Southeast Asia investments reward prepared GPs - AVCJ Forum

"As the US economy recovers, and as Japan continues to do better, you are going to see some offset to the slack that's generated from China," said Brian Hong, partner at CVC Capital Partners. He acknowledged that recent currency fluctuations in the region will also present temporary problems for manufacturers, but said in the long run a falling currency could actually help those companies.

"After a period of volatility, the lower currencies will settle in, and trade flows will focus on commodity exports that come out of some of these countries," Hong said. "Light manufacturing exports are three times higher than the commodities. So, if your currency is 30-40% lower, and you're doing light manufacturing, which is largely labor intensive, you are going to see FDI come back in as manufacturers take advantage of what is essentially a repricing of your competitiveness."

However, this kind of profit is not always a reliable indicator of a company's long-term prospects. In some cases, investors might take a stake in a business only to find that its success depended on a fluke that will shortly become irrelevant - as almost happened to Rodney Muse, co-managing partner at Navis Capital Partners.

"I looked at a consumer goods business with exports outside of Southeast Asia, and I was just shocked at how incredibly profitable they were," said Muse. "Then I realized they had contracts that were up for renewal in a matter of months. They'd been benefiting from US dollar contracts that had been struck a year ago at a different exchange rate."

In addition to exports, Southeast Asia's manufacturers are increasingly targeting the region's domestic markets and rising middle class. An expanding urban population means more opportunities for producers of consumer goods, and thus higher demand for investors to supply the necessary growth funds.

Expansion also carries with it the risks of excess debt, however. AIF Capital CEO Peter Amour pointed out that overleverage has been a common factor in several Southeast Asian economic crises, and continues to affect not just businesses, but entire industries as well.

"One of the real areas of concern, particularly when you drill down into the companies themselves, is how are they affected by leverage at their level, but also how their sector is affected, are players generally overleveraged?" said Amour. "That's a factor you can never forget in this type of environment."

GPs that are active in Southeast Asia investments contend that the region is not to be feared. But investors should be aware of these common risks and have a plan to mitigate them.

"There are certain businesses that we avoid and certain businesses that we like," said NDE Capital Managing Partner John Lin. "If you're heavily exposed to commodity downside pricing, have a lot of US dollar or foreign currency debt, and your costs are structured locally, then it's definitely in the wrong space. The ones where we have done well are businesses with no US dollar or foreign liabilities, and whose cost structure is driven by local currency and local businesses."

The AVCJ Forum is being held in Hong Kong from November 3-5. For more information, please go to www.avcjforum.com.

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• Topics
• Southeast Asia
• GPs
• Investments
• Southeast Asia
• GPs
• AVCJ Private Equity & Venture Forum
• AIF Capital
• Navis Management
• CVC Capital Partners