As an investment destination, Southeast Asia is not what it used to be. Once investors focused mainly on commodities and industrials out of the region, but now its growing new economies are bringing new opportunities in the search for yield.
Switching out of the more traditional investment sectors and tapping into the growing opportunities thrown up by new technology and burgeoning consumer brands was high on the agenda at a January private equity conference in Hong Kong.
Thanks to the trade war which continues to drag on, private equity is looking to Southeast Asia - and especially Indonesia - with increasingly large cheques as opportunities in other markets dry up.
"Much of the dispute is political as well as trade-related. As technology is the battleground, manufacturers are looking to diversify their supply chains, and Southeast Asia offers lower labour costs and a level of high technology innovation, which could encourage US-based manufacturers to invest more into Southeast Asia," said Wai San Loke, co-founder and managing partner of Novello Tellus Capital Partners, at the HKVCA Asia Private Equity Forum 2019.
China is Indonesia's largest trading partner. It totalled $39.32 billion in the first six months of last year, according to figures from China's Ministry of Commerce.
It works both ways. Direct investment from China into Indonesia hit $3.36 billion in 2017, up from $2.66 billion the year before, according to data from the Indonesian Investment Coordinating Board.
"Whilst the trade dispute between China and the US is worrying, the size of Indonesia's domestic market and growth in trade between Indonesia and China is a positive thing for Indonesia," said Samir Soota, managing partner of Falcon House Capital Partners.
Investment in Southeast Asia’s tech sector reached $7.3 billion in the first half of last year, up from $5.2 billion in 2017, data from Cento, a Singapore-based Series A venture capital firm, show. And investment in the consumer products sector is also booming. It hit a record $1.2 billion in 2017, according to Dealogic data.
What helps to drive these investments is the surge in the number of millennials in Indonesia - those who reached adulthood in the early part of the 21st century and are generally described as being between 20 and 36 years old.
“Indonesia has a median age of 28 years and some 90 million millennials in Indonesia with growing domestic demand and a huge rise in digitalisation. These are the consumers driving demand for the next decade,” said Soota.
And global funds have been keen to get in on the act.
KKR nabbed a stake in Go-Jek, Indonesia’s largest ride-hailing and e-commerce group, in 2016 and a slice of the country’s largest bread maker, Nippon Indosari Corpindo, in October 2017.
But while Indonesia, with the world's fourth biggest population, currently stands out as the poster child for private equity in Southeast Asia, the wider region is also attracting attention from investors.
In October, for example, KKR joined forces with Tencent to invest $175 million into digital payment platform Voyager Innovations in the Philippines.
And Warburg Pincus invested more than $370 million into Vietnam's Techcombank in March last year, with other investments in Vincom Retail and hospitality firm Lodgis in the country.
“Asia is driving the global growth story today and as the market matures we will see more funds and investors looking to Southeast Asia as growth continues to slow in developing markets,” said Eugene Lai, managing director and co-managing partner of Southern Capital Group.
CHANGING GUARD
As economies in Southeast Asia continue to grow and develop, one other key ingredient private equity investors are casting an eager eye over are the life cycles of some of the region’s more established companies.
Many of its largest companies and conglomerates have morphed from country-specific entities into regional powerhouses.
The likes of Salim Group in Indonesia and other similar conglomerates are now more receptive to investment from private equity funds.
Salim Group raised $1 billion from a group of private equity firms including Northstar Group and TPG in December 2015.
As the younger generations of family firms climb up the corporate ladder, private equity investors are increasingly being presented with opportunities to take controlling or minority stakes in established companies.
That might be because they are less attached to the business, but also because the founders of companies or their immediate offspring might be looking to retire after building up the business,” said Novello Tellus Capital Partners' Loke.
RISK MITIGATION
It goes without saying that there are still many risks when investing in the emerging and frontier markets of Southeast Asia.
Political risk, corruption and governance concerns and the rule of law are all listed as concerns for foreign investors by the World Economic Forum.
But while these risks have not been totally eliminated, progress has been made in the last decade, according to the OECD.
There is a common point of consensus when looking at Southeast Asia as an investment destination. The key factor which can sink or swim a private equity investment in the region is getting the buy-in of the board and senior management from the outset.
“Aligning with the vision of the founders and senior management is critical to the success of any investment in Southeast Asia,” said Soota.
But then again the timing, as a company founders retire and a new generation of leaders takes up the reins, appears to be on the region's side.
As the region's capital markets continue to deepen (funding in Asia is likely to double in the next 20 years, according to a January report from UK-based think-tank New Financial Report) private equity investors may increasingly flood Southeast Asia’s markets with cash in the search for returns.
