Private equity in South East Asia

February 2013  |  FEATURE  |  PRIVATE EQUITY

Financier Worldwide Magazine

February 2013 Issue

February 2013 Issue

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.


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.

Emerging from the BRIC shadows

According to the report, a key area of growth for the region going forward will be the manufacturing sector. As inflation has drastically eaten into China’s cost advantage, companies across multiple sectors are being drawn to the much cheaper South East Asia region. The migration of manufacturing out of China has been spurred by South East Asia’s competitive costs and its large, young and increasingly urbanised workforce.

When compared with the traditional BRIC manufacturing giants China and India, the climate for investors in South East Asia looks even more positive. There is currently a dearth of competition in the region and, subsequently, that lack of opposition has caused existing profit margins to be significantly higher than in rival emerging regions. The report notes that in 2010 South East Asian revenues for consumer financial services reached $91bn, roughly half of China’s $184bn. However, because average margins in South East Asia were 4 percent versus 4 percent in China, the profit pool in South East Asia was roughly $3.6bn, virtually identical to China’s. PE firms that are proactive in developing investments around manufacturing growth will be well placed to exploit changes in trade policies and make the most of the migration of manufacturing out of China and India.

As manufacturing blossoms, so too will the export sector. The growth of the exports market in South East Asia has put increasing pressure on the region’s underdeveloped infrastructure systems. The region’s expanding and urbanised middle class has also caused automobile ownership to become more widespread. This rapid proliferation of automobiles and the growing demands of the export sector have prompted many nations to begin ambitious, long-term, large-scale projects, aimed at improving the region’s road networks, as well as investing in new and improved ports and transportation facilities. These infrastructure developments represent excellent investment opportunities for firms that are willing to expand their deal horizons and make significant, large-scale investments.

Some of the best investment opportunities in the region will be found in sectors where surging growth is expected. Consumer sectors such as beauty products, dental care, life insurance and private education are expected to grow considerably in the future. The high tech and new media sectors were also highlighted by the report as areas in which PE firms can look to make profitable inroads. Firms in the region have not previously given much heed to these sectors; only 15 transactions have taken place in this sector in the region in the past five years, compared to 300 in the US and 500 in Europe during the same period. With South East Asian smartphone users due to expand to 71 million in 2015, up from the current figure of 43 million, PE firms can look to develop what will be one of the largest smartphone markets in the world.

Sovereign knowledge

The report stresses that PE firms entering the South East Asian market for the first time must be prepared for an entirely different business culture than they may have previously encountered. It is imperative that firms respect the differences between South East Asian nations and deal with each individual nation on its own merits. Rather than attempting to inappropriately impose an existing US or European business model onto the region, investors should modify their plans appropriately and sensitively in order to appeal to a particularly idiosyncratic region.

One of the most successful routes into the region will be achieved by exploiting local knowledge of the markets. Many successful firms have been establishing local offices in the area, as well as entering into joint ventures or minority stake holdings with sovereign wealth funds. By employing local workers, and consulting native funds, firms can rely on strong local knowledge; this will assist firms when attempting to navigate any potentially tricky political barriers they encounter. They will also be able to locate a steady flow of business opportunities other firms might not be able to identify.

Furthermore, the report suggests that PE firms should focus on carve out businesses. Due to the comparatively low labour costs in the region, there are many carve out opportunities to be had in back office operations, support functions and business process outsourcing. The fragmented nature of many business sectors in the region will also provide PE firms with excellent prospects for roll ups and build and buy businesses.

As the South East Asian region continues to grow there will be ample opportunity for PE firms to continue to invest. The continued expansion of the consuming middle classes, the region’s political and economic liberalisation and sustained growth will lure the biggest players in global investment. However, according to BCG, the influx of investors into the region and a flurry of dealmaking have driven asset prices sharply upward, narrowing “the corridor of success”. Consequently, in order to continue to profit in the region, investors must begin to look beyond the boundaries of conventional sectors.

© Financier Worldwide


Richard Summerfield

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