Southeast Asia PE: Integration angst

Ever so gradually, the Association of Southeast Asian Nations (ASEAN) is moving towards a free trade agreement that would trump them all. The Regional Comprehensive Economic Partnership (RCEP) was proposed in 2011 and went through its 26th round of negotiations in Australia last week. It has taken on renewed importance since the US withdrew from the Trans-Pacific Partnership (TPP) in 2017, although a revised version of that agreement came into force at the end of last year.

If RCEP succeeds, it will bind together the 10 ASEAN members with China, Japan, South Korea, India, Australia, and New Zealand. This would create the world’s biggest free trade zone, encompassing territories with a combined population of 3.5 billion and a GDP of $22.6 trillion. Even though the pact is not as all-encompassing as TPP, little wonder that the details are proving difficult to finalize.

Private equity investors are divided on ASEAN integration. There is no dispute about its desirability, but some point to the efforts being made to create bridges between ASEAN and the world and note – with some irony – that the region still has much to accomplish internally. Trade is increasingly frictionless, bur from a private equity perspective, language, culture, economic disparity, and implicit and explicit regulation remain barriers to cross-border deal flow.

Examining a list of the largest private equity investments in Southeast Asia over the past five years, few buyouts jump out as sub-regional expansion stories. Many of the companies are global in nature or have as much, if not more, of a China angle than a Southeast Asia one. The dynamics vary by sector and by size – a mid-cap consumer products business may see considerable upside in exploring new markets within the region – but a common complaint among larger managers is that it’s hard to find scalable opportunities. 

Affinity Equity Partners, for example, found the right in combination in Malaysia’s Leong Hup International. The poultry producer was a largely domestic business when the private equity firm invested in 2014. By the time of the IPO earlier this year, Malaysia, Indonesia, Singapore and Vietnam each accounted for at least 19% of revenue. None of Affinity’s other handful of portfolio companies in the region have this kind of profile.

The emergence of large internet services platforms in Southeast Asia therefore represents an interesting opportunity for those looking to write sizeable equity checks. Several of these unicorns are expanding aggressively throughout the region, even though their strategies are not uniform. While Grab sought to be pan-regional almost from the outside, rival ride-hailing player Go-Jek decided to establish a strong beachhead in Indonesia before entering new markets last year.

For anyone pursuing a service-based business model, the main cross-border pain point is usually human – assuming they have sufficient capital. Finding the right people to lead a local management team and giving them the autonomy to devise a solution that is attuned to the needs of local consumers without undermining the ethos of the brand or the efficiencies gained through a one-company approach.

Over the course of four months in 2012, Singapore-based online property portal PropertyGuru launched operations in Malaysia, Indonesia and Thailand. The company had strong teams across sale and marketing, technology, human resources and finance, but they were programmed for Singapore. “Suddenly they were being asked to build a website in Malaysia, apps in Thailand, hire 50 people in each country, and think about approaches to branding and pricing. We hired about 150 people rapidly and they soon became ex-staff,” co-founder Steve Melhuish told AVCJ last year.

PropertyGuru was stretched close to breaking point in 2012-2014 before structural reforms and further initiatives aimed at strengthening leadership and improving business processes began to bear fruit. There are gains to be made from expanding within Southeast Asia can be considerable, but they are invariably hard-won.

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• Topics
• Southeast Asia
• Fundraising
• Buyouts
• Economy