How to approach private equity investing in Southeast Asia

Eugene Lai, Co-Managing Partner, Southern Capital Group shares his insights into the best approach for private equity investing in Southeast Asia ahead of SuperReturn Asia: 

Southeast Asia is a large region comprising 11 countries with a combined population of 640 million, median age of under 30, GDP of US$2.6 trillion and GDP growth rate of 5% per annum. Long term trends include a growing middle class and increasing consumer spend. There are shared cultural and other similarities among various countries, but there is also significant diversity.  The opportunities, risks and networks can be quite different from country to country.

Although Southeast Asia comprises 11 countries, almost all private equity activity is in six countries.  Over the five year period 2012 to 2016, the largest private equity markets in Southeast Asia (by value) were Singapore (45%), Malaysia (22%), Indonesia (18%), Vietnam (6%), Philippines (6%) and Thailand (2%).  The percentage next to each country refers to that country’s share of all private equity investments.  The source of all the private equity data in this article is AVCJ.

"Singapore, Malaysia and Indonesia are the largest private equity markets and account for 85% of all private equity investments in Southeast Asia from 2012 to 2016. "

The size of a private equity market is significantly correlated with the maturity of a country’s economy.  Hence, Singapore, Malaysia and Indonesia are the largest private equity markets.  These countries have long private sector histories.  Together, they accounted for 85% of all private equity investments in Southeast Asia from 2012 to 2016.

The vast majority of private equity investments are in the low end of the middle market. In 2012 to 2016, over 90% of private equity investments (by number of deals) had transaction values below US$200 million.

Year to year, there can be a degree of lumpiness in deal flow in each country.  Hence, we believe a sub-regional strategy, focusing on a few countries, is superior to a single country strategy in order to target the highest quality opportunities and avoid adverse selection.

We believe the middle market space in the active countries in Southeast Asia provides sufficient depth for private equity firms to execute a sustainable investment strategy.

Southeast Asia also provides sufficient depth across investment categories. For the period 2012 to 2016, private equity investments (by value) can be broken down into the following categories: buyouts (36%), growth (31%), PIPEs (19%), mezzanine and pre-IPO (8%) and early stage (6%).

At Southern Capital, we focus on control investments.  All our investments, without exception, have been control investments.  Post-investment value-add is an important part of our investment strategy and control is essential in order to execute a value-add strategy effectively.  In addition, control enables us to exit through a trade sale.  As most private equity investments are small, IPO exits can be challenging and depend heavily on market sentiment.  Trade sales are more dependable.

"Relationships are important in this region. The ability to work with local vendors, partners and management teams is critical."

Relationships are important in this region. The ability to work with local vendors, partners and management teams is critical.

Local owners of small businesses are often reluctant to share confidential business information widely.  They are also generally not overly process-minded.  That provides an opportunity for a firm that can operate effectively in this region to structure something that meets a business owner’s requirements and avoid an auction.  At Southern Capital, all our investments have been made on a proprietary basis.

We target businesses with growth, predictable cash flows and strong management teams.  We use acquisition debt in almost every investment.  The bank market is deep and liquid and banks are willing to extend acquisition debt for the right businesses and where they are comfortable with the private equity firm.

We seek to make our expected returns through a combination of growth and deleveraging.  We do not assume a multiple expansion on exit at the time we make an investment, although we have in fact achieved it in most of our exits.  We believe that in practice, the possibility of a multiple expansion increases when we grow and improve the quality of our portfolio companies.

In conclusion, Southeast Asia is an attractive private equity market which benefits from healthy GDP growth, a growing middle class and increasing consumer spend.  However, each country is different and it is critical that an investor understands the markets it is investing in intimately.  Relationships and the ability to work with local vendors, partners and management teams are critical.  At Southern Capital, we have an experienced local team and a control strategy with a strong focus on post-investment value-add.  We have deep local networks and have sourced all our investments on a proprietary basis.  We believe our approach to investing is sustainable and can generate superior returns on a repeatable basis over the long term.

Southern Capital is a private equity firm that focuses on control investments in the middle market space in Southeast Asia, in particular, Singapore, Malaysia and Indonesia.  The firm was founded in 2004 and has offices in Singapore, Kuala Lumpur and Jakarta.   All the firm’s investment professionals are native to, and have spent most of their careers in, Southeast Asia.  Southern Capital has invested across a number of sectors, including healthcare, education, consumer, business services and infrastructure services.  The firm’s investments have included family businesses with succession issues, businesses built by entrepreneurs over a long period of time who eventually wish to do something else, non-core assets spun-off by local and foreign conglomerates and public to privates.  The firm’s Southeast Asia investments from its inception have generated a US dollar gross IRR of 25%.

Hear more from Eugene Lai, Co-Managing Partner, Southern Capital Group at SuperReturn Asia.