Q&A: Axiom Asia's Chihtsung Lam and Marc Lau

Q: What is Axiom's exposure to Southeast Asia versus other geographies?

CL: We look at top down and bottom up considerations - our view of the overall environment and our view of individual managers. In each fund-of-funds we typically have about 20 names. If you drop one or add one in each sub-region it can change things quite significantly, but we aim to half about half of the portfolio in China, India would be next, and then Southeast Asia in the high single digits or low teens.

Q: When you look at the amount of capital raised in China, is Southeast Asia under-tapped in private equity terms?

CL: Based on the relative sizes of GDP, it appears a bit under-tapped, but there are some systemic factors that contribute to the disparity between the two markets in terms of deal flow. China is transitioning from Communism to capitalism and this creates opportunities for private equity, for example private companies have difficulty getting all the capital they need, either from the IPO market or the banking sector. In Southeast Asia there is a large and well established private sector that has no problem getting access to bank funding, and that reduces the addressable market for PE. Having said that, compare Southeast Asia with Japan and, relative to the size of the economy, we see more opportunities in Southeast Asia.

Q: Is Indonesia justifiably flavor of the month in Southeast Asia right now?

CL: It is an issue of scalability. If you are a country of 20 million people, at the prevailing GDP per capita level in Southeast Asia there may not be sufficient opportunities to create an addressable market. So there are single country funds for Indonesia and also Vietnam - which is interesting for some special reasons - and then there are sub-regional funds. These players might have a good footprint in 1-2 markets, but given how important relationships are, they aren't so good elsewhere.

Q: So why is Vietnam special? Its population is about the same size as The Philippines...

ML: Vietnam is undergoing a similar transition to China. From an economic and structural perspective, much of what happened in China could happen in Vietnam. For both countries, the transition point was signing up to the WTO. In a similar way, people are now interested in Myanmar. There is a definable event where the economy becomes more integrated with the rest of the world. That transition point was passed a long time ago in places like the Philippines and Malaysia, so there isn't the same rush of interest.

Q: How keen are you to have Myanmar exposure through your existing GPs?

CL: Private equity relies on an ecosystem being formed. Back in the early 1990s when I first began participating as an LP, there was a lot of excitement about China but it was too early. You could see that key elements of the ecosystem - the exit market, the stock exchange regulations, the governing legal framework - weren't in place. That didn't happen until the late 1990s. With Myanmar, we are very encouraged by the developments there, but speaking as PE professionals, we probably want to wait a bit longer. That's not to say other types of players cannot go in and make money.

Q: Family conglomerates are often cited as a competitor to private equity in Southeast Asia. How much of a threat are they?

CL: You have to ask: What is the addressable market in terms of deals and who are the players that might get these deals? Clearly these families are a more prominent part of the landscape in Southeast Asia than in China. The other important consideration is the issue of scalability. Once you've scaled a business in one country there's no guarantee you can do it another. If you have a $200-300 million fund, you have to work back and say, ‘I want to write $10-20 million checks, and my ideal exit would be $50 million, so what size does the company need to be?' Once you've completed this back-of-the-envelope math, you rapidly get to the point where you say that for this particular economy, 75% of the companies are not candidates for PE. Of the other quarter, most are already listed on the stock exchange.

Q: So what is an appropriate fund size for the region?

ML: There are opportunities PE managers can take advantage of if their fund size isn't too large. If a manager raises $100-150 million then you are looking at check sizes that can make a lot of sense in each of these geographies, despite the fact that they are fragmented. You can find companies with $10-20 million in top line and $5-10 million bottom line that can be grown to double or triple that size before they get bought up by a larger player, a conglomerate or a strategic investor with interest in the space. It's really a case of how a manager takes advantage of individual particularities or market he is in by moderating fund size, strategy and the kinds of opportunities he looks at.

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• Topics
• Southeast Asia
• Vietnam
• Philippines
• Southeast Asia
• Axiom Asia Private Capital