June 1, 2015
Interviewed by: David Snow
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PE Opportunity Abundant In Southeast Asia

While economies in Southeast Asian countries are improving, there are still many questions when it comes to private equity investment. EY’s Mike Rogers, FLAG Capital Management’s Wen Tan, and Headland Capital Partners’ Paul Kang discuss the obstacles and the opportunities in the region.

While economies in Southeast Asian countries are improving, there are still many questions when it comes to private equity investment. EY’s Mike Rogers, FLAG Capital Management’s Wen Tan, and Headland Capital Partners’ Paul Kang discuss the obstacles and the opportunities in the region.

PE Opportunity Abundant in Southeast Asia
With Mike Rogers of EY, Wen Tan of FLAG and Paul Kang of Headland Capital Partners

David Snow, Privcap: Today, we’re joined by Wen Tan of Flag Capital Management, Paul Kang of Headland Capital Partners and Michael Rogers of EY. Gentlemen, welcome to Privcap today. Thanks for being here.

Unison: Thank you.

Snow: Today, we’re talking about a very large and important part of the world: Southeast Asia. There is a vibrant private equity market in Southeast Asia, but it is growing and not a lot of Western investors know as much as they should about it. So I’m thrilled to hear to your varying perspectives on what’s going on in private equity across Southeast Asia.

Wen Tan, Flag Capital Management: You’re right. Certainly, Southeast Asia does have significant potential in terms of private equity at the moment. If you look at a high level, it’s driven by a range of factors. There’s a demographic play in many of the Southeast Asian countries in terms of young population and increasing consumption. In tandem with that, [there’s] the whole underlying urbanization trend that’s occurring. And, as you know, the whole price of urbanization and infrastructure investment has that multiplier effect in terms of driving growth.

Combined with that, there’s the fact that various of the economies are still under transition either from communist or at least non-traditional capitalist systems to pure capitalism. Or they have been capitalists for a long time, but hobbled for one reason or another by restrictive government policies. So, putting all of that together, it’s a large economy. It’s around about $1.5 trillion overall.

Snow: Paul, you’re in charge in Southeast Asia for Headland Capital Partners, which is a pan-Asian private equity firm. What do you tell investors when you’re trying to get them excited about what you do for a living?

Paul Kang, Headland Capital Partners: First of all, I’d echo all the points Wen just made about the macro drivers. Just underneath that—the fact that you’ve had the generational shift within many of these economies, right? Businesses that have been founded in the ‘80s and ‘90s have reached a certain stage of maturity. And many of the people running those companies are asking them what’s next.

Added to that, you’ve also got perhaps less of a hang-up in Southeast Asia, relative to North Asia or China, of family-owned companies being preoccupied of creating dynasties. In many instances, the next generation down has actually studied abroad and may want to do something different. There’s not necessarily a hang-up about keeping the business within the family. So if you take the macro that Wen has talked about—the young population, the growing middle class, the increasing consumer expenditure—plus what we would look at as shareholder-type catalysts, then it’s a very interesting opportunity.

Snow: Mike, your team advises private equity firms across emerging markets and you’ve done a lot of research into Latin America and Africa and other places. What do you find interesting about the private equity story in Southeast Asia?

Mike Rogers, EY: Following these gentlemen, they’ve hit a number of the demographic issues and other things that private equity looks for in terms of where they like to invest their money. And one thing that was touched on is the consumerism and the fact that food and beverage industries like that are very attracted to private equity. That’s a great space for private equity to invest in. But I would take their comments and add something different possibly that’s out there, [which] is the benefit of picking up some of the manufacturing that’s satelliting out of China and moving into some of these outlying markets. Because we’re seeing that trend in reverse, which had been a lot of manufacturing on-shore, in China, coming the other way now…to the benefit of Southeast Asia.

Also, I think regulatory issues and some of the burden has been broken down. For example, we’ve seen in Latin America, in the Indian region, where the Pacific Alliance was formed. The countries in that Pacific Alliance had broken down some of the trade barriers and made it much more effective for those folks to trade. I see something similar on the horizon potentially in Southeast Asia. I think people look at the relative attractiveness of the marketplace and the size, scale and consumer interest of the population and see a very attractive market.

Snow: How does a macroeconomic story across Southeast Asia affect private equity opportunity? To what extent does China loom large?

Tan: Sure, that’s a good question. In terms of various of these Southeast Asian countries, China has now eclipsed the U.S. as their largest trading partner. But if you look carefully at the capital flows and trade flows between the nations, a lot of what’s being exported from Southeast Asia to China is actually resource-related, whether it’s energy or soft commodities. So what we’re seeing in terms of a slow-down in China impacts upon various of the Southeast Asian countries in different ways. In some cases, it is quite noticeable. For example, if you are the coal sector in Indonesia and others, frankly, there’s been a pretty minimal impact.

Kang: I’d agree with that. I think if you set aside the energy sector, the slowdown in China has probably had a lesser impact on Southeast Asia in terms of the overall growth dynamics than what we’re actually seeing in terms of capital flows and the strong U.S. dollar most recently. And I think that’s going to continue with QE tapering. That’s potentially a cloud on the horizon in respect of Southeast Asian consumer expenditure in respect of inflationary pressures within those economies. We’ve already seen many of the currencies throughout the region depreciate significantly over the last 18 to 24 months. And I think that’s potentially a cloud on the horizon.

Snow: Mike, what are you watching in the global economy that will be important for people thinking about Southeast Asia to pay attention to?

Rogers: We chatted about China earlier. I think that the growth slowing there has a dramatic impact in emerging markets around the world because if you think about—as Wen mentioned—the commodity purchase that was going on, it drove the economies in Australia. It was very heavily impacting Latin America and investment into Africa. And, around the world, people have felt that that contraction has impacted their local economies in the emerging markets. In the developed markets, we’ve seen continued strength, of course, in the U.S. market and AMIA seems to be picking up a bit of strength now in Europe. And I think it’s going to be interesting because valuations are very, very high for acquisitions in the U.S. and the developed markets. And there’s been a bit of softness in some of the developed markets or lesser-developed markets, which could provide more opportunity for folks. But the overall economy seems to be in a slower-growth mode and just maybe little pockets moving a bit up and down on a relative basis. But, generally, the developed markets have been stronger over the last year or two. So it’ll be interesting to see how the impact of China slowing [down] impacts the rest of the world.

Rogers: At EY, we’ve been focusing on emerging markets private equity for some time now and it comes in three different buckets. What we like to do is, of course, support those funds in these markets directly that are growing and thriving and raising capital. There’s a whole suite of skills and support that we can provide those funds.

Of course, we then like to support the pan-regional funds as well. There’s more and more of those. We’re seeing those bucketed in Southeast Asia, in Latin America and in Eastern Europe. Some folks are just focused on those markets, so we will reach across borders and…support those investments that might touch multiple jurisdictions, multiple countries.

Lastly, we try and follow our large global clients around the world. Even though some of these funds might be based in London or New York or San Francisco or Singapore, they might have an interest in doing deals in any market we could name around the world.

We would bring the firm’s full scope of resources to bear from a tax perspective, an advisory perspective and a transactions perspective. And, ultimately, in many cases, we might provide the assurance relationship as well. It’s our job to follow the footprint of our bigger clients, all the way down to the smallest local funds where we can add significant value.

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