Asian powerhouses such as China and India may attract far more capital from private equity investors than the likes of Thailand and Vietnam, but some firms are quietly making hay in Southeast Asia.

Such investing is not without its difficulties, however, as was noted by a panel of PE specialists from four different Southeast Asian countries at the Asia Private Equity Forum in Hong Kong last week.

As a grouping of relatively small countries, Southeast Asia is a highly complex and inefficient market for private equity investors, says Rodney Muse, co-managing partner of Navis Capital in Kuala Lumpur.

One thing that makes the region difficult to invest in is that large asset managers do not view it as an investible asset class in itself, he says, but that also helps to make it profitable for those who know what they’re doing.

Muse says Navis stays out of countries such as China because of the depth of competition. “We stick with what we know,” he adds, “and [Southeast Asia] is inefficient and under-intermediated.”

He points to the greater sophistication and maturity of PE markets such as Australia, China and India, where potential investors are “chaperoned” and given detailed prospectuses on deals. “Australia is the most over-priced and most over-funded market I know," adds Muse, “and India is catching up [in that regard] very quickly.”

Other panellists make similar points. For instance, David Do, managing director at Vietnam Investments Group (VIG) in Ho Chi Minh City, says Vietnam is a nascent market with a lot of growth potential but a limited number of experienced managers.

General partners in Southeast Asia need to develop “local and sustainable teams who really become a part of the local business fabric", argues Pote Videt, managing director at Lombard Investments in Bangkok.

They will thus have the ability to gain access to family patriarchs and matriarchs, as well as understanding less obvious political and regulatory risks.  

A GP's local relationships are as important in business in Southeast Asia as they are in China, agrees Hanjaya Limanto, Jakarta-based managing partner at Aureos Capital.

“You need to know the families and the industry [involved in a deal] very well,” he says. “Until I’m invited for dinner with the family, then I don’t feel they consider me a true partner.”

Aureos invests in five Southeast Asian countries – Indonesia, Malaysia, the Philippines, Thailand and Vietnam – and has offices in each of these countries, plus one in Singapore.

Videt notes that the universe of opportunities in the region mainly consists of growth-type deals, as opposed to controlled buy-outs, of which Lombard has executed both.

Careful planning and due diligence are required for all PE deals in Southeast Asia, agree the panellists. “Since substantive relationships and developing trust are key to accessing family-run businesses for growth equity, it takes us 2.5 years on average from the initial meeting to closing the deal,” says Videt. “So we come to know the family very well.

“During that multi-year period, both sides are performing due diligence on each other,” he adds. “From that perspective, the risk of such transactions is lower because the due-diligence process takes place over a couple of years.”

Lombard’s execution focus is on downside protection, adds Videt. "We are practical in the sense that we focus on what have been problem areas in the past, such as affiliate transactions, risk management (financial or operational mismatch) and making sure our partners do not stray from their areas of core competence," he says.

Another issue GPs should be aware of is funding. VIG looks closely at the capital structure of the target company, says Do, especially if the target is a capital-intensive business. In Vietnam, banks tend not to provide particularly long-term financing, he notes, so it’s important to make sure the company is sufficiently funded.

Something else the panellists all agree on is that they hardly ever encounter competition in deals they work on. They would presumably like to keep it that way.