Southeast Asia is gathering steam as a destination for private equity deals, with global buyout firms boosting their on-the-ground presence and making notable deals.
While Indonesia remains the PE hotspot, other Asean countries are attracting interest.
KKR earlier this month announced a $200 million investment in sauce maker Masan Consumer Corporation, marking the largest investment in Vietnam to date by a private equity firm. The company, part of Vietnamese conglomerate Masan Group, received $159 million from KKR in 2011.
“The awareness of Southeast Asia and the [planned] Asean Economic Community from outside the region is at an all-time high," says Nicholas Bloy, managing partner of Navis Capital.
The Kuala Lumpur-based firm, which manages more than $3 billion, has been making private equity investments in Southeast Asia since 1998.
Navis expects PE inflows to Southeast Asia to increase in coming years. An internal rate of return of 15-24% “should be the expectation of the region”, says Bloy.
Aside from KKR’s landmark deal in Vietnam, other global buyout firms have recently made significant moves.
In November, KKR launched a Southeast Asia operation in Singapore while Carlyle made its first deal in the region, investing about $100 million in Indonesian telecom towers operator Solusi Tunas Pratama. Earlier last year, TPG co-founder David Bonderman visited Myanmar in May.
However, Navis co-managing partner Rodney Muse notes: “The universe of big buyout deals is really small in Southeast Asia, and the risk for them is that they all chase a very limited number of opportunities.”
Navis does not see greater competition in Asean as a big threat, says Muse. "[PE firms] have been flying down to Southeast Asia for a long, long time and people have periodically opened satellite offices. It’s never really directly impacted us."
While Navis focuses on buyouts – taking controlling stakes in companies – it does not use leverage and thus would target deals with an enterprise value of no more than $100 million.
Global firms, by comparison, would seek larger deals with an enterprise value of $600 million to $1 billion, using leverage, says Muse. However, he acknowledges that the presence of more PE firms on the ground may raise valuation expectations on the part of business owners.
An initiative by Asean countries to establish an economic community – a tariff-free, unified trade and investment bloc – will help to generate greater investor interest and inflow in the longer term, although Bloy predicts that it will likely take longer than two years to establish, breaching the target goal of 2015.
“There will be a two- or three-year delay versus what was expected,” he says, adding: “This process of economic integration is not without risk. There’ll be problems along the way.”
Among them is the reaction of those with “vested interests, incumbents with a lot to lose”, who may resort to political connections to “slow things down”, says Bloy.
“We’ve been investing in Southeast Asia for 15 years and we’ve seen plenty of dirty tricks.”
His sentiments echo those of other PE investors who acknowledged the prevalence of corruption in the sub-region.
However, the political will to create the Asean Economic Community is high, “driven by the rise of China as a manufacturing power and a global power”, says Bloy.
“Governments in Southeast Asia realise that they need to have an economic voice and a political voice that is bigger than any single country ... in a century when China will become the dominant economy not just in Asia-Pacific, but the world,” he says.