Family groups ‘ruthless’ in Southeast Asia

GPs must be wary of competing and partnering with the region’s powerful family groups.

Family groups continue to control Southeast Asia’s economies making them impossible for private equity to ignore, according to a panel of Southeast Asia experts at the HKVCA 4th Asia Private Equity Forum in Hong Kong this week.

“Family conglomerates still dominate the scene in Southeast Asia, especially in Indonesia,” Sandiaga Uno, president director at Indonesia-focused private equity firm Saratoga, said.

“They can be your partner or your competitor. In Southeast Asia it is all about relationships and you have to have good relationships with these families – the top 20 are very strong, very cash rich, they have learnt from the [previous] Asian financial crisis and don’t want to let it happen again.”

One of the unique challenges of investing in Southeast Asia is dealing with family conglomerates that own large portions of each individual country’s economy.

The key difficulty for private equity is facing competition from these groups, who are extremely liquid and prepared to pay high prices.

“If there is an asset available, some of these families actually can be very aggressive,” Uno said.

Fellow panelist Rodney Muse, co-founder and managing partner at Navis Capital Partners, added, “They are ruthless competitors, they know what their strengths are and use them wisely.”

Aside from their unrivalled connections in their respective markets, family groups also often have the advantage of being able to pay the highest price.

For example, while a GP might be willing to pay 6x EBITDA for a business, family conglomerates are known to have come in at 40x EBITDA, according to Karam Butalia, executive chairman at KV Asia Capital. “At some point you just say – ‘It’s yours’”, he commented.

However, family groups can be a great partner for private equity firms to work with and they are increasingly looking for operational expertise to help grow their businesses.

CVC Capital Partners famously teamed with Indonesian family conglomerate the Lippo Group to invest in the country. Lippo owns department store Matahari, from which CVC had a partial exit in March last year gaining a 7-8x EBITDA, Private Equity International reported earlier.

Brian Hong, senior managing director at CVC who was speaking on the panel, said that the firm has found its relationships with family groups to be an ideal fit as long as you agree on the same goals. While the conglomerate is likely to bring a longer-term view, private equity brings a sense of urgency that can help a business grow or improve.

“Our strategy in Southeast Asia revolves around partnering with local families. The [main] reason is that they actually own the best assets,” Hong explained, emphasising that “we don’t with a family until we’ve spent many, many months getting to know them, understanding their interests, getting to know their friends and family.”

However, others warn that families can be ruthless partners as well.

Navis' Muse said, “As partners, they don’t like to give control. Even if they say they’re prepared to do it, deep down it is not natural to them. So recognise to the extent they say they are willing to give up control, they’re probably not telling you something.”

“Quite often the family conglomerate will seek to buy back the business from you and at that point they may try and cap your returns [while] having a lot of very shrewd ways of making sure you can’t sell the business to anyone but them.”