Southeast Asia on private equity firms' radars

Southeast Asia is pegged for a turnaround by private equity executives, who expect it to endure continued emerging markets volatility this year.

Indonesia was the darling of Southeast Asia until May 2013, when the start of US Federal Reserve bond tapering triggered volatility in emerging markets, says Sandiaga Uno, managing director of Jakarta-based PE firm Saratoga Capital.   

However, the country’s rosy long-term growth prospects have meant that business owners have not lowered the valuations of their businesses, preventing Indonesia from becoming a buyer’s market, says Uno, speaking on a Southeast Asia-focused panel yesterday at the Asia Private Equity Forum in Hong Kong.

Fellow panellist Karam Butalia, executive chairman of KV Asia Capital, notes that Southeast Asia’s economic growth is faster than that of Europe and the US, and domestic consumption is on the rise.  “I sincerely believe that Southeast Asia’s time has come."

Panellist Rodney Muse, managing partner of Navis Capital Partners, notes another attractive – if unusually appealing – aspect of the sub-region: “[Corruption] exists and it is declining, and I’m quite pleased about how it’s declining.”

Strict enforcement of laws in the US financial sector has likely changed attitudes, says Muse.  

Uno notes that “Indonesia is undergoing a massive transformation” as the result of a recent anti-corruption drive. “More than 400 high-ranking officials, governors, ministers and parliament members are now behind bars.”

When pressed to name Southeast Asia’s most corrupt countries, Muse cites Myanmar, Cambodia and Laos “as utterly opaque and utterly corrupt and un-investible by my standards”. Vietnam, on the other hand, “is bureaucratic and corrupt simultaneously, so they’re incompetent at being corrupt".

Aside from high valuations for businesses and pockets of corruption, there is also the challenge of gaining controlling stakes in Southeast Asian companies – particularly those owned by families.

“They don’t like to give up control. Even if they say they are prepared to do it, deep down it's not natural to them,” says Muse.

Their business acumen can also complicate deal exits, he adds. “Quite often, the family conglomerate ultimately seeks to buy back the business from you, or buy out your stake from you... at that point they’re going to try to cap your returns.

“When it comes time for you to try to maximise price, they’ve got very shrewd ways to make it pretty hard for you to sell it to anybody but them,” says Muse. “ I’ve become very respectful [about families], but cautious.”

Brian Hong, senior managing director of CVC Capital Partners, agrees that while some families can be very ruthless, partnering with them is necessary, since "in many of these countries, they actually own the best and most attractive assets”. He says he won't work with a family until he has spent many months with them to form mutual trust.

Southeast Asia's individual and disparate markets will grow at differing paces, with Uno foreseeing a pick-up in Indonesia this year, while Muse and Butalia believe Thailand could surprise market-watchers with a quick recovery despite current civil unrest.

"If Thailand can pull through some relatively turbulent times, it could surprise on the upside," says Muse.