Over the years, investor interest in Southeast Asia has ebbed and flowed like the multiple seas surrounding it.
Since 2018, investors and GPs alike have been taking a closer look at the region amid rising geopolitical and trade tensions between China and the US – in particular, many are looking to capitalize on Southeast Asia’s rising importance as a global manufacturing hub.
According to KKR’s Thoughts from the Road: Asia, return on equity in the region is increasing as a result of productive growth in Malaysia, Vietnam, Singapore and Indonesia. According to the commentary: “Global allocators should put Southeast Asia back on their radar.”
This dynamic has not gone unnoticed. At the Hong Kong Venture Capital and Private Equity Association Asia Private Equity Forum 2024, the event featured, for the first time, a standalone Southeast Asia discussion panel – one that attracted a full house. A year prior, the region had been forced to share the spotlight with India.
Southeast Asia is made up of 11 countries: Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, Timor-Leste and Vietnam. According to data from Bain & Company, the GDP of the region’s six largest economies — Vietnam, the Philippines, Indonesia, Malaysia, Thailand and Singapore, known collectively as the SEA-6 — is expected to grow at an average annual rate of 5.1 percent over the next decade, outpacing that of China. What’s more, in 2023 the SEA-6 attracted nearly five times as much foreign direct investment, recording $206 billion against China’s $43 billion.
“Private equity is much more underpenetrated in our part of the world than other geographies, and that creates opportunity,” Abrar Mir, co-founder and managing partner at Singapore-based healthcare specialist Quadria Capital, tells affiliate title Private Equity International.
With this rare set of circumstances at its fingertips, it’s easy to see why some believe the stars have aligned for the region. Its investment activity, however, is yet to fully reflect this potential.
Dealflow hurdles
According to Bain & Co’s Asia Private Equity Report 2024, only about 5 percent of Asia-Pacific private equity deal value came from Southeast Asia last year. The region’s proportion decreased from an average of 8.26 percent across 2013-2017 to 6.53 percent in 2018-2022.
Southeast Asia suffered from a dearth of deals in 2023, with only $3.95 billion invested across 22 transactions, according to EY’s Quarterly Private Equity Update: Southeast Asia. This compares with $16.9 billion invested across 39 deals in 2022.
“There are obviously challenges,” says Mir. “The velocity of dealflow in private equity in Southeast Asia has traditionally been much lower than the most sophisticated markets like China, India, and obviously the US and Europe.”
The region – which mainly relies on early-stage venture and growth investments – is yet to see a sufficient pool of deals large enough to merit bigger tickets from global LPs. “If you work out the macro, then you’ll think that this is a good destination point for your capital and that it will all work similarly to your experience in more developed markets,” says Sam Robinson, a Singapore-based senior adviser at multifamily office North-East Family Office. “In reality, it is hard to invest at the same pace as a developed market because there are fewer intermediaries, there’s less understanding for the possible sellers of these businesses.”
North-East manages capital on behalf of the family behind jewelry brand Pandora, among other clients. Robinson notes that around 20 percent of North-East’s Asia portfolio is allocated to Southeast Asia, and is invested into both funds and co-investments. The institution has invested with Indonesian firm Capsquare Asia and the Philippines’ Sierra Madre, according to PEI data.
While Robinson recognizes the interest in Southeast Asia, he adds that finding a manager worth backing is difficult. On the deal front, managers are also extremely selective as a result of Southeast Asia being a developing region.
“When you add in the other elements, such as valuations and management capabilities, it becomes an extremely high bar,” says Mir. “We’re probably evaluating 300 deals, of which we evaluate 30 in detail before we do… two to three deals a year.”
“Private equity is much more underpenetrated in our part of the world than other geographies, and that creates opportunity”
Abrar Mir
Quadria Capital
It is also “unrealistic” to expect to find the same number of $1 billion-plus deals in the region as you may find in the Western markets, says Mark Webster, a Singapore-based managing director and partner at investment banking advisory BDA Partners. One of the reasons for this, he says, is the difficulty that comes with addressing the fragmentation and scale of the region. There are not enough regional platforms that can navigate the nuances of Southeast Asia and address the demand for scale.
