Article section
Southeast Asian GPs jockey for global attention with mixed results as the largest LPs continue to hesitate to commit to the region. A trickle of investment fuels theories about how to get more.
Most recently these concerns have been compounded by a generally ineffective response to COVID-19 across the region.
There remains a sense, however, that Southeast Asian gambits in specialization and pivots to more hands-on models are merely meeting the baseline of expectations, rather than setting any of the region’s investors above the pack. These are areas of focus – tech and ESG in particular – that are not only essential to getting a commitment from global LPs; they’re essential to just getting a meeting.
“Having a technology and operational value creation focus is no longer a differentiating factor but a critical component of any PE strategy,” says David Low, Partner and Head of Asia Private Markets at Albourne.
David cites that, “in Southeast Asia, entrepreneurs may lack the experience, expertise and resources to expand regionally or globally or take their business to the next level. This is where PE managers can add the most value beyond bringing capital to the table. GPs that are able to execute this consistently and generate outsized returns will have an edge in attracting investors.”
For the full article can be found here or expand below.
Justin Niessner - 03 August 2021
Southeast Asian GPs jockey for global attention with mixed results as the largest LPs continue to hesitate to commit to the region. A trickle of investment fuels theories about how to get more
Navis Capital Partners secured a final close on the largest Southeast Asia private equity fund raised this year with $900 million in commitments, putting 2021 on track to be the region’s best year for fundraising since 2015. But industry observers are hardly celebrating.
Navis, the only Southeast Asian GP to crack the $1 billion mark with a single fund, is generally considered the most prospective proof that middle-market strategies can scale in the region. The Malaysia-based GP has executed 80 control transactions since 1998 and is probably the regional leader in terms of exits.
But Fund VIII has added to a sense of malaise about the pace of private equity’s maturation in Southeast Asia, having closed substantially below its $1.75 billion target. Even though Navis opportunistically targets deals in Australasia and Greater China – and LPs expect most of the firm’s buyout activity to be in Australia – the sluggish fundraise is being held up as a disappointing verdict on the viability of Southeast Asia-focused models.
Supporting evidence for this view includes a shallow field of sufficiently large and investable companies, demographic complexity, currency risk, and disruptions to the timing of realizations created by myriad political and infrastructural wildcards.
Most recently these concerns have been compounded by a generally ineffective response to COVID-19 across the region. This has not only stalled the cornerstone consumer thesis for most investors; it also continues to protract deal-making and fundraising processes. While the most visible GPs in China and India have proven capable of transitioning to virtual channels, Southeast Asia’s middle-market leaders remain relatively dependent on in-person meetings.
“I think Southeast Asian fundraising has been difficult except in early-stage venture where there isn’t much to diligence in a physical sense,” says Nick Bloy, a managing partner at Navis. “But in the buyout space, it’s been hard to get predecessor fund DPIs [distributions to paid-in] up from exits, as it’s been impossible for almost all potential buyers to do due diligence, and also impossible for LPs to do their own due diligence.”
Differentiation drive
A number of approaches to surviving in this environment have emerged. Diversification to the point of including non-ASEAN jurisdictions in the mandate is one. Indonesia-based Creador, for example, secured a $500 million first close on its fifth flagship fund last month – the target is $600 million – with a track record of investing about one-third of its capital in India.
For its part, Navis has made a point of covering the breadth of Southeast Asia, with its latest fund including a $150 million co-investment sidecar for frontiers such as Myanmar and Laos. Pan-regional players going in the opposite direction include Southern Capital, Archipelago Capital, and KV Asia Capital, which position themselves as tightly focused on a limited set of more reliable markets, especially Singapore and Malaysia.
The most recent fundraising action among these players was a $100 million first close in June for KV Asia’s second fund, which is targeting $300 million. All the investors in the first close were re-ups, but several new backers have joined in the past few weeks, including a Southeast Asian sovereign wealth fund. Adams Street Partners and HarbourVest Partners are among the re-ups.
“Flight-to-quality means you cannot be recklessly deploying your old strategy because the world has changed. Malaysia has changed from the Malaysia we knew two years ago. Indonesia too. So, LPs expect you to allocate funds with that new COVID-impacted lens,” says a GP with another firm that limits its exposure to Singapore, Malaysia, and Indonesia.
“If I can get high-quality businesses in Singapore and still generate the expected returns from a risk-reward perspective, I don’t think LPs are going to say no if I deploy most of the money in Singapore.”
