Southeast Asia Lures Private Equity, but Dealmaking Challenges Grow, Says New Report

Thu Dec 6, 2012 12:01am EST

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  SINGAPORE, Dec 06 (Marketwire) -- 
Some of the biggest names in private equity are racing to set up shop in
Southeast Asia, drawn by the region's rapid economic development and
abundance of natural resources, according to a new report by The Boston
Consulting Group. The report, Private Equity in Southeast Asia:
Increasing Success, Rising Competition, is being released today.

    A word of caution, however: a spate of dealmaking is pushing asset prices
upward, the report says. As a result, the corridor for success is growing
narrower, and private-equity (PE) firms can no longer rely on growth
alone to generate attractive returns. 

    "Successful dealmaking calls for careful target selection, accurate
pricing and skillful execution, both before and after closing," said
Dinesh Khanna, a BCG partner and a coauthor of the report. "We also
believe there are significant opportunities beyond the conventional
growth and demographics investment thesis."

    Interlocking Forces Drive Southeast Asia's Growth

    Despite its legacy of political, economic, and environmental turmoil,
Southeast Asia has become a magnet for investment. With a population of
532 million and GDP, at $2.9 trillion in 2011, growing at about 8 percent
a year, Southeast Asia is home to an expanding middle class. That creates
investment opportunities in industries such as organized retail, consumer
products, health care, education, transportation, and telecommunications.
Economic liberalization and intra-regional trade are on the upswing,
spurring lively competition for customers and capital. Southeast Asia
also benefits from its rich endowment of natural resources, which include
oil and gas, minerals, palm oil, and agro-commodities. Strong demand is
increasing wealth and powering the growth of adjacent industries such as
oil services and logistics and transportation.

    Some Sectors Are Growing Extremely Fast

    Key sectors of the region's economy are poised for surging growth.
Historically, emerging economic subsectors hit an inflection point -- the
first upward slope of an S-curve -- when national wealth reaches a given
level. When wealth arrives at this tipping point, some economic
subsectors expand at a rate that far outstrips the overall GDP growth
rate. In Indonesia, for example, the proliferation of modern trade has
propelled the mini-mart sector to a 45 percent compound annual growth
rate (CAGR) from 2004 through 2007, more than three times the overall
Indonesian economy's CAGR of 14 percent.

    "Across Southeast Asia, consumer sectors such as beauty products, dental
care, life insurance, and private education are in the early stages of
similar strong growth surges," said Carl Harris, a BCG partner and a
coauthor of the report. "Some of the most attractive investment
opportunities in the region, we believe, can be found in sectors
currently on the lower slopes of their S-curves."

    Competition for Deals Is Fierce 

    Precisely because Southeast Asia's growth story is so compelling,
however, investing in the region is growing more challenging. Several
prominent PE firms have already established a foothold in the region, and
they and their rivals have committed considerable capital in the past
decade. From 2001 through 2011, the amount of documented capital under
management in Southeast Asia rose from $11.7 billion to $30.1 billion.
Because the pace of dealmaking has not matched the growth in capital
commitments, some of that capital remains uninvested.

    As capital and competition increase, good deals based solely on income
and population growth are growing harder to find. Yet many bargains
remain available. BCG believes investors should consider alternative
investments theses. Carve-outs from large corporations, conglomerates,
and family groups represent a significant opportunity for those wishing
to leverage Southeast Asia's lower labor costs. Many business sectors in
Southeast Asia are highly fragmented, offering PE investors a host of
potentially suitable candidates for rollups, buy-and-build plays, or
consolidation. The breakneck growth of many Southeast Asian economic
sectors, meanwhile, has fueled strong demand for infrastructure assets. 

    Local Knowledge Keeps Firms in the Loop

    To improve their chances of success in Southeast Asia, PE firms need to
adapt their business models to local customs and conditions. To allow a
wide enough scope for potential deals, PE players should be flexible
about investment criteria such as debt ratios and be prepared to accept
smaller deals and minority stakes. Being flexible has proven to be of
strategic value in what remains a relatively small deal market.

    Savvy PE firms build local offices in the region with local talent
wherever possible. The locals' networks and skill at reading behavioral
nuances can be invaluable. PE firms should also consider inviting local
investors into selected deals. State-owned PE firms (sometimes called
sovereign wealth funds) can provide useful insight into potential targets
and help negotiate political obstacles.

    To receive a copy of the report or arrange an interview with one of the
authors, please contact Eric Gregoire at +1 617 850 3783 or
gregoire.eric@bcg.com. 

    About The Boston Consulting Group

    The Boston Consulting Group (BCG) is a global management consulting firm
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The Boston Consulting Group
Eric Gregoire
Global Media Relations Manager

Tel +1 617 850 3783
Fax +1 617 850 3701
gregoire.eric@bcg.com 

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