High valuations in some of Southeast Asia’s economies are creating challenges for private equity, according to Sigit Prasetya, managing partner of CVC Asia Pacific, speaking at the CFA Institute Annual Conference in Singapore.
In 2010, companies in Indonesia were trading at six – seven times EBITDA and today they are trading at about 15 times EBITDA, said Prasetya, who spoke on the topic of ‘Private equity investing in Southeast Asia: Anatomy of a boom”.
Malaysia and Singapore have offered more stable valuations over the trailing five years, he added.
However, the expected flow of capital into Southeast Asia from several global firms raising multi-billion dollar Asia funds could send valuations higher, some sources have pointed out.
CVC, for example, intends to launch its fourth Asia fund in June with a target of $3 billion, Private Equity International reported earlier. Kohlberg Kravis Roberts, TPG Capital and the Carlyle Group are also raising multi-billion dollar funds for Asia.
Increasingly, family groups [in Southeast Asia] aim to professionalise management teams and put a stronger focus on shareholder value than in the past.
Increased investment interest and deal activity in Southeast Asia has come on the back of stable political environments, growing economies and relatively stable currencies, Prasetya said. But he emphasised “this is very much the early days of investing”.
To put things in perspective, he said that in the last five years, the entire region has had less than 20 deals larger than $200 million in size.
CVC has completed nine investments in Southeast Asia in the past six years, including Indonesia’s first LBO in 2010: the acquisition of Matahari Department Stores, which Prasetya led. The firm partially exited Matahari in March by floating 40 percent of shares on the Jakarta Stock Exchange in a deal worth $1.3 billion.
Prasetya said the equity markets in the region are more liquid now than a few years ago and that makes exiting investments a little easier. Moreover, the economies in the region are growing quickly and more importantly, they are generally open to foreign private capital coming in.
Opportunities for private equity will come from the many large family-owned businesses in Southeast Asia that are at a stage of generational transition. Increasingly, family groups aim to professionalise management teams and put a stronger focus on shareholder value than in the past, he said.
Another big change in the region has been the willingness of local banks to fund large transactions. Earlier, global banks were the key providers of acquisition capital, but many of them now face balance sheet constraints and regulatory issues in their own markets and are less active.
Local banks are stepping up. “These banks are now able to provide financing and at very attractive terms.”