Several country funds in Southeast Asia have persevered amid the pandemic by taking the idea geographic focus to its natural extreme, with Lakeshore Capital raising $150 million for a Thailand-heavy strategy as recently as April. These funds are smaller and therefore better positioned to deploy quickly.
However, country-focused GPs will continue to depend on hyper-local investment strategies as well as backing from strategic, impact, and development finance players in the foreseeable future. Almost by definition, their successes will remain contained as local stories, and even as their investor bases institutionalize, they will never usher Southeast Asian PE into the mainstream for global financial LPs.
Sector specialists
Sectorial and operational specializations have also been pursued by GPs in the name of accelerating realizations, boosting returns, and scaling the asset class regionally through more global participation. Navis helped illustrate this theme with its latest fundraise; a $450 million continuation vehicle for companies with strong environmental, social, and governance (ESG) agendas was raised alongside the flagship fund.
The most conspicuous advocate of this approach is Northstar Group, an historically traditional industries investor that made a concerted move to recast itself as digital technology-focused upon raising $810 million for its fourth fund in 2015. Fund V, targeting $800 million, hit a first close of $260 million in April 2020 and a second close of undisclosed size later the same year.
The Singapore-based firm says it sees increasing interest in Southeast Asia from international LPs driven by potential to benefit from US-China tensions and opportunities in the region’s rapidly evolving digital economy. Global LPs in Fund V include Laborers’ District Council & Contractors Pension Fund of Ohio.
“The major concerns we are hearing from prospective LPs center around the region’s handling of the pandemic and what the timing and shape of the recovery will look like, as well as how managers are thinking about deployment and how the exit environment will develop,” says Gerald Ng, head of IR at Northstar.
“We have had some success convincing LPs that there continue to be attractive long-term investment opportunities in Southeast Asia, in particular in the digital economy, that will do well notwithstanding the pandemic and in some cases because of the pandemic. Online education is an example.”
There remains a sense, however, that Southeast Asian gambits in specialization and pivots to more hands-on models are merely meeting the baseline of expectations, rather than setting any of the region’s investors above the pack. These are areas of focus – tech and ESG in particular – that are not only essential to getting a commitment from global LPs; they’re essential to just getting a meeting.
“Having a technology and operational value creation focus is no longer a differentiating factor but a critical component of any PE strategy,” says David Low, head of Asia private markets at Albourne Partners.
“In Southeast Asia, entrepreneurs may lack the experience, expertise and resources to expand regionally or globally or take their business to the next level. This is where PE managers can add the most value beyond bringing capital to the table. GPs that are able to execute this consistently and generate outsized returns will have an edge in attracting investors.”
As an ecosystem, Southeast Asian GPs may need demonstrate a bigger edge than most. Brian Lim, a partner and head of Asia and emerging markets at Pantheon, observes that funds targeting Southeast Asia must have a considerable element of specialization to address LP expectations around domain expertise and value-add capacity that in turn facilitates sustainable returns.
Does that mean these managers must do more prove their operational credentials versus their counterparts in other parts of Asia? “Maybe, because they have stiff competition from funds in more established markets,” says Lim.
“It’s frankly incumbent on the Southeast Asian GPs to change the narrative to show that you can generate consistently very strong returns in the region. But right now, given that there’s been quite strong returns in other regions, many LPs can afford to take a wait-and-see approach to Southeast Asia. The biggest contributor to getting LPs to move would be GPs doing the portfolio work to generate value. I don’t really see anything else that would move the dial.”
Concentration, control
The thinking here suggests that more concentrated, control-oriented portfolios may be the most appropriate strategy for managers going forward. Tower Capital, a Singapore-based firm that previously operated on a deal-by-deal basis until reaching a first close of $250 million on its first fund in January, is one of the latest players to leverage this approach.
Tower is targeting $300 million for its debut and expects to curate a compact portfolio of 6-7 sector-leading investments. The approach is flexible in terms of control, acknowledging the difficulty in taking over longstanding businesses in the region, but some form of minority influence over operations and capital protection is a must.
It is a proven strategy in markets where investable assets are thin on the ground, with Quadrant Private Equity sometimes flagged as a successful parallel in Australia. Southeast Asian precedent includes KV Asia, which made only seven investments with its $263 million debut fund. These were split roughly 50:50 between control and influential minority positions.
