Private equity and family conglomerates

The conglomerates are typically cast as competition to private equity. Boasting ample cash reserves and strong relationships with local banks, they represent an alternative source of capital for entrepreneurs.

For example, if an Indonesian entrepreneur is wary of selling an equity stake to a PE firm, he has the option of doing a debt-based deal instead. The lending rate might be 17% but if the company's revenues are growing even faster, he could potentially pay down the debt without giving up any equity exposure. Hedge funds are willing to do this kind of hedge fund-style lending, but so are the conglomerates. They also act as angel investors, putting money into start-ups.

Influence is not necessarily wielded in a positive manner. Industry participants recall investments made at the right time in the right companies underperforming because of the commercial and informal networks of the conglomerates. Close ties with domestic regulators can be used to impair the growth of smaller rivals, sometimes with the ultimate objective of forcing through an acquisition.

It is enough for some investors - whose memories stretch back to the economic and reputational damage inflicted by some of these families defaulting on their debts during the Asian financial crisis - to rule out Indonesia entirely. But not all these conglomerates, Indonesian or from elsewhere in the region, should be tarred with the same brush.

Furthermore, large industrial players beyond the confines of Southeast Asia are known for using commercial or regulatory sway as a competitive advantage. China's state-owned enterprises and South Korea's chaebols come to mind.

The other option for private equity firms is to try and treat the conglomerates as partners rather than opponents, leveraging their access to plum assets.

As discussed on page 10, investors of all stripes are interested in Southeast Asia's booming media industry and public market valuations have rocketed as a result.

CVC Capital Partners and Saban Capital Group took another route as they completed investments in two Indonesian companies - Link Net, a fixed broadband and cable TV operator, and Media Nusantara Citra (MNC), a vertically integrated media player, respectively. The deals came about through relationships with tycoons whose family firms control the assets.

This strategy is as risky as it is potentially lucrative. The conglomerates rarely divest equity positions in their businesses, so they either need to be convinced of a PE investor's value-add or looking for a very high price.

The Carlyle Group's negotiations last year over a 25% stake in Indonesia's Garudafood were apparently drawn out by changes in the price and the assets on the block. All the while the valuation continued to rise, before the deal fell apart. More of the same might be expected as Siloam Hospitals, a unit of the Riady family's Lippo Group, goes up for sale. The family conglomerate is said to want to offload at least 20% of its holding for around $300 million.

Building close ties with these asset owners may make sense - in fact it might be the only sure-fire way to secure access to large deals in many Southeast Asian markets - but it is as well to do your homework on potential partners.

 

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• Topics
• Southeast Asia
• Southeast Asia
• The Carlyle Group
• Saban Capital Group
• CVC Capital Partners