When people talk about Southeast Asia’s private equity potential, they usually mean Indonesia and Vietnam. Why does Lombard have a particular interest in Thailand, given its political situations?
Thailand is Southeast Asia’s second-largest economy, and today enjoys a truly thriving private business sector with steadily improving corporate governance practices. We’ve been able to find highly rewarding opportunities backing fast-growing, middle market companies needing fresh capital and seeking to increase their competitive advantage. If you are a local PE team, this can lead to becoming a repeat, long-term partner for strong business families who own market leading companies, often considering expanding offshore.
For the last five years, Thai politics has captured headlines globally while the underlying strength of the economy has been underreported. Despite political uncertainties in 2010, Thailand’s economy still grew at a nearly 8 percent rate, and the stock market was one of the best performing in Asia. Most of our consumer and domestic demand sector companies actually generated above-budget numbers during the period of political disturbances in April and May 2010 – surprising, but reflective of the depth and resilience of the economy. Importantly, no matter what political party or coalition leads Parliament, there are no major “ideological” issues which could adversely impact foreign investors – in other words, government policies would remain pro-business and squarely aimed at attracting foreign capital and FDI.
What does a typical private equity deal in Thailand look like?
Although we have completed some control buyout transactions, we see the greatest opportunities in middle market growth – generally for influential minority stakes of up to $50 million.
About 70 percent of our portfolio companies earn their profits from the increasing spending power of the rising middle class. Since branded consumer product companies are hard to acquire at reasonable valuations, we have focused on proxies for the domestic demand sector such as local retailers, food service, consumer finance, media/entertainment and low-cost, privately financed housing. It’s an interesting dynamic that this consumption-led growth is extending to include provincial markets and secondary/tertiary cities – which require on-the-ground understanding to target the appropriate investment opportunities.
For the internationally competitive sectors, we focus primarily on areas where Thailand will remain competitive over the long run: auto parts, tourism and healthcare. There are some surprising areas of strength – Thailand is a major hub for white goods production, for example, and it is one of the world’s largest producers of auto and residential air conditioners.
What challenges are unique to doing deals in Thailand?
As in other [emerging] markets, the major challenge is building and retaining a strong local team that practices true teamwork and embraces the long term outlook of the private equity approach to value creation. In Thailand, the key business and government communities remain surprisingly small, yet many complimentary contact points are needed to effectively source deals and then add value to portfolio companies. So a cohesive, seasoned team becomes much more valuable than its individual members. Yet even with strong local teams, you cannot underestimate the time needed to access and complete a high quality transaction. Auctions are rare, and many good deals do not involve financial intermediaries. But, more often than not, effectively sourcing and closing a great deal takes years, not months