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Why Private Equity Firms are betting on Red-Hot Southeast Asia

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Southeast Asia is taking the centre stage – once again. In 2011, Southeast Asia’s aggregate GDP topped US$2 trillion; the region is home to young and increasingly affluent population of 600 million; …

Southeast Asia is taking the centre stage – once again. In 2011, Southeast Asia’s aggregate GDP topped US$2 trillion; the region is home to young and increasingly affluent population of 600 million; and “growth in the region’s six largest economies is forecast to accelerate by, on average, 4.5% to 6.7% compounded annually through 2015.” Great headlines that make global private equity firms take notice.

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  • 1. Why Private Equity Firms are Betting on ‘Red-Hot’ Southeast Asia Darwin Jayson MarianoSoutheast Asia is taking the centre stage – once again. In2011, Southeast Asia’s aggregate GDP topped US$2trillion*; the region is home to young and increasinglyaffluent population of 600 million; and “growth in theregion’s six largest economies is forecast to accelerate by,on average, 4.5% to 6.7% compounded annually through2015.” Great headlines that make global private equityfirms take notice.For the uninitiated, private equity (PE) funds are the reserve of capital that isinvested by private equity companies. PE funds are usually set up as either alimited liability company or a limited partnership (LP). There are, however,other types of structures that exist which are also controlled and managed bythe specific private equity firm that is acting as the general partner (GP).** ____________________ *Source: Bain Southeast Asia Private Equity Brief **Source: secondventure.com
  • 2. So, why does Southeast Asia generate a lot of 13 deals worth close to US$900 million. Dealbuzz lately among PE investors looking for value in Thailand is at US$114 million overgrowth and value? Possibly because the the same period. On the sell side, firms andregion is „sizzling hot‟ these days and is fund managers are able to take advantage ofexpected to remain so in the next couple of their investment on Southeast Asian assets.years. “In 2011, Navis Capital Partners sold‘Red-Hot’ Southeast Asia Singapore-based King‟s Safetywear Limited, a manufacturer of industrial safety footwearIn a recent Asia-Pacific Private Equity and personal protective equipment, to US-Outlook 2013 report by Ernst & Young, based Honeywell International forLuke Pais, Ernst & Young‟s M&A Leader US$345.8m. Navis purchased the companyfor the ASEAN, opined that investors‟ in 2008 for US$83.5m. That deal wasstrategy is shifting. “Historically, China and preceded by Navis‟ sale of Linatext, aIndia have been high on limited partners‟ Malaysia-based maker of specialty rubber-(LPs) radars, but increasingly we are seeing a based products purchased for US$31.1m, toshift in investment strategy and a recognition the Weir Group for US$200m.” the reportof Southeast Asia as a destination for that says.shift.” he says. “Curiosity from LPs ispiquing, and Southeast Asia is becoming a Robust fund-raising activity has also beenvery exciting market.” seen in the region. According to Bain Southeast Asia Private Equity Brief, PELet‟s look at some deals that happened lately. funds focused on Southeast Asia “attracted US$1.6 billion dollar in new capital” lastGathering from the same EY report, we‟ve year. And that may be just the tip of thelearned that since 2011, Indonesia has seen iceberg.
  • 3. “Historically, China and India have been high on limited partners’ (LPs) radars, but increasingly we are seeing a shift in investment strategy” Luke Pais, Ernst & Young’s M&A Leader for the ASEAN“Three funds focusing exclusively oninvestments in Indonesia and six smaller onestargeting opportunities in Vietnam arelooking to line up more than US$2.5 billion.“Twenty-two funds focused on SoutheastAsia are currently on the road, aiming toraise an aggregate US$6.4 billion forinvestment in the region. This is in additionto the capital that global and pan-Asian fundswill deploy into the region.”Even countries that are not a traditionalinvestment destination are making goodshowing. One such example is thePhilippines.“The Philippines awaits its share ofinvestment. Historically, private equity firmshave had a fleeting interest in the country,opening and closing representative offices asneeded. This was largely due to politicalinstability, but that is changing. The currenttrend is seeing a rapid shift away fromcorruption to transparency, fostering a more signs that things are doing well,welcoming environment for international economically, in the country.businesses and creating confidence amongforeign investors,” says Renato Galve, Head Bain & Company and the Singapore Ventureof Transactions Advisory Services in the Capital & Private Equity AssociationPhilippines. (SVCA) ran a survey lately to look at the region‟s prospects and results revealed thatIn fact, Bloomberg reports that the there are clear signs of optimism goingPhilippines Beats Global Stocks by an around, “which could mark 2012 as the startamazing 124% as of Feb 2013, showing of Southeast Asia‟s time to shine.”
