June 15, 2015
Interviewed by: David Snow
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Locating the Right Southeast Asia Deals

Southeast Asia is rich with opportunity for private equity investment. EY’s Mike Rogers, FLAG Capital’s Wen Tan, and Headland Capital’s Paul Kang—all experts with extensive experience in the region—discuss some themes and share their investment theses.

Southeast Asia is rich with opportunity for private equity investment. EY’s Mike Rogers, FLAG Capital’s Wen Tan, and Headland Capital’s Paul Kang—all experts with extensive experience in the region—discuss some themes and share their investment theses.

Locating the Right Southeast Asia Deals
Investing in Southeast Asia

David Snow, Privcap:

Today, we’re joined 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, David.

Snow: [We are] talking about a very important part of the world: Southeast Asia. Private equity is growing as a source of capital in the region and international investors are increasingly interested in what’s going on in Southeast Asia, so I’d love to hear your views about what’s going on. Let’s talk about what you see as some compelling opportunities to invest there and what you’re seeing by way of deal flow.

Paul Kang, Headland Capital Partners:

If we look at where Headland Capital likes to play, typically it’s midmarket. We like to back good, quality-growth companies. And one sector we feel is very exciting right now—[where] we’ve made a couple of very interesting investments—is in the education space, because if you look overall at where Asians are driven to actually spend, it’s an aspirational space. It’s sending their kids to schools with the view ultimately to have their children educated abroad. And in that respect, the education sector—particularly the private education sector—is a very interesting opportunity. We’ve made a couple of investments in that particular sector at this point and they’re doing very well. And we continue to look for opportunities in that space.

Snow: Wen, what are some key themes, or even geographies, that seem to be particularly compelling right now?

Wen Tan, FLAG Capital Management:

Expanding on Paul’s theme, consumer upgrade overall is one of the key drivers as to where the opportunities are coming from. And that’s quite a broad category, because it could be everything from consumer services through to consumer products. It could be education. It could be healthcare. It could be food and beverage, etc. All of them are driven by an underlying theme of increasing incomes. And with many industries, there’s not necessarily a linear relationship between income and demand for particular products. Once you…pass over a tipping point, the demand for each of those products or services increases quite substantially.

That’s the overall what we’re looking at. In terms of geography, obviously Southeast Asia, a very diverse collection of markets. But it is important to remember that basically…about 90% of the exit activity—and ultimately as investors, we look at exits—over the past five years has come from what we call core Southeast Asia, which is basically Indonesia, Malaysia and Singapore. Not to say that there isn’t private equity that goes on elsewhere. Certainly, there are interesting pockets in the likes of Thailand, Vienna and the Philippines, but in terms of dollars for deployment and return of capital, certainly it’s the southern half of the region.

Snow: Mike, Wen mentioned—you called it “consumer upgrade.”

Tan: Yes.

Snow: That’s a fairly common theme across emerging markets, correct?

Michael Rogers, EY:

Absolutely. I was going to pick up on his comment there because that is, I think, the first wave of private equity. When I talk about private equity from my perspective, I’m thinking about maybe inbound from some of the bigger funds located or headquartered in the U.S., for example. If they’re going into Southeast Asia, a lot of times they’re very interested in some of the basic industries—the first pass, if you will, of investment. So it might have been basic food and beverage-type companies. Very lower-end, if you want to call it, on a scale of consumerism. And, as Wen was touching on, what we’re seeing now is this trend toward, “We’ve gotten comfortable with the region. The basic industries are fine. Where can we find maybe more niche markets that provide more opportunity for us now?” Moving from consumer-related business into potentially technology or other aspects of life that touch the consumer, because there is increased spending power there, but not some of the more basic industries or foundational-level industries there.

I think that bodes well, because it really speaks to the fact that private equity’s getting more comfortable with the economic environment and the political environment. And we see that around the world in emerging markets. As they get more comfortable, they get to interested investing it at the next levels of organizations.

Snow: A question back to you, Wen. Again, we can’t overstate the important point that Southeast Asia is a big place with many different cultures and economies. But if you could characterize the deal flow that GPs you know are seeing, what are some commonalities? I’m guessing that family groups are an important source of investments for GPs.

Tan: I would characterize it as a combination of family groups, certainly beginning to see that generational transition that’s occurring in at least some of the more mature economies within the region. There’s quite a lot of ongoing “take-privates”—public to private activity—especially out of Singapore and, to some extent, Malaysia. There’s the odd corporate spinout from time to time and that could be either local conglomerates or international firms, in effect, carving out non-core operations within Southeast Asia. The diversity of deal flow is quite broad, which is quite positive obviously.

Rogers: David, I might add to that, too. I think the other component that’s making the market more positive is the scale of some of these entities reaching the size that becomes attractive on a global basis. They’re not all small deals. There are some very large transactions, which becomes very attractive to traditional larger-cap private equity.

Kang: To add to what both gentlemen have already said, the other dimension—and they’re not necessarily exclusive—is that often you’ve got businesses that are very strong in a particular core market, be it Malaysia or the Philippines. But then, as you’ve got these businesses evolving (and a generational change if the family decides they want to keep the business), the question always is what’s next for them? For example, we’ve backed the leading snack food manufacturer in Malaysia, a company called Mommy Double Decker, who already have a 50% market share in Malaysia.

