PE firms go south to Asean, but buyers beware

Private equity in the region has gone south – to Southeast Asia – with single-country, growth capital and global buyout shops seeking deals in Asean.

From January to October this year, $1.1 billion was raised for five Asean-focused PE funds, compared with the $900 million garnered for all of 2011, according to figures from data provider Preqin.

Led by Indonesia – whose credit was upgraded to investment-grade by rating agency Moody’s in January – interest in the sub-region has been building over the past year.

However, attention reached a high point last month, with KKR’s launch of a Southeast Asia operation in Singapore and Carlyle Group’s maiden deal in the sub-region: an investment of about $100 million in Indonesian telecom towers operator Solusi Tunas Pratama.

Amid the hoopla are knowing voices from veteran Southeast Asian investors, who caution that the market, which is still fairly new to private equity, has potential pitfalls – including corruption.

“The issue of corruption is something that we do come across both in respect to deal sourcing and sometimes even the portfolio companies that we invest in,” Sigit Prasetya, CVC Capital Partners managing partner for Southeast Asia, says during a panel discussion at the recent Asian Venture Capital Journal conference in Hong Kong.

CVC’s Asia Pacific Fund III, which it is currently investing, has more than 35% of its portfolio in Southeast Asia so far, notes Prasetya, compared with 10% exposure from predecessor Fund II.

“From our point of view, the experience is that it is possible for us to be an agent of change and improve the situation” by introducing a high standard of corporate governance into its companies and the markets in which it operates, says Prasetya.

“Corruption is definitely a problem in Indonesia,” concurs fellow panellist Veronica Lukito, chief executive of Ancora Capital, a Singapore-based PE firm dedicated to mid-market deals in Indonesia.

“We have to be the agent of change and we instil all the right management” in portfolio companies, says Lukito. 

Ancora institutes corporate governance in its portfolio businesses as a “value-add”, she notes, “getting them ready for a big play where international [investor] participation can happen in the next couple of years”.

In some Asean markets, the risks are sufficient enough to serve as a deterrent. Panellist Rodney Muse, co-founder and managing partner of Navis Capital Partners, says of Indonesia: “I don’t think the risk-adjusted returns are there.”

He added that the deal multiples “are quite high”, above the 6x to 7x entry multiples that are targeted by Southeast Asian-focused firm Navis.  

An alternative method is to invest in a regional business in Singapore that has exposure to Indonesia “at a substantially lower multiple and ... with much better corporate governance”, suggests Muse.

Expanding the footprint of a country's national brand into neighbouring markets has been a profitable strategy for Navis over its 14-year history, and is a reason why it is planning the launch of new offices in the strong consumer markets of Indonesia and Vietnam in the next 24 months.

Panellists note that the growing presence of competition in Southeast Asia is leading to competition for deals and a greater scarcity of talent in the region. 

However, Muse notes: “Most of the things you worry about are outside of Southeast Asia, [such as] the euro and the [US] fiscal cliff.”