Q&A: NDE Capital's John Lin

Q: How did NDE's China-Southeast Asia strategy emerge?

A: Since 2007, we have focused on what is known as the "China-Southeast Asia Silk Road." At the time, only a handful of Chinese funds were focusing on cross-border fertilization with Southeast Asia so we dominated the space. In part due to our heritage, we have the language skills and the on-the-ground operational knowledge. There is a huge cultural gap between these markets. The common languages for Indonesia, Malaysia and Brunei are Bahasa Indonesia and Malay, and if you don't speak them it is very difficult to negotiate. That is why few Chinese GPs operate in this area.

Q: What kind of support do investee companies usually need?

A: Most of the companies we invest in require support in order to access China or they are Chinese companies entering Southeast Asia. We focus on products and services that meet the modernization and urbanization needs of China and Southeast Asia, which typically means consumer goods and services, healthcare, education, and industrials. For example, we invested in two companies - both of which are now listed - that specialize in seafood. The first, a seafood processor, was driven by the contamination of the supply chains in China. It needed to integrate its supply chains with Southeast Asia in order to source raw materials and also to leverage relatively lower labor costs. The labor intensive parts of production were moved so that sourcing, cleaning, processing and cooking all took place in Southeast Asia. When the products were sent to China and other target markets they were almost finished. The second company produces fish balls and crab meat. It was controlled by Indonesian shareholders plus some mainland Chinese, Singapore and Hong Kong investors. They wanted to expand in China but were weak in sales and marketing. We helped them through our own Chinese networks.

Q: How many exits have there been?

A: We have completed five exits - three IPOs and one trade sales - from companies with operations in China and Southeast Asia. A further two exits have been from firms that are China only. The advantage we have is that even though a company might be based in Southeast Asia, the exit is China consumer-driven, which allows for more liquidity event options and higher valuation multiples. Rather than pursue an IPO on the Jakarta Stock Exchange we are able to take companies public in Greater China, the US or Hong Kong, where multiples are higher than those in Southeast Asian markets. Trade sales are also an option because some of our LPs are international and Chinese strategic players. We are mid cap-focused so once a portfolio company reaches a certain size one of our LPs might become a natural buyer for it.

Q: How active has NDE been in Indonesia?

A: We made seven investments from our first fund and three of those had Indonesia-based operating assets. However, those deals were completed in 2007 and 2008. In recent years we've had to be patient and avoid Indonesia because it was too bullish. The market goes through cycles and now is a better time to invest due to the economic uncertainty and the fact that fewer groups are coming in. The rupiah is fallen from IDR9,500 to the dollar 14 months ago to around IDR14,000 today, so there has been a heavy readjustment. We recently completed another Southeast Asian deal with significant Indonesian operating assets involving coconut beverages, snack foods and seafood for customers in China and the Middle East. Our relationship with the company goes back four years but 2-3 years ago it was still too expensive to enter. When the volatility happened we were able to move quickly.

Q: China announced the 21st Century Maritime Silk Route Economic Belt, with effective implementation starting in 2015, and plans to invest substantial sums in deepening ties with its Southeast Asian partners. How significant is this?

A: Last year the Chinese government announced a $60 billion investment in Indonesia part of the Maritime Silk Road initiative. Indonesia is the anchor of the ASEAN portion of this program and we really see it as a validation of our strategy. Trade between the two countries is growing by more than 20% per year and China is helping Indonesia improve key infrastructure and providing banking facilities. Exports, imports and supply chain logistics and production are becoming more efficient. There is also a lot of knowledge transfer in technology and processing, which is intended to enable Indonesia to climb the industrial value chain. It's not just about raw materials and labor. Chinese companies are getting involved in joint ventures in e-commerce and other technology areas, essentially participating in the digitization of the Indonesian consumer.

Q: What do these developments mean in practical terms for your portfolio companies?

A: Supply chains, licensing, approval, customs clearance - everything is much faster. Ports are particularly important. Indonesia's ports have limited capacity to support large container ships, so China is bringing in new machinery and dredging port areas to facilitate the arrival of these vessels. The equipment is also more advanced. For example, cold chain logistics is unreliable in Indonesia and it is being upgraded. It means our portfolio companies have much better logistics infrastructure for exports to China and other markets. Power is another consideration. We don't invest in this area but the energy supply to the industrial park to which some of our portfolio companies have relocated production lines was completed with Chinese assistance. This means there are fewer interruptions and production becomes more cost effective.

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• Topics
• Greater China
• Southeast Asia
• Expansion
• Consumer
• China
• Growth capital