Few exits, limited investor appetite to test S-E Asia’s PE managers
Despite difficulties associated with the region, most of them are likely to soldier on
PRIVATE equity (PE) funds operating in South-east Asia will need a strong domestic presence to pull off roll-ups and trade sales in the face of mounting challenges, including difficulties exiting investments and raising funds.
Investors are showing a preference for larger funds and managers with a pan-asia focus, but various industry players The Business Times spoke with said any fund that hopes to succeed in South-east Asia will require a focused approach to sourcing for deals – whether for buy-and-build strategies, or for exits.
“South-east Asia is a very fragmented market,” said Angela Lai, vice-president and head of Asia-pacific and valuations at data provider Preqin.
“The interest is there. People see the potential of South-east Asia – it has the right demographics, it’s growing from a smaller base, and it has the right opportunities. The challenge is deal sourcing.”
A survey by Bain found that South-east Asian PE managers were the most likely among Asia-focused managers to be concerned about deal opportunities and the potential for exits.
For that reason, Lai said, investors are most likely to favour managers with a very local presence, and those that “have a niche rather than being a generalist”.
Those are among the selling points being trotted out by Seatown Holdings, an investment manager whose list of funds includes a private equity fund that has been active in South-east Asia.
Seatown’s ultimate owner is Singapore state investor Temasek, and its past investments include ecommerce and ride-hailing platform Goto and rival e-commerce platform Sea.
Eddie Ong, Seatown’s deputy chief investment officer and managing director for private investments, said success in the region requires “taking a strategic approach that is tailored to the unique opportunities of the region”.
“The nuanced and fragmented nature of economies in South-east Asia often poses a challenge for private equity players without the onthe-ground expertise and regional knowledge,” he added.
“Due to South-east Asia’s nature as largely a collection of relatively small emerging economies, we need to work on building up smaller companies and developing M&A strategies that grow their size through horizontal and/or vertical integration.”
EQT, a Stockholm-listed investment group, has a similar emphasis on dealmaking. “Our success in the region is due to our prior investment outcomes, our consistent team, and our focused approach to deal selection,” said Janice Leow, partner in the EQT Private Capital Asia advisory team.
“We are highly focused on deals that build on our expertise and network, and on deals in sub-sectors with good future tailwinds.”
Despite the difficulties associated with South-east Asia, most managers – including Seatown and EQT – are likely to stick with the region.
James Wood, a partner at law firm Hogan Lovells whose area of expertise includes international fundraising in the PE space, said he has not really seen managers pull out.
“Relocation is always a challenge – successful private-market
investors need a track record with local knowledge,” said Wood. “It’s never as easy as relocating to a new geography to roll out the same strategy. The market dynamics are nuanced, and a formulaic approach seldom works in practice.”
Both Seatown and EQT continue to have an optimistic outlook on the region.
“Domestic GDP growth in many South-east Asian economies is still strong, and a rapidly expanding middle class underpins the continued expansion of consumption spending,” said Seatown’s Ong.
“With the valuation gap between developed markets and South-east Asia continuing to widen, we think, at some point, we will see the financial performance of companies in the region drive valuations to play catch-up, and a further boost could also come as China recovers and investors get excited again.”
EQT’S Leow, too, said activity is “already ticking upward”. She expects investment activity in the region to pivot away from a focus on growth equity and towards the buyout market this year.
EQT in May announced the close of a mid-market growth fund at US$1.6 billion – more than double the fund’s original target size of US$750 million. The fund will invest in high-growth mid-market companies across Asia, prioritising India, South-east Asia, Japan and Australia; and focusing on the technology, services and healthcare sectors.
Funds such as this one, with a pan-asia mandate, are likely to be more palatable to investors, said Preqin’s Lai. She noted that fundraising activity among South-east Asia-focused funds has faded in recent years.
“South-east Asia fundraising is a very small piece of the pie,” Lai said, adding that the larger funds tend to be the pan-asia funds. “They can allocate to any market that they see as attractive.”
Abhinav Goswami, senior director at PE firm Daiwa PI Partners Singapore, said the future of Southeast Asia’s private equity industry “remains bright” in spite of the difficult exit environment.
“There is an increasingly active primary and secondary market as founders learn more about private equity, and as more companies scale up, mature and/or restructure,” said EQT’S Leow.