large-scale transactions have been completed and those that do get done tend not to be buyouts. Private equity investment in Indonesia, Malaysia, the Philippines and Vietnam totalled $2.2 billion last year, some way off the $4.9 billion of 2008 but well up on the inevitable poor showing of 2009. Small deals dominate. Industry breakdowns for investments made in Southeast Asia as a whole between January 2010 and May 2011 are distorted by one mega-deal – Malaysian sovereign wealth fund Khazanah Nasional’s acquisition of Singapore-based Parkway Health for $2.3 billion. CVC’s $616.3 million investment Indonesia’s Matahari Department Store ranks second, but it is an outlier as far as consumer transactions are concerned.

This doesn’t indicate a lack of potential targets or a general discomfort with the idea of accepting large portions of foreign capital – the current owners are just unwilling to sell. Jason Sambanju, managing director and co-head of Asian Operations at Paul Capital, estimates that wealthy families account for as much as 70% of economic activity in emerging markets like Indonesia. These people – fixtures in their nations’ respective Forbes rich lists – bestride privately-held conglomerates that occupy leading positions in a range of industries, from resources to retail.

“The lack of large buyouts is driven more by the resilience of family businesses,” says Sambanju. “They got put through the wringer during the Asian financial crisis so their balance sheets are very healthy.”

The large private equity firms have come to understand that it is easier to work with controlling families – often as minority shareholders – than to try and buy them out. For example, should The Carlyle Group’s investment in GarudaFood go through, it would be in partnership with Tudung Group, a company with interests spanning the food and beverage, consumer health, distribution and logistics, and agribusiness sectors. It is controlled by the family of the group’s late founder, Darmo Putro.

Family ties

The experiences of TPG Capital and CVC are also instructive, both firms having made early headway in Indonesia through a combination of pragmatism and local relationships.

TPG doesn’t invest in Indonesia directly, preferring to use a local affiliate, Northstar Equity Partners. The US private equity firm invests in Northstar’s funds and serves as a co-investor on certain deals, but it relies on the affiliate to source and structure deals that require a nuanced understanding of the local market. It does no harm that Theodore Rachmat, one of Indonesia’s wealthiest individuals, is father-in-law to Patrick Walujo, co-founder of Northstar.

Major deals include the purchase of a majority stake in Bank Tabungan Pensiunan Nasional in 2008 and last November’s acquisition of a 40% holding in Delta Dunia Petroindo, a property company that traded on the Jakarta exchange. This deal facilitated the backdoor listing of Bukit Makmur Mandiri Utama, a coal-mining services provider. TPG and Government of Singapore Investment Corp. subsequently bought into Northstar’s acquisition vehicle for $400 million.

Prasetya admits that CVC “has been more flexible” in Asia than elsewhere, a number of significant deals being proprietary transactions that arose from negotiations with family owners.

In March, CVC invested $275 million in LinkNet, Indonesia’s second-largest fixed-line broadband and cable TV operator. The transaction was structured as a bond and share issue, giving CVC a 33.94% stake, with the option of increasing it to the 49% foreign ownership ceiling. “This is more of a growth capital investment where we put a significant amount of new capital into the business to help the company grow,” Prasetya tells AVCJ.

The deal originated in part from CVC’s relationship with Lippo Group, a leading Indian conglomerate controlled by the Riady family. LinkNet is a subsidiary of PT First Media, which is in turn owned by Lippo. This was CVC’s second partnership with Lippo in the space of 18 months: It bought a 72.6% holding in Matahari Department Store from the group in January 2010. The two parties agreed on a partnership structure, which saw Lippo’s Matahari Putra Prima sell its majority stake in the store to a joint venture company of which it owned 20% to CVC’s 80%.

The private equity firm’s network of contacts stretches deep into Southeast Asia. In May, it secured 15% of Rizal Commercial Banking Corporation (RCBC), one of the Philippines’ top five commercial lenders, for the sum of $115 million. The investment was CVC’s first in the Philippines for more than a decade and, like LinkNet, it was a proprietary transaction that is rooted in a familiarity with the owner, in this case the Yuchengco family.
“The Yuchengcos are people we have known for a long time and this gives us comfort,” Prasetya says. “We have the ability to do something that is more partnership in nature.” He notes that of the seven deals CVC has committed in Southeast Asia since 2007, three are joint ventures or minority interests but they tend to involve close cooperation with partners the company knows well.

