Emerging opportunities in Southeast Asia

Southeast Asia is a complex region with many different market dynamics at play. But as countries in the region continue to mature, new opportunities are emerging for investors.

In a panel discussion at SuperReturn Asia 2017, Eugine Lai, managing director and co-managing partner of Southern Capital, pointed out that although there was a tendency to treat Southeast Asia as a single entity, it was actually made up of 11 different countries.

He added that it was home to 640 million people, whose average age was under 30, while it had GDP of USD2.6tn, and GDP growth of 5%.

He said Southern Capital was pursuing a control strategy in the three most mature markets in Southeast Asia, namely Singapore, Malaysia and Indonesia.

He explained that between 2012 and 2016 Singapore accounted for 45% of all private equity investment in the region, while Malaysia accounted for 22% and Indonesia 18%.

“If you look at buyouts, they constituted 36% of all private equity investment in Southeast Asia,” he said.

But he added that the size of transactions was at the low end of the mid-market with 90% of private equity deals at below USD200m.

“This is where we feel the opportunities are,” he said.

He added that Southeast Asia was not a crowded space, and it was actually under-served by private equity.

Aongorn Somprasong, managing director of Lombard Investments, is based in Thailand.

She explained that when Lombard started investing in Thailand it looked at areas such as manufacturing, but with rising incomes it now focused more on consumer spending.

“We are trying to be ahead of the curve by looking at consumer behaviour,” she said.

She added that during the past two years, the market had been difficult as purchasing power has dropped, the economy had not performed well, commodity prices were down and household debt had affected spending power.

“As a result, we have shifted to focus on more niche markets, such as hospitality, tourism and healthcare,” Somprasong said.

Frontier markets

Joshua Morris, founding partner of Emerging Markets Investments, focuses on the frontier markets of Cambodia, Laos and Myanmar.

He said all three countries were included in the top six fastest growing economies in the world in 2016, and that growth had been spurring a lot of economic activity and driving consumer demand for products.

“That is really changing the investment profile and making interesting opportunities for us,” he said.

He said all three markets had improving regulatory environments, but there were political challenges.

He added: “The dynamics at play in the markets are local and it requires a local presence to understand them.”

In terms of where capital is coming from, Lai said most limited partner investments in Southeast Asia came from the US and to a lesser extend from Europe, with funding also increasingly coming from Asia itself.

He added that a lot of direct investment capital in the past five to six years had come from China, while Japanese money was also coming back.

Morris added that most of the capital into Laos, Cambodia and Myanmar came from development finance institutions in Europe and multinational organisations.

“We are seeing some family offices investing in funds in the region,” he said.

“Some funds are backed by local high net worth individuals, which has advantages and disadvantages.”

High valuations

There is a perception that valuations in Asia are higher than they should be.

Lai said: “Certain sectors, such as healthcare, consumer and technology, do trade at high valuations, but you also have a lot of more boring sectors that do not.”

He added that his firm’s average entry multiple was 7.5 times EBITDA.

Indonesia has traditionally suffered from high valuations, and he said this was partly because it was a high growth market and partly because investors just expected high valuations and held out until they got them.

Somprasong said part of the valuation problem was that people in the private market looked at the public market as a benchmark, and there was currently a lot of liquidity which was driving up prices in the public market.

“As a fund manager, you need to do a lot of homework to identify the right target,” she said.

Morris said in Cambodia and Laos there was limited competition for deals and this tended to keep valuations low.

He added that Myanmar currently had high valuations due to hype, but these were starting to come down as people become more realistic.

The panelists felt Southeast Asia was still best suited to regional rather than single country funds, but they agreed the region offered significant opportunity.

Lai said: “Today compared to 12 to 13 years ago, Southeast Asia is a much more mature, deeper, more interesting market.

“I think this trend should continue because the underlying economies are doing well and maturing."