“Our strategy fits the market because the Southeast Asia market is relatively shallow,” says Danny Koh, founder and CEO of Tower.
“If you fish in a shallow pond, you need to look far and wide – you need to be more deliberate, diligent and careful. Also, after being in Southeast Asia long enough, you realize that the lack of homogeneity works against a cookie-cutter style of doing deals. The shallowness makes it hard for specialists because the deals, by definition, tend to be more opportunistic.”
Nevertheless, the industry has yet to establish a clear correlation between adopting new strategic approaches and attracting new global investor attention. All the LPs in Tower’s first close are existing regionally based believers in Southeast Asian private equity, having previously backed other funds. Likewise, Ng confirms that Northstar has not seen a significant change in its LP mix since shifting to a digital focus.
Indeed, with growing sophistication and maturity, Southeast Asian PE has seen a gradual decline in fundraising in the past decade. Between 2010 to 2015, an average of $3.2 billion was committed a year, excluding venture capital. From 2016 to 2020, not a single year came close to that mark, with the annual average coming to $1.8 billion, according to AVCJ Research.
Much of the explanation for this stasis boils down to the idea that more time is still needed for strategies to be proved out and for the broader industry to mature. Yes, GPs in the region should do what they can to boost returns, but that logic could be applied to any market. Southeast Asia’s more unique fundraising headache is that the ecosystem has still yet to adequately sell its story of massive potential despite minimal concrete results to date.
“There’s obviously a big economy, big population, and tons of opportunity, but I think there is more to be done by the local players in educating the Western investors on the Southeast Asia opportunity set,” says Fraser van Rensburg, a managing partner at Asante Capital.
“The top Indian and Chinese GPs have gone to the US and Europe to raise their money, and by doing all those roadshows over the years, they’ve educated the market and created excitement. Southeast Asia has only 5-6 prominent pan-regional players that can do that, and they’re doing it, but there’s just not enough education out there, and those players haven’t done it for long enough.”
Against the grain
Interestingly, one of the most successful fundraising episodes in recent years was largely attributed to ignoring the region’s massive growth story. Like some Indian GPs that leverage a low domestic cost base to build out companies targeting global markets, Singapore-based Novo Tellus Capital Partners is not trying to convince investors of the upside of its home region; it’s telling a global story from an advantageous perspective.
Novo Tellus closed its second fund at $250 million in late 2020 with 80% of the corpus coming from institutional investors, including pensions, endowments, foundations, and sovereigns, primarily representing North America. This compares to $25 million for Fund I, which had only one institutional backer, a UK fund-of-funds.
After a difficult start trying to communicate the bankability of Southeast Asia businesses, the industrial technology-dedicated firm tweaked its pitch to highlight the region’s ability to exploit US-China trade tensions by helping reconfigure global supply chains. Wai San Loke, Novo Tellus’ founder and managing partner, believes the macro consumer story in Southeast Asia has been overplayed and is often undigestible for global investors with high ESG standards.
“People get caught up in Indonesia and then realize a lot of the attractive plays were probably victims of governance,” Loke says, adding that he emphasized to LPs there would be no investments in volatile jurisdictions.
“If you want an ESG supply chain, you have to invest in it being managed by a Singapore or Malaysian company. You could go cheaper in another Southeast Asian country, but you’re not assured of labor policy or environmental policy – and that’s not what multinationals want.”
The pitch and the strategy details only get a foot in the door. Novo Tellus’ success attracting global LPs ultimately came down to performance, domain expertise, and a curated, high-control portfolio. When fundraising began, three of five Fund I companies had been exited. Six investments have been made to date with Fund II. About 40% of the overall portfolio is control, with the rest influential minority.
This is not to say that ASEAN storytelling is only about getting a foot in the door; it can also contribute to existing skepticism about the market. For Vincent Ng, a partner at Atlantic Pacific Capital, one inhibitor of fundraising in the region has been a tendency toward over-optimistic pitches and projections about expected exits. He evokes a past relationship with a Southeast Asian manager, where an attempt to stoke enthusiasm ended up having the opposite effect.
“They consistently promised that they would deliver two solid 2.5x over time, but every time we caught up – and this spanned several years – that exit was still pending for one reason or another. And it was still held at 2x or 2.5x,” Ng says. “Over time, that IRR gets eaten away by the time value of money. So, the story gets pretty old. To some degree, unrealistic promising and underwhelming delivery has not been helpful to the cause.”
Right sidebar
Top Stories
