Southeast Asia: Wary voices

One of the more interesting private equity trends for 2018 will be fundraising in Southeast Asia. About half a dozen managers with mandates covering multiple jurisdictions in the region are either in the market or expected to enter it before the year is out. There might be an outlier, but these processes are unlikely to be speedy or smooth because LP sentiment on Southeast Asia is lukewarm. 

This is, of course, nothing more than a general observation. But it could be argued that nowhere else in the region exhibits such a wide gap between the investment opportunity and perceptions of private equity investors’ ability to turn that into a string of wins across a fund portfolio.

There have certainly been success stories in Southeast Asia, for managers small, medium and large. In the past four months alone, COPE Private Equity completed its exit from Malaysia’s Serba Dinamik Holdings – which it took public last year – with a gross multiple of 8.9x; Navis Capital Partners generated 3x through the sale of Singapore-based MFS Technology; and Warburg Pincus made a partial exit as Vincom Retail raised $740 million in Vietnam’s largest-ever IPO.

Warburg Pincus this week demonstrated its faith in the Vietnam consumer story once again by agreeing to commit $370 million to Vietnam Technological & Commercial Joint Stock Bank (Techcombank). The announcement was accompanied by data points illustrating robust economic fundamentals: more than 60% of Vietnam’s population is aged below 40 and more of them qualify for the middle and upper-income segment; consumer loans increased threefold between 2013 and 2016, even though the banking penetration rate is only 30%, indicating significant growth potential.

Young, upwardly mobile populations are found in most of Southeast Asia’s emerging markets, as are the forces of urbanization, industrialization and technology-enabled mobility that drive their nascent wealth. Economic activity coalesces around small and medium-sized enterprises (SMEs) that account for more than 50% of GDP and up to 30% of exports across the ASEAN member countries, while in Thailand and Vietnam – to pick to examples – they are responsible for 99% and 70% of employment.

These companies form the vanguard of what most middle-market Southeast Asia-focused private equity firms want to invest in. And according to a recent survey by UOB, Dun & Bradstreet and EY, they need plenty of support. Respondents identified 12 major operational challenges, but they can be distilled into three core issues: difficulties hiring and retaining talent; costs, covering everything from raw materials to rental; and accessing financing on reasonable terms.

Technology is an investment priority for 60% – with a focus on software and services – while 45% want to upgrade machinery and equipment. A clear majority already have operations outside their immediate home market and many identify offshore expansion as a medium-term goal. As to how they expect to fund these ambitions, debt financing is the preferred source for 76% of respondents, but private equity is only marginally behind on 74.8%.

When asked to give reasons for their reticence on Southeast Asia, LPs invariably point to track record. In most instances, they have not seen enough evidence to suggest a manager can turn intermittent home runs into a consistent stream of exits over multiple funds. The preferred option is to get their exposure through the pan-regional firms, which dabble in Southeast Asia less frequency and write bigger checks for more proven counterparties when they do.

In this sense, the problem is more the market than the managers. Southeast Asia remains a work in progress, with fewer investable companies, still developing commercial infrastructure, and far less cross-border coherence than many would assume. Nevertheless, any GP looking for an allocation this year must come up with a compelling plan to tap into the vibrant SME dynamic, rather than simply illustrating the size of the opportunity and expressing a belief that the stars will one day align.

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• Topics
• Southeast Asia
• LPs
• Fundraising
• Malaysia
• Vietnam
• COPE Private Equity
• Warburg Pincus Asia
• Technology