Now, the reality is that business has done extremely well, but it’s unlikely to increase that market share by double again. And Malaysia’s a relatively small market. So the question the family had—as well as putting an infrastructure in place to insulate and further consolidate their market positioning at home—was what were the market opportunities it could address elsewhere within the Asian region? So, yes, we’ve helped them set up a base in Indonesia. We have a me-and-my expansion strategy and we’re looking at other ways to diversify regionally. But I think that’s a pretty common theme: businesses that have gone from $50 to $100 to $200 million and then what’s next?

It may lead to a corporate divestiture. It may be a succession issue. There may be a situation where professional managers take over.

Snow: Mike mentioned the availability or presence of big international private equity firms. Are you seeing the arrival of big mega-firms?

Kang: Sure. There’s no question in my mind that the GP base actually, in Southeast Asia in particular, has broadened significantly over the course of the last five to 10 years. When Headland Capital did its first public to private in Singapore—this is going back eight or nine years ago—it was rare that that type of transaction occurred. Now it’s relatively cookie cutter for those deals to happen and the domestic markets are very familiar. All the promoters are very familiar with that concept. And I think the size of the deals has increased significantly such that it does bring in the bigger, global private equity houses. On the one hand, I think it’s more competition, greater liquidity driving valuations upward. But on the other hand, I think it’s always a validation of the opportunity. There are pros and cons either way.

Tan: Jumping in on that point as well, different global majors have approached Southeast Asia in different ways. You have the likes of the CVCs and TPGs of the world who have been active in Southeast Asia for quite a while, whereas you have others who are relatively recent entrants into the landscape. But, not withstanding all that, that segment—that echelon of deal flow—is very different to what these guys and various of the other more local firms would look at, i.e., it would be mid-cap or small-cap as opposed to truly large-cap.

Snow: How about firms based in China that are expanding? Have you guys seen China-based private equity firms start to do deals in Southeast Asia?

Kang: We’ve certainly started to see that. We bought an English-language training business in Vietnam and one of the competitors for that— one of the parties that was also interested in that asset—was a Chinese private equity firm who had actually set up an Indo-China capability because they were keen to do that. Again, it’s still relatively early days.

Rogers: Yeah, David, I would add to that from a trend I’ve seen recently that I was surprised by: historically (you mentioned China), we’ve seen investment going into China looking for opportunities there. That’s been the big discussion and the deal flow has been that direction. Over the last, maybe, six months or so, we’ve seen a number of opportunities where the funds in China are coming to the U.S. looking for transactions. So what had been an almost always one-way street into investment into China has now turned around, and we’re seeing the Chinese funds coming in wanting to visit with us in the U.S. and with our teams in Europe, about actually making outbound investments from China. I think that’s a developing trend.

Snow: Let’s move to a final topic, and that is exits. There is no healthier stimulant for a private equity industry than the existence of good exits for others to emulate and envy. A quick question for you, Wen: if you could characterize the history of exits across Southeast Asia, what would you say?

Tan: Look at Southeast Asia or at least Southeast Asia over the past couple of five-year cycles, i.e., back to the middle of the last decade. The fact that Southeast Asian private equity is more buyoutfocused than its peers in China and India has meant that, despite the global weakness or bounce of weakness in the public markets globally, there has been that opportunity or that avenue for exits within the Southeast Asia context. So distributions have not been too bad in the overall context of emerging markets private equity, especially for funds that have a large buyout component.

Kang: It’s an interesting phenomenon that’s really evolved over time. If you go back, as you say, a decade or so, David, you would have found that most exits—particularly on controlled yields in Southeast Asia—would primarily have been driven by sales to strategics or other financial buyers. What we’ve seen—it’s still early days. But we’ve seen increasing capital market liquidity, so dividend recaps are a possibility that I would argue five or 10 years ago weren’t possible. Exits through the public markets in the form of an IPO historically have been quite challenging, but I think some of the hurdles around that have actually started to ease.

Then, the other dimension again, there’s a positive on to everything, where you’ve got increasing liquidity chasing up valuations. But also, I do think we’ll start seeing more and more secondaries. Private equity owners selling to other private equity firms and in respect of liquidity alternatives in Southeast Asia, it’s a pretty healthy environment right now.

Rogers: Yeah, David, I might add to that. Anecdotally, if you talk to investors and people we work with, they might say, “Well, the exit trend is a little slower than what we would like.” But if you actually go and look at the data underlying it and look at the actual information, you’ll see, as Paul was mentioning, there’s a nice trend of exits from many of the countries there. And while China’s IPO market was shut down, obviously it was open in Southeast Asian markets, so they were still able to do IPOs and get some deals exited in that fashion.

I think if you look at the actual knowledge, the information behind it and the content, you’ll actually get yourself more comfortable that there has been a nice track record of exits in Southeast Asia.

At EY, we’ve been focusing on emerging markets private equity for some time now and it really comes in three different buckets, if you will. 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.

Then, of course, we like to support the pan-regional funds as well. And 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 help those funds…and support those investments that might touch multiple jurisdictions and 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, New York, 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, from an advisory perspective and from a transactions perspective. And ultimately, in many cases, we might provide the assurance relationship as well. It’s really 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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