The current political climate in Southeast Asia is far from ideal. Weak government now looks on the cards in Indonesia following the country's fragmented vote, while elections in Thailand have descended into chaos and the Malaysia vote remains dogged by fraud allegations almost a year after it was held.
As a result, analysts have been busy speculating as to what the regional shake-up means for domestic and foreign investors looking to these potentially high-growth markets.
But the reality is less hysterical. One class of investor seemingly unmoved so far is private equity, with KKR, Blackstone and TPG all ramping up their Southeast Asian operations over the past two years. For KKR at least, political winds are not a big issue.
“We have not seen any negative movement in terms of barriers, both in terms of government policy or local-market conditions,” Ming Lu, head of KKR for Southeast Asia, told FinanceAsia. “The obstacles are actually reducing, and we are seeing more receptiveness to private equity players.”
KKR has been active in the region since 2005, making a range of investments including building a stake in Vietnam fish sauce maker Masan Consumer for a total of $359 million – the doubling of its stake in 2013 is the country's largest private equity transaction.
Last year, KKR also bought a 9.5% stake in Tiga Pilar Sejahtera, an Indonesian snack food maker and, at the end of last year, it spent 642 million ringgit ($198 million) on a stake in Weststar Aviation Services, its first investment in Malaysia.
That investment came from its $6 billion Asian II Fund, which closed last year and followed its $4 billion regional fund in 2007 and its $1 billion China Growth Fund in 2010. KKR said that 26%, or $1.47 billion, of the Asia II Fund was raised from Asia-based investors.
Lu said KKR is working on full buyouts as well as minority equity investments to support private companies, families and entrepreneurs in their investment plans. The nature of private equity, he said, meant that investments were not dependent on the prevailing political or economic winds.
“The reason we have been able to invest through the cycle is because … we do not just think about the next two years –- we look at the next 5, 7, 10 years. We take into consideration the long-term trends versus short-term challenges and on that basis we make an investment,” he said.
These trends include the region’s young demographics, a rising middle class, urbanisation and rising incomes. As a result, consumer sectors, education, healthcare, service sectors and logistics are sectors in which KKR “is keen to look for opportunities in,” he said.
The other side of the coin is that Southeast Asia is also maturing, with executives and politicians adopting a more welcoming view of private equity, acknowledging it as an important force in upgrading fragile infrastructure as well as in buying stakes in domestic companies.
“I’ve been in the market for more than a decade and I can recall that [back then] if you tried to knock on doors and talk to people they did not have any idea what private equity was,” said Lu. “Today, awareness levels are very high, at all levels – business, government and in general. We have come a long way.”
Talent pool
A large part of this relationship, according to Lu, are people. The battle for talent is a lament heard across the whole of Asia and it is this more than the localised political and economic issues that perturbs Lu.
“Our business is very much driven by people. [But] the talent pool in Southeast Asia is not very deep given that the private equity investment history [in the region] is not that long. As a result you just don’t find people with long years [of] experience or track record,” Lu said.
KKR opened a Singapore office in 2012, which acts as the firm’s regional hub, and it expects to continue adding people in the region over the next 2-3 years.
Lu said people working within the industry need particular qualities for a firm to be successful in the region. First, they need years of experience investing through cycles: “you need to show you can invest when the market is not great”. Second, they have to either be local or have very localised knowledge. Third, they have to work well within a team.
As a result, he said KKR’s offices across the region are staffed by a mix of people; local professionals delivering local knowledge and connections and people drafted in from other areas with experience in certain sectors and products. “We blend them together,” Lu said.
“The first challenge is attracting, retaining and growing good talent. If you start to lose these people, I would be worried,” he said. “[We] hire junior people to train them so [that] 7-10 years from now they will be very experienced investors in Southeast Asia.”
Challenges
Another challenge is the valuation of assets across the region, which Lu said were still ahead of the reality. Given that the last few years have been really good – with low interest rates, plenty of liquidity and solid Chinese economic growth – people are still thinking about the good times, he said.
Yet even though the environment has changed or will change, valuations haven’t reflected this change.
“At present, we do not think it is the right time to make investments in certain markets given the valuation cycle is at a very high level. Therefore we need to be more disciplined when looking at investments,” Lu said.
According to a report by the Nomura Research Institute in December, investments of US$100 million or less account for two-thirds of Southeast Asian private equity deals, while deals of US$500 million or more account for only 10 of the 106 deals for which data are available.
Chasing these small deals are an increasing pack. Competition in the region is tough; not just from established global private equity groups but also local and regional private equity funds such as TPG-backed Northstar, Navis and KV Asia Capital, while Temasek and International Finance Corp, the private equity arm of the World Bank, also make investments.
That said, Lu states that it is becoming much harder for new entrants to be successful in the region because localised teams are not easy to build and take a long time if they are to generate sufficient returns.
“If you don’t have a track record you meet a highly sceptical target audience and your potential investors will be very sceptical also. You really need to show you can add value operationally,” he said.
This could be particularly important at a time when Europe appears to be entering a recovery, the US economy is picking up steam and China shows signs of slowing down. In short, the global investment sands may be shifting once again.
“Maybe liquidity will flow back to Europe and the US as opportunities are presented there. Our region may have a challenging period over the next few years,” Lu said.
