Print Edition
May 2013 
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Private Equity In South East Asia |
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Richard Summerfield, February 2013 |
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Throughout the last decade the emerging markets (EM) have become increasingly popular destinations for many investors. While the BRIC nations have garnered the majority of headlines, and therefore the lion’s share of available investment capital, the South East Asian region has been growing rapidly. According to a December 2012 report published by the Boston Consulting Group (BCG) – ‘Private equity in South East Asia: increasing success, rising competition’ – the region has now become a genuine hotspot for investors.
Historically, there have been considerable drawbacks to investing in the South East Asian market. Social and political instability, coupled with volatile and occasionally catastrophic environmental conditions, have often deterred investors from developing a foothold in the region. Concurrently, strict ownership regulations, alleged government corruption, and underdeveloped management structures have also caused investors to baulk in the past.
However, as onerous ownership regulations are relaxed across the region, and the wider political and economic landscapes have become more liberalised, the area has grown increasingly attractive to private equity (PE) investors.
In recent years a number of the biggest names in PE have been drawn to South East Asia.
In conjunction with the increasingly liberalised landscape of the region, the considerable economic might now wielded by South East Asian nations has also served to attract PE investment. To that end, the report notes that the 10 member states of the Association of South East Asian Nations (ASEAN) now boasts a regional population of approximately 611 million and a collective GDP of $3.3 trillion, a figure which is growing by approximately 8 percent annually. As such, South East Asia is the now the third largest EM bloc behind China and India. The traditional BRIC powerhouses of Brazil and Russia trail some considerable distance behind.
Connectivity
As South East Asian economies have blossomed exponentially in recent years, government control over certain service sectors has been relaxed. Ownership legislation surrounding the healthcare and education sectors in particular has been reformed. Such liberalisation has created lucrative opportunities in a number of South East Asian nations, including Thailand, Malaysia and Vietnam.
In recent years, Indonesia has gone to great lengths to dismantle its once stringent ownership regulations. The 2007 ‘investment law’ and the 2011 ‘master plan for acceleration and economic development’ are just two pieces of legislation passed to improve levels of foreign direct investment (FDI) into the country. To that end, Q3 2012 saw a 22 percent rise in FDI compared to 2011, and the government’s investment coordinating board also forecast that FDI increased overall by 26 percent in 2012. The foreign shareholding limit has also been raised in a number of Indonesian industries – foreign firms can now own 49 percent of staple food plantations, 95 percent of power plants and, in the construction sector, the ceiling for foreigners has been raised from 12 percent to 67 percent.
Malaysia has also been actively seeking to create and expand its PE sector, while other countries such as Myanmar, under its new President Thein Sein, have been implementing policies designed to carry out broad social, political and economic reforms. These reforms are intended to usher in a new age of democracy, as well as a free and open market economy. As BCG notes, in this type of environment, the possibilities for PE firms that can demonstrate patience and foresight are almost limitless.
Intraregional relations within South East Asia nations are also improving rapidly, according to the report. Despite the very distinct disparities in business culture between different countries within the region, economic integration is on the increase. Although the South East Asian nations were impacted by the global financial crisis, trade within the region has rebounded and is rising once again.
Furthermore, in the spirit of improving intraregional relations, and in accordance with the timetable set out by the ASEAN, a formal, universal approach to trade and business will be adopted in 2015 when the ASEAN community is created. The community will establish a common single market among member states. In preparation, many firms, such as AirAsia, Maybank and CIMB, have already been looking to establish operations across several community countries. The establishment of the community will also lead to a freer flow of labour and reduced tariffs. Although it remains to be seen if the organisation can be a success, the proposal itself has already led to increased integration between companies and countries, as well as more intense competition among firms vying for business.
Natural resources fuel growth
One of the key driving forces behind the prosperity of the South East Asian region is the plethora of natural resources in the area. There has been, and still is, a strong demand for the region’s rich caches of oil and gas, palm oil, minerals and agro-commodities. The exploitation of this overabundance has not only increased wealth within the region, but has also fuelled the growth of associated industries such as oil services, logistics and transport.
Parallel to the exploitation of the region’s natural resources has been the rise of the burgeoning middle class in South East Asia. The creation of a large, consuming middle class has been a key feature of the astonishing financial ascent of the region. It is estimated that 102 million households or 145 million people will have achieved middle class status – an annual income of more than $3000 – by 2015. Currently there are around 75 million middle class households in the region. The rise of the middle classes, much like the natural resource sector, has had a knock-on effect on other industries; retail, consumer products, health care, education, transportation and telecommunication sectors have all stood to benefit from the increasing monetisation of the new middle classes and the aforementioned relaxation of ownership legislation.
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