  • 4. 40% Nearly 80% expect deal of respondents plan to invest more than activity to increase US$150 million in 2012Source: Bain-SVCA Southeast Asia Survey The financial foundations for PE expansion Douglas Clayton, Founder & CEO of look solid. Debt issuance is at record levels. Leopard Capital, told CNBC.com “Myanmar Mergers and acquisitions activity is buoyant. will be one of the great investment stories of Singapore‟s pipeline of initial public 2013, it‟s changing very rapidly now. This is offerings is full. a country, for 50 years that missed out on the whole Asian miracle. ‘Frontier Markets’ are also doing well “It is going to catch up very rapidly as the reforms take place…. everything is being As investors try to maximize growth in changed, (from) the foreign exchange regime emerging markets, PE firms are also looking to the foreign investment code, and so on,” beyond traditional economic powerhouses he says. and are now increasingly turning their attention on frontier markets including In addition, Bangladesh and Cambodia, Myanmar, Bangladesh and Cambodia to because of its increasing strength in fulfil the funds‟ future growth potential. manufacturing and growing consumer markets, are expected to do well. Frontier Markets is an economic term which was coined by International Finance “Bangladesh is one of the cheapest places to Corporation‟s Farida Khambata in 1992. It is manufacture in, and as China gets more commonly used to describe a subset of expensive, factories are rapidly moving down emerging markets. The frontier equity into places like Bangladesh and Cambodia,” markets are typically pursued by investors Clayton adds. seeking high, long term returns and low correlations with other markets.*** ____________________ ***Source: Wikipedia.com
  • 5. Risks are abundant –but so too are thetreasures of a region Ernst & Young’s M&A Leader for the ASEAN Luke Pais,ripe for privateequity and foreigninvestors. All Aboard! With all these developments in the region, coupled with the fact that US is still beset Learn more about capitalising on with great economic challenges and Europe your private equity investments in still mired in difficulties, Southeast Asia is Southeast Asia and learn about now starting to show its prowess in terms of investor attraction. There are still some issues successful exit strategies at the 8th that need to be addressed – no doubt about Annual Private Equity Southeast Asia that – including transparency, standards and Summit 2013. regulatory frameworks, these things are solvable and are outweighed by the vast To find out more, visit potential that the region holds. www.private-equityseasia.com A quote from the Ernst & Young report probably says it best: Risks are abundant – but so too are the treasures of a region Disclaimer: Please note that we do all we can to ensure accuracy and timeliness of ripe for private equity and foreign the information presented herein but errors may still understandably occur in some cases. If you believe that a serious inaccuracy has been made investors. please let us know. This article is provided for information purposes only. IQPC accepts no responsibility whatsoever for any direct or indirect losses arising from the use of this report or its contents. About the Author: Darwin Jayson Mariano is the Online Content Manager and the Regional Editor - Asia for International Quality & Productivity Center (IQPC), a leading producer of events and conferences for business leaders around the world. You can contact him on Twitter @whoisdarwin or email darwin.mariano@iqpc.com.sg References: http://www.secondventure.com/Private-Equity-Funds-and-General-Partners.asp | http://www.ey.com/Publication/vwLUAssets/Asia-Pacific_private_equity_outlook_2013/$FILE/Asia- Pacific_private_equity_outlook_2013.pdf | http://www.bloomberg.com/video/philippines-beats-global-stocks-by-124-sA8WLH1xSSWeXPDUFHyQfA.html | http://www.cnbc.com/id/46451418/Private_Equity_Firm_Bets_on_Asiarsquos_Frontier_Markets |http://www.forbes.com/sites/baininsights/2012/06/26/can-private-equity-strike-gold-in- emerging-markets/ | http://www.bain.com/Images/INDUSTRY_BRIEF_Southeast_Asia_Private_Equity.pdf