SOUTH EAST ASIA: THE MIDDLE GROUND

Southeast Asia is often overlooked in discussions on private equity in the Asia Pacific region, having not seen the same spike in activity as other Asian markets such as China, India or even Australia in the past four to five years.

As Nick Bloy, co-managing partner of Kuala Lumpur-headquartered Navis Capital Partners, points out, the number of deals getting done in Southeast Asia is ultimately a “function of how much capital investors are willing to allocate to the region”.

While Southeast Asia as a whole has a sizeable economy, the fact remains that it is not one market: it is instead an amalgamation of different economies at varying stages of development. Many LPs have followed the ‘law of large numbers’ and made their first foray into Asia with commitments to funds investing in India and China, because these are simpler – and more accessible – markets to invest in.

Alun Branigan, Singapore-based partner at emerging markets private equity firm Actis, says the region's disparity poses challenges. “Southeast Asia is much more complex and nuanced – it is far more difficult to understand than other single markets.”

NO ZERO – SUM GAME
Although the fragmented markets of Southeast Asia remain overshadowed by those of India and China, this should not detract from their prospects. Pote Videt, a Bangkok-based managing director at Lombard Investments, says the reality is far from “a zero-sum game”.

In his view, one of the region's compelling investment theses is that its growth patterns are linked to Chinese domestic demand. “Many Southeast Asian countries have a sizeable trade surplus with China,” he says. And while these economies do not have the same rates of growth as China, as long as China's growth continues apace, their companies stand to benefit.

Furthermore, the region has eyecatching demographics and macro-economic dynamics – specifically, a huge population of about 580 million with rising incomes. “That makes this region a great consumer story,” Branigan says. He adds that anything that plays to the theme of rising wealth in the region – be it consumer goods, healthcare services or even financial services – has the potential to do well.

The abundance of natural resources in the region also presents interesting opportunities. Firms can either invest directly or in companies in supporting sectors. In September, for instance, energy-focused private equity firm First Reserve invested $500 million for a 99 percent stake in KrisEnergy, a newlyestablished company that aims to build a portfolio of oil and gas exploration, development and production assets across Southeast Asia.

In recent months, there has been a drop in deal activity, fund managers say. But now there is less capital in the market and entrepreneurs cannot get credit easily to fund their businesses. In these circumstances, Branigan expects private equity to become an important source of capital for companies in the region.

Managers also talk about attractive valuations. Videt, for instance, says that the difference between Southeast Asia and other Asian markets is “you can get similar growth at lower valuations – which is where you can achieve superior returns”.

Furthermore, the IPO markets are in better shape now than a year ago and Chinese and Indian multinational corporations are emerging as prospective buyers as they look to expand in the region through the acquisition of assets. This is helping to address the lack of exit opportunities, which has been a factor limiting private equity activity in the region thus far.

STILL GROWING
Most importantly, perhaps, the region is still growing and maturing. As corporate governance and the banking system in Southeast Asia improve further, the likelihood is that investments will increase as well.

In recent years, the region has seen the growth of a few country-specific managers such as Quvat Management, Saratoga Capital and Northstar Pacific Partners in Indonesia; Leopard Capital, which currently invests in Cambodia; and Mekong Capital in Vietnam.

And as these country-focused private equity groups look to expand their investment remit, they will start to look at Southeast Asia as a regional block, predicts Bloy. As barriers between various regional economies recede and the economies become more integrated, the expansion of local firms' operations is to be expected.

LN Sadani, a Singapore-based director at Paris-headquartered AXA Private Equity, believes private equity firms between them can comfortably deploy between $500 million and $1 billion annually in Southeast Asia.

He expects to see a fairly vibrant private equity market blossom in the region, and says he would be surprised if assets under management in Southeast Asia did not rise above $20 billion in the next five years.