The flurry of significant investments made by the likes of TPG and CVC in recent years suggests that private equity is making a breakthrough with family owners – but why now? Certainly, political stability in Indonesia has given global players the confidence to get involved, helping owners to realize the value of assets at premium prices. At the same time, though, companies need capital to support expansion plans that allow them to fully leverage rapid consumption growth. LinkNet will use CVC’s money to broaden its services; over the next 10-15 years, Matahari Department Store wants to add 150 new stores to the 88 it had at the start of 2010; and RCBC is looking to build more branches and ATMs in a market where banking penetration remains relatively low.

Sean Monaghan, senior analyst for Southeast Asia consumer and gaming at HSBC, also argues that the traditional structure of highly concentrated ownership and single companies dominating industries is being challenged. “Emerging local rivals are threatening the position of local and international incumbents,” he says.

Again, Indonesia – which is “rapidly undergoing a transformation in that space” – is the standout example. Monaghan highlights the case of Wings Corp., one of the country’s largest manufacturers of fast-moving consumer goods. In the instant noodles segment, Wings has a 15%-20% share to the 70% of Indofood Sukses Mukmur, which is part of the Salim Group, Indonesia’s largest conglomerate; but the challenger is now reeling in the long-time market leader. Meanwhile, in the personal care and household products market, Wings is beginning to take the fight to Unilever Indonesia.

Opportunities for growth

This is a snapshot of the competitive environment at the large end of the consumer sector, companies of sufficient size that they appear on the radar of equities analysts. But the changes taking place add credence to what private equity players describe as a flowering of an entrepreneurial class across the region. Vietnam, the Philippines, Indonesia and Malaysia are all at different points on the path towards organized retail and commoditized consumerism – and each market presents unique challenges – but there are no shortage of opportunities for growth capital.
Backed by investments of anything from $5 million to $50 million, consumer companies that successfully build out their branch networks and enlarge revenue streams are strong candidates for sale to either larger buyout firms or to multinationals looking for greater Southeast Asian exposure.

Mekong Capital has taken Mobile World from a five-store outfit in 2007 to become Vietnam’s largest independent mobile phone retail chain with 110 branches. Chris Freund, managing partner at Mekong Capital, tells AVCJ that there has been considerable interest from private equity firms that typically focus on China and India, and he expects a deal to go through quite soon. Freund sees similar development paths for restaurants and convenience stores.  

Kuala Lumpur-based Navis Capital has already been through the expansion and trade sale process with diaper manufacturer Drypers Asia. It bought the company in 2001, widened its market in Southeast Asia, and sold out to SCA, a Swedish hygiene products firm, three years later. In January 2010, Navis took a majority stake in Alliance Cosmetics Group and is busy adding Indonesia and Vietnam to the company’s traditional target markets of Malaysia, Singapore and Brunei. A trade sale is a possible future outcome for this investment too, but Rodney Muse, co-managing partner at Navis, warns that it is not simply a case of going through the motions. “We might see many consumer-related opportunities but Alliance is a jewel that only comes along once in a 5-10 year period,” he says.

Navis uncovered Alliance after trawling through countless companies in the fast-moving consumer goods sphere. It was attracted the cosmetics firm’s high growth, high margins and strong indigenous brands. According to Muse, realistic investment targets that meet these criteria are in short supply in Southeast Asia, so they command premium prices.

With the exception of Vietnam, deal valuations are going up across the region. Given the influx of new investors, this situation isn’t likely to change in the near term. A typical mid-market transaction was $20 million ten years ago; it is now $50 million today and few are willing to doubt that it will be $100 million in ten years time.

Private equity players are therefore left weighing up potential growth versus current valuations. Indonesia, Malaysia, Vietnam and the Philippines are generating more interest because the balance appears to be tilting unfavorably in China and India. It remains to be seen whether an Asia-obsessed investor community ends up going the same way. Exposure to the Southeast Asian consumer is desirable, but not at any price. 

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• Topics
• Southeast Asia
• Consumer
• CVC Capital Partners
• TPG Capital
• The Carlyle Group
• Paul Capital Partners
• GIC Private
• Navis Management
• Mekong Capital