“If your pan-Southeast Asia business is a properly integrated entity enjoying economies of scale, then that’s the dream. But not all can live up to that standard,” Webster says. “They can try and project that image, but if you look under the hood, potential investors could discover there’s still some work to do in terms of truly integrating a business that’s been built up by acquisitions across different geographies.”
Robinson notes that some countries in the region have experienced waves of hype that will ultimately drive deal valuations up. Vietnam, Indonesia and Myanmar, for example, have all seen sudden peaks of interest from investors. “A lot of money went into Indonesian deals,” says Robinson. “Even if you’re investing with disciplined managers, operating in an environment where there’s a lot of money going in and the prices are going up, it’s very, very hard to deploy capital in a sensible way.”
When the valuation is right and the deal is of an attractive scale, the next question from concerned LPs is naturally how easy it is to exit. Perhaps unsurprisingly, exits are not Southeast Asia’s forte.
Exit fluctuations
Bain & Co’s Southeast Asia Private Equity 2023 Year in Review found the region’s private equity exit value has fluctuated wildly over the years: starting from a high of $23.3 billion in 2017, it dropped 87 percent to $3.1 billion in 2020, climbed back to $12.2 billion in 2021, before dropping once again to $6.8 billion in 2022 and $2.8 billion in 2023.
Over the 14 quarters from Q1 2021, exit activity has ranged from zero to nine exits per quarter, with exit values ranging from nothing to $7.96 billion, according to EY. In 2021, Southeast Asia recorded $10.88 billion across 15 exits, averaging $725 million per deal. And while 2024 is set to surpass 2021’s exit count – the region saw 13 exits in Q1 and Q2 alone – the average exit value dropped to $105 million.
As a region comprising mostly developing markets, the lion’s share of investments in Southeast Asia are in growth-stage companies and minority stakes. This makes both exits and distributed to paid-in capital generation more challenging. “It’s fair to say that Southeast Asia has been one of the slower elements of DPI generation,” says Robinson. “Japan, Australia: they’re the ones that bring the DPI so far in our portfolio.” He adds that when it comes to performance in Southeast Asia, investors may consider a more “forgiving” approach stemming from lower expectations.
Development finance institutions like the Asian Development Bank have – given their mandate – been long-term backers of regional and country-focused funds within Southeast Asia. According to Janette Hall, director of investment funds and the special initiatives division in private sector operations at ADB, performance from the bank’s regional GPs has been a mixed bag.
“For our 2014-16 vintages, it ranges from a low of 0.2x to a high of 1.5x,” says Hall. ADB invested in South and Southeast Asia-focused Creador’s third flagship and Vietnam Investments Group’s Fund III, PEI data shows. Hall adds that Creador is one of ADB’s top-performing funds.
“On paper, the Southeast Asia secondary opportunity is there. In reality, you need to put the bar extremely high if you want to be successful”
Paul Robine
TR Capital
“When we invest in a fund, particularly in funds that are in fund three, four or five, we do look at the DPI of the prior funds to make sure the strategy has been proven out,” she says. “We basically tell our GPs that if you don’t have a DPI of at least 0.6x-0.7x, then we cannot look at them because everything else is just purely unrealized and it’s not really demonstrated.”
Strategic sales, rather than local IPOs, are the preferred exit route in Southeast Asia, according to panelists at the HKVCA Asia Private Equity Forum 2024. Rodney Muse, co-managing partner at Navis Capital Partners, noted that about 50 of the 65 exits the firm had done so far were via strategics. “IPOs are inverse DPI – you’re just going to trap money,” he told delegates.
For secondaries players like TR Capital, this exit dynamic could present a tantalizing opportunity. “On paper, the Southeast Asia secondary opportunity is there,” according to Paul Robine, founder and chief executive of the firm. “In reality, you need to put the bar extremely high if you want to be successful. The reality is that not all companies in Southeast Asia are of good quality, not all companies have the right governance, not all companies are backed by good quality investors.”
Robine says he has seen steep discounts to net asset value – up to 80 percent – within Southeast Asia. In his view, these are value traps: they are usually complicated assets, and investors may never be able to sell them.
