South-East Asia, a collection of small, unique markets, has been inherently difficult to access for private equity.
Deal activity still comes in fits and starts, mainly driven by large transactions in real estate and infrastructure, and more recently, disruptive technology in Indonesia.
Fifty-five deals totalling $23.2 billion were recorded in the first half of 2018, compared with $2.7 billion across 50 deals in the first half of 2017, according to Private equity briefing: South-East Asia by EY. Those exceptional investment levels for H1 2018 come on the back of two large secondaries transactions completed in the first quarter: the $12 billion acquisition of Singapore-listed Global Logistic Properties, the largest warehouse operator in Asia, by a consortium of Chinese investors; and the $5 billion purchase of Equis Energy.
Two other big-ticket deals are ride hailing and logistics companies GrabTaxi and GO-JEK at $2.5 billion and $1.5 billion, respectively. Warburg Pincus, meanwhile, scored the largest private equity deal in Vietnam’s history in March with its $370 million acquisition of Vietnam Technological and Commercial Joint Stock Bank.
But a couple of dynamics are changing the private equity landscape.
Vietnam is seeing a new wave of entrepreneurs willing to give up more control of their businesses, says Chad Ovel, a partner at Ho Chi Minh City-based Mekong Capital. In light of this development, Mekong, which has been making growth equity investments in Vietnam since 2001, has started picking up control stakes in companies for the first time in their current fund, the $112 million Mekong Enterprise Fund III.
“In our previous three funds we never acquired greater than 40 percent of any company; in this fund, we own more than 50 percent in three out of the nine companies in our portfolio,” he says. “We see a lot more of that coming in the future. Particularly in the next fund we are tracking a lot of generational succession.”
Fewer of today’s entrepreneurs are strictly attached to maintaining control but are more inspired by the “internet generation of entrepreneurs”, who believe having a small piece of a big pie is much more exciting than a big piece of a small pie, Ovel says.
Its $50 million Mekong Enterprise Fund II delivered a net return multiple of 4.5x and a net internal rate of return of 22.5 percent. Mekong’s $3.5 million investment in Mobile World in 2007 remains one of the most impressive private equity exits in Vietnam, delivering a gross IRR of 60 percent and a return multiple of 50x for its investors as of last year.
The deal scene in South-East Asia, market participants tell us, has evolved from state-backed listed companies in Vietnam and entrenched family conglomerates like those in Thailand, the Philippines and Indonesia, to a more robust and open private sector.
Much of the region’s growing appeal is driven by its young and increasingly wealthy middle class, beyond that, governments are also ensuring it’s easier for private equity to access markets. Under President Joko Widodo, Indonesia is breaking down restrictions on foreign ownership. In Vietnam, privatisation of its state-owned enterprises has picked up steam. Malaysia, Thailand and the Philippines have seen a more stable political backdrop as well as an increasing number of companies of investable size.
Limited partners have also taken notice of these changes. South-East Asia was the most attractive emerging market in 2018 for GP investment, according to EMPEA’s latest Global Limited Partner Survey. The region has held the first or second spot in the rankings for the last six years, although challenges such as limited GP relationships and currency risk still remain.
Against this backdrop, firms are entering new markets. KKR in October teamed up with Chinese tech giant Tencent for its first deal in the Philippines, an up to $175 million investment in tech company Voyager Innovations. CVC Capital Partners, already a well-established investor in Indonesia, struck its first deals in Vietnam and Cambodia last year, while Kuala Lumpur-based Creador set up an outpost in Ho Chi Minh City this year.
What’s more, South-East Asia could be well-placed to benefit from the growing divergence between the US and China. While it isn’t clear whether the trade war will result in an uptick in private equity investments in the region, there is more likely to be a rise in strategic outbound M&A from China as players in the mainland seek to buy and build production capacity, notes Siew Kam Boon, a Singapore-based partner at law firm Dechert.
She warns, however, that even though South-East Asia will take a larger percentage of global trade, it’s harder to predict on a net basis taking into account the broader negative impact of a trade war.
“[A trade war] leads to uncertainty. Uncertainty leads to cost of financing increasing,” she says. “We’re also working against a backdrop of a larger amount of protectionism in countries.”
Competition for good opportunities also remains fierce in the region. According to Bain & Company’s 2018 Asia Private Equity Report, 70 percent of GPs surveyed expect competition to increase moderately or significantly this year. The biggest threat is local or regional private equity firms, followed by strategic or corporate players.