Corruption an opportunity for SE Asia dealmakers

There are different dynamics to the corruption theme in Southeast Asia, according to Rodney Muse, managing partner at Navis Capital Partners. "There's cronyism, there's corruption and then there's leakage. They all exist in different degrees," he told the Hong Kong Venture Capital and Private Equity Association's Asia forum.

But ridding a business of these imperfections is one of the reasons for private equity's existence in the region. "A multi-national is not going to buy a dirty business," Muse explained.

Cleansing is important to the exit thesis, whether it be an IPO or sale to a multi-national, and GPs in the region have built up capabilities to identify and eliminate corruption.

While corruption levels may vary, a common element is that "a company has four books - first for the tax office, second for the bankers, third for the owner and the fourth for the wife of the owner," said Saratoga Capital founder Sandiaga Uno. That's why the firm insists on installing CFOs in the companies it invests in, to get better control of the situation.

Leakage in particular is all pervasive and distorts economics. Brian Hong, managing director at CVC Capital Partners, noted that it can be a source of opportunity. After buying one business, CVC brought in new management to plug these leakages and found that the margins for the business doubled.

Another part of the PE firm's strategy in the region is to partner with local family conglomerates. Five of its past deals have been with families, notably Matahari Department Store and LinkNet in Indonesia, both joint control deals with the Riady family. 

"There are many reasons we choose to partner with local families, and one of them is that many of them own the best and most attractive assets," Hong said.

These cash-rich local players own the bulk of the larger businesses that a buyout firm might target and are aggressive in bidding for potential add-on targets. In one instance where KV Asia Capital bid for a business at 6x EBITDA, a conglomerate offered 40x EBIDTA for the same asset, according to Karam Butalia, KV's executive chairman.

But the family conglomerates can be ruthless partners. "Quite often they also seek to buy back the business from you or buy out your stake, and at that point they are going to try to cap your returns," Navis' Muse warned.

"If you're relying on a shareholder's agreement to govern your partnership, then you should find a new line of work or focus more on North Asia," Hong added.

CVC's strategy is to spend many months getting to know the family, and the friends of the family, in order to understand their interests. "They don't want to necessarily do things that are going to look bad in front of their friends," he explained.

 

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• Topics
• Southeast Asia
• Southeast Asia
• Saratoga Capital Group
• CVC Capital Partners