“Companies that are loss-making, even if we get them at 50 percent-70 percent discount, we won’t touch them by any means,” he says. Out of all the deals TR sees in the region, only 3 percent-5 percent will pass their due diligence process, Robine adds.
Robinson at North-East believes the comparative inexperience of GPs in Southeast Asia is a contributing factor to slower and lower DPIs. “There aren’t that many GPs in Southeast Asia who have worked in bigger European or US firms that understand the discipline and how an LP thinks. The low DPI is not just a function of difficult, emerging, young markets: it’s also a function of the GPs having a good deal that they don’t really want to exit.”
Pursuing controlling stakes can improve the ability to exit. Federated Hermes, for example, predominantly targets buyouts or control stakes in mid-market funds that have demonstrated a track record of at least 2x DPI and 20 percent internal rate of return, says the firm’s Singapore-based partner and head of APAC private equity Sean Yoo.
When occasionally investing in minority stakes, the firm prefers deals that have “very strong downside protection,” says Yoo. “Five years down the road, if the company doesn’t go public, we have an option to sell back to the owner, or we have redemption rights.” Yoo adds that it is crucial to conduct extensive diligence on the possibility of honoring these protections under various regulatory regimes across Southeast Asian countries.
“There aren’t that many GPs in Southeast Asia who have worked in bigger European or US firms that understand the discipline and how an LP thinks”
Sam Robinson
North-East Family Office
Healthcare wins
For this tropical region, the sun appears to be shining on the healthcare sector.
In 2019, healthcare deals accounted for 8 percent of deal count and 22 percent of private equity deal value in Southeast Asia, according to Bain & Co. Last year, those figures rose to 12 percent and 24 percent, respectively. Deal value was driven in part by the $1.2 billion acquisition of Ramsay Sime Darby Health Care by TPG-backed Columbia Asia. Of the top 10 largest private equity investments and exits in 2023, four involved healthcare-related assets.
“Ten years ago, for our [healthcare-focused] Fund I, the lead time between investment and exit was probably five to seven years,” says Quadria’s Mir. “Now, over our Fund II and Fund III, that cycle has dropped down to three to four years.” Temasek and Tower Capital Asia’s $514.7 million sale of Chinese medicine business Eu Yan Sang marked the region’s top private equity-backed exit in Q2 2024, followed by Affinity Equity Partners’ $233 million exit from Indonesian consumer healthcare company PT Industri Jamu dan Farmasi Sido Muncul Tbk.
Affinity also exited its majority stake in Malaysia’s Island Hospitl for $966 million in September, selling to Asia’s largest private healthcare group, IHH Healthcare. The Hong Kong-headquartered manager owned 78 percent of the hospital via its fourth flagship fund.
“When we invested in Island Hospital in 2015, our view had been that the eventual buyer will always be a strategic buyer,” says Benny Lim, Affinity’s head of Southeast Asia. Lim notes that the investment generated a roughly 25x return in terms of acquisition multiple. Affinity invested about $200 million in 2015 via its fourth pan-Asia flagship and generated around a 3x return on the investment. The divestment also concluded the realizations of Fund IV’s Southeast Asian assets.
“The thesis is to make it attractive enough to the eventual strategic investors – and to me, that will be the primary exit,” adds Lim. “If there’s going to be [an] exit that we need to go through the public market… I would be less interested.”
That said, IPOs are not completely out of the picture. Affinity partially exited its 23 percent – or about $421 million – stake in Malaysian poultry producer Leong Hup International via the local stock market in 2019. According to Lim, its public listing was a commitment made with the family business upon Affinity’s investment in 2014.
On the bright side
Dealmaking and exit activity in Southeast Asia more broadly is showing early signs of recovery. Q2 2024 saw $5.6 billion invested across 28 deals, marking the second highest quarterly deal value since Q4 2021. Global private equity giants are increasingly seeing opportunities in the region and are bulking up their Southeast Asia presence: at the beginning of this year, Blackstone said it would double the size of its private equity business headcount in Singapore within the next two years in order to tap a growing number of deals within Southeast Asia.
Investment experts are also hopeful that exits and M&A may start to gain momentum with both strategics and pure corporate buyers returning to the region.
According to BDA’s Webster, deals took longer to close in 2023 and H1 2024 as a higher proportion of transactions were done via a bilateral or limited-scope process, giving buyers more time and less pressure to complete.
“As we’re getting towards the end of 2024 and going into 2025, there’s now more of an appetite to go for the market-clearing type approach, which speaks to sellers’ own confidence that they’re seeing a wider pool of buyers out there coming back in,” says Webster. “If you’re running a managed auction process and successfully putting buyers under pressure to hit certain milestones, then you should end up with a faster timeline to closing.”
This wider pool of buyers includes newer entrants from the Middle East. “We’re seeing Middle Eastern parties being more active across the whole region,” Webster adds. “You’ve got the funds, more people here like [Abu Dhabi Investment Authority] and Mubadala; you’ve got sovereign wealth-backed strategic platforms from the Middle East actively looking to develop their corporate profile and reach into Asia via M&A.”
“By visiting the countries and seeing visible stuff , it might change [foreign investors’] perception”
Janette Hall
Asian Development Bank
Middle Eastern investors are proving a significant source of capital when it comes to Asia-Pacific fundraising. They committed a total of $12.9 billion into Asia funds and direct investments in 2016-19; this figure jumped to $57.1 billion in 2020-23, according to a report published by the Global Private Capital Association in February. Of this invested capital, 58 percent was deployed in India, 21 percent in China and 20 percent in Southeast Asia.
ADIA – the world’s fifth-largest private equity investor, per PEI’s latest Global Investor 150 ranking – has committed to at least two large private infrastructure deals in the region this year. ADIA announced in January its investment in the Trans-Java Toll Road project with APG Asset Management, committing $2.75 billion. In May, ADIA partnered with Khazanah Nasional Berhad, the Employees Provident Fund of Malaysia and BlackRock’s Global Infrastructure Partners to take Malaysia Airports Holdings private for $3.9 billion.
It will take some time before private equity deals in Southeast Asia can replicate the size of these infrastructure deals. To be able to absorb large pools of capital annually from global managers and institutional investors, the region first must demonstrate its ability to deliver consistent DPI.
Strategies aligned with the climate transition trend may benefit before traditional private equity. “When you have these new strategies like climate transition or infrastructure and credit, that will hopefully improve the dealflow and DPIs and exits,” says Hall at ADB. In the past, ADB focused primarily on growth funds, allocating 85 percent in this sector. “Now, we’ve shifted: we’re going to be doing about 50 percent growth funds and 40 percent in this climate transition or infrastructure, venture capital and credit segment.”
The DPI situation may, in some ways, resemble the chicken and the egg: more capital inflows from overseas investors could, in turn, result in greater deal and exit activity, further catalyzing interest in the region.
For ADB, seeing is believing. “By visiting the countries and seeing visible stuff, it might change their perception. Maybe that’s what it is,” says Hall. “Maybe it’s not just looking at the deal from the US or from Europe, but actually coming into these smaller markets.”
Southeast secondaries
Exits have been difficult globally over the past two years. This dynamic is even more pronounced in Southeast Asia.
The challenging exit environment has hit some parts of Southeast Asia particularly hard. With early-stage managers facing greater LP pressure for distributions, more are approaching secondaries buyers like TR Capital, says founder and CEO Paul Robine.
“These companies are growing. These companies are innovative… The main issue for a lot of investors has been the lack of exit,” Robine says. “The DPI figures which are reported by a lot of VC firms in Southeast Asia are generally below average.”
Though he adds that many investors therefore have the impression that Southeast Asia is a difficult market, that doesn’t mean there is nothing to do in the region.
“So far, we’ve been ultra-selective in Southeast Asia. We focus on quality assets, quality companies, quality portfolios that are exitable within a time frame of three to maximum five years, and where you can influence and have an important role as an active secondary investor,” he says, noting that valuations are becoming more reasonable and conservative at around 20 percent